The new scheme outlines how income tax and national insurance contributions (NICs) will be imposed on employee loans which are outstanding on 5 April 2019, irrespective of when the loan was advanced to the employee or individual. This means, say experts at contractor tax specialist Capital Consulting, the new tax charge could be imposed on loans which were advanced even over ten years ago.
There are two forms of disguised remuneration loans:
Employee benefit trust (EBTs) loans – used by company owners to extract funds from their own companies without paying high levels of income tax;
- Contractor loans – where an individual receives a loan and a small salary from their ‘employer’ which was usually based offshore.
In each case the loans were repayable but were usually never actually repaid or fully repaid. The employee is taxed on the interest-free loan being deemed a benefit in kind, which can amount up to 4% of the loan (depending on the official rate of interest in the tax year), for the duration of the employment.
These EBT-type loan schemes have been in operation since the 1980s, and contractor loans have been commonly used since as early as the beginning of the century. HMRC maintain that these arrangements do not work. However, there must be a considerable chance that they do. Very few of those schemes have been taken to the tax tribunal, and when HMRC have won a case they have generally done so on technicalities concerned with the implementation. New tax rules to stop disguised remuneration were introduced from December 2010 and April 2011
HMRC have offered settlement opportunities for those individuals who took up EBT or contractor loan schemes, which required the individuals to agree to pay PAYE and NIC on all the loans they received. HMRC have also highlighted the contractor loan schemes to demonstrate disapproval and they are doing everything in their power to combat the schemes that used such loans for tax avoidance purposes.
Those who used contractor loans but who haven’t taken up a settlement opportunity are now receiving accelerated payment notices (APN) where their tax return is under enquiry. The APN is often based on estimated figures as HMRC don’t know exactly how much loan was advanced, so are guessing at six times the contractor’s salary.
The creation of an APN forces the taxpayer to pay the tax demanded as the APN cannot be appealed. If the tax is not actually due, the taxpayer has to force HMRC to conclude their enquiry by going to tribunal. The proposed tax charge will be imposed on an outstanding loan if income tax has not been paid on that loan (even where income tax was not due under the tax law in place when the loan was advanced). The new charge will not be imposed if the taxpayer has reached a settlement with HMRC, or otherwise paid tax on the loan as if it was salary.
David Kirk, an expert on employment taxes, said: “HMRC have for a number of years made it plain that they will not tolerate tax avoidance in this area. However, they have often been very slow to act in practice, and this has left people with the feeling that they had dropped their cases. Whilst the government has every right to change the rules, I do have concerns about four particular things with this proposed tax charge:
- “The tax can be raised on historical loans of any age, so it could relate to actions taken over 20 years ago.
- The records relating to historical loans will often be lost and are difficult to reconstruct.
- Individuals were often sold the loan schemes by IFAs and accountants, in some cases quite aggressively. There is consumer protection law to assist victims of this sort of miss-selling when it comes to investments; however, in this case HMRC seem to be going for the victims instead of the real culprits.
- The tax charge should fall on the employer, but it will be transferred to the employee/contractor.”
Kirk concludes that many former contractors could face hefty retrospective taxes and penalties and also says the charge is deeply unfair as in many cases the tax was not payable under the law that existed when the loan was advanced (pre-December 2010).