The new loan charge regime effectively starts from 5 April 2019 and relates to loans primarily made between 6/4/1999 and 5/4/2019. HMRC have made it clear that they consider that it is essential that anybody affected acts now as contacting HMRC before that date to arrange a settlement may well prove beneficial.
Without a request for a settlement, the loan charge rules will apply from that date. These are very complicated and - depending on which type of scheme is operated – may involve the following:
The need for employees to declare to their employer that they have a relevant loan
The need for employers to include the loan in their normal PAYE submissions and deduct this from the employee
The charge might need to be included in the individual's self-assessment return
The charge might affect an individual’s income related benefits
At the end of this article there are links to more detailed guidance from HMRC.
What is disguised remuneration?
A disguised remuneration ‘scheme’ involves paying staff via loans instead of normal taxed salaries. As the loans are never intended to be paid back, this is designed to avoid paying Income Tax and National Insurance contributions on that income.
In the past this type of arrangement made the headlines involving famous celebrities and footballers. However, these days similar schemes are being advertised more generally, often the main tag line being ‘tax efficiency’ or ‘retain 80-90% of your pay’. Some of them are through umbrella companies, which also appears to add some legitimacy to the process.
The legislation covers two main schemes:
Employment based schemes
Self employed schemes (trade based schemes)
How do the schemes work?
Naturally the exact details of each process will vary but they do generally have a common theme. HMRC give the following example of a typical scheme:
You receive a small payment which has tax and National Insurance contributions deducted.
At the same time (or shortly after) you receive a larger payment without tax and National Insurance contributions deducted.
The larger payment may arrive from a different account than the first payment, potentially from overseas, although not necessarily.
Your payslip may show the larger payment separately and refer to it as something other than pay. No tax or National Insurance contributions have been deducted.
How can I tell if I am being paid through a scheme?
Obviously any type of remuneration which does not take the normal forms might be suspect. HMRC has published the following red flags:
the company promises that you can keep 80, 90 or 95% of your wages and be tax compliant (this is unlikely to be true as, in most cases, the basic rate of Income Tax is 20% and National Insurance contributions are also due on earnings)
only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income)
you are paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions (this is tax avoidance)
the payment from your umbrella company is routed through various companies before it comes to you.
These companies may tell you they are compliant with tax rules but you shouldn’t rely on this. These companies do not always explain the risks of using these schemes or try to hide the fact they involve tax avoidance.
What are the tax consequences of using this type of scheme?
The loan charge was announced at the Budget 2016 and the charge will apply to disguised remuneration loans that are outstanding on 5 April 2019.
Prior to this, the options available are:
People who have used these schemes have a choice – they can:
repay the original loan
agree a settlement with HMRC
pay the loan charge when it comes in to force.
Settling now will give you certainty about your disguised remuneration scheme and may also mean you:
do not have to pay the loan charge that comes into effect on 5 April 2019
pay a lower rate of tax on your disguised remuneration loans - the loan charge will add all your loans together and tax them in one year
settle on better terms - if a scheme moves to litigation, these terms may no longer be available
do not face extra costs if the scheme moves to litigation.
Note that if you want to settle your use of a disguised remuneration tax avoidance scheme so that you do not have to pay the loan charge, you should contact HMRC and send all the information needed as quickly as possible, and by 5 April 2019 at the latest.
How is the charge paid?
Please refer to the detailed guidance links at the end of this article.
What are the relevant dates I should know about?
Take action by 5/4/2019 to avoid the loan charge
Loan charge reporting requirements commence
Employee must provide UK employer with outstanding loan details
Deadline for postal RTI payment
Deadline for online RTI payment
If employer is liable to PAYE, employee must reimburse PAYE to avoid section 222
Deadline for individuals to fulfil reporting requirements to HMRC
Deadlines for individuals to register for ITSA
Deadline for 2018/19 self assessment return
How should we contact HMRC to discuss a settlement?