12th April 2019
The HMRC are taking action against disguised remuneration schemes. The HMRC understand that not everyone entered these arrangements knowing that they are tax avoidance schemes. However, they have now created the ‘loan charge’. This charge will affect anyone who has been involved in these loan schemes.
What are Disguised Remuneration Schemes?
Disguised remuneration schemes are tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions by paying scheme users their income in the form of loans.
Who is affected?
It has been used by employers and individuals, and also by contractors. Under these schemes, an estimated 50,000 workers – mostly contractors – were paid by way of a loan, an arrangement that was made to avoid tax and National Insurance contributions. HMRC said it never approved these schemes and had always said they did not work.
Of those affected, 65% work in business services, which includes IT consultants, financial advisers, and management consultants. Fewer than 3% work in medical services (doctors and nurses) or teaching and fewer than 2% work in the social and community services sector.
What is the 2019 loan charge?
The 2019 loan charge was introduced by Finance Act 2017 and is a tax charge on employment related taxable loans. It was introduced to tackle the disguised remuneration loan arrangements and will apply to all outstanding loans on 5 April 2019. Anyone who has received such loans instead of standard income and who has not taken action by then to either settle their tax affairs with HMRC or repay their loans will face the loan charge.
When does it need to be settled by?
The loans were never intended to be repaid, so they are no different from normal income and are taxable. HM Revenue and Customs (HMRC) encouraged people to come forward and settle their tax affairs before a charge on these outstanding loans came into effect on the 5th April 2019.
Payment can be spread over a number of years, however, the amount due can be paid over a period of up to seven years without the need to provide any detailed financial information. For payment arrangements of up to five years, the expected current year taxable income is less than £50,000.
There is no minimum time period for payment arrangements but HMRC will need to ask more information.
Can paying it back be avoided?
Some people will inevitably try and get around paying the loan charge which is likely to land them in more trouble.
HMRC is currently aware of several schemes that claim to get around the charge and is warning people not to use them. These schemes do not work.
What as an employer do you need to do?
Where the scheme user was in an employment-based loan scheme and the employer still exists and is UK-resident, they should tell the employer what the outstanding loan balance is by 15 April 2019. The employer will need to calculate the PAYE liability on that loan charge income and make payment to HMRC either by 19 April 2019 (by post) or 22 April 2019 (online). The employer will need to report the loan charge amount to HMRC via Real Time Information from 20 April.
Payroll is tricky. Using a knowledgeable trustworthy payroll provider will always help you to remain compliant with the HMRC. FMP regularly blog on matters affecting payroll in the UK, so you can stay ahead of the challenges that can affect your business.