Employment Benefit Trust (EBT) loans
In July 2017, the Supreme Court gave their decision about the disguised remuneration schemes used by Rangers Football Club. Disguised remuneration schemes usually involve an employer paying the person through a loan from a third party, usually an Employee Benefit Trust (EBT), that is unlikely ever to be repaid. The objective of these schemes is to defer or possibly even avoid having to pay income tax and National Insurance (NI).
In their decision, the Supreme Court ruled that the scheme used by Rangers Football Club – which tried to pay staff through an EBT did not work. The court said that Rangers should have deducted income tax and National Insurance Contributions (NICs) from payments they made to the scheme.
HMRC’s opinion is that the principles set out by the Supreme Court apply to a wide range of disguised remuneration schemes. As a result they have started to consider issuing follower notices and accelerated payment notices, which require those under investigation for alleged tax avoidance to pay the disputed tax upfront. This could be an issue as many employers may now not have the funds to pay the tax and NI.
In addition new legislation has been introduced to put beyond doubt that income tax and NI is payable on these arrangements.
New loan charge in 2019
Under new legislation introduced last year HMRC will be able to tax any outstanding loans made on or after 6 April 1999 via an EBT on the basis that a non-repayable loan is not a loan, but is disguised remuneration.
The new tax charge will apply to a loan (or loan transfer arrangement) outstanding at 5 April 2019 which would now be caught by the disguised remuneration rules, unless tax has already been accounted for on the loan or it falls within one of the very limited exemptions. Thus many employers may find themselves with significant liabilities in 2019 that they cannot afford to pay.
HMRC has announced a new Settlement Opportunity for disguised remuneration schemes ahead of the new loan charge being introduced on 6 April 2019. Taxpayers must register their interest by 31 May 2018. They must then provide all information to HMRC by 30 September 2018.
The settlement opportunity will work for employers as follows:
- Income tax and NIC (employer's and employees') will be payable in respect of all loans taken from trusts under the scheme where an assessment and/or determination has been raised based on the tax rates and bands for the years the loan were taken. This is in contrast to the loan charge which will tax all loans in one year and will therefore push most scheme users into additional rates. A settlement is likely therefore to cost less than the 2019 loan charge although the liabilities will need to be calculated to be sure there is a saving to compensate for the early payment.
- To prevent future disguised remuneration charges arising on loans or other payments made in years where an assessment and/or determination has not been raised, a voluntary payment must be made for those years.
- Where the employer pays the income tax and employee’s NIC then this will normally need to be grossed up to account for the employer providing a benefit by paying the employee’s liability. If the trust deed allows, and the secondary Class 1 NIC is paid to HMRC from the funds contributed to the scheme, HMRC will treat the contribution to the scheme as earnings plus secondary Class 1 NICs on those earnings.
- In addition to the tax and NI, interest on late payment will usually be due and in some instances penalties as well.
- Where the relevant corporation tax return is open or capable of amendment employers will be able to make a deduction for the original contribution and the fee paid to the promoter for entering into the scheme if they have not already done so. However, if the relevant corporation tax return is not open and out of time for an overpayment relief claim then no deduction can be claimed where the company has not already done so. HMRC may, however, allow a tax deduction in a year that a disguised remuneration charge arises.
- In certain circumstances Inheritance Tax will need to be paid. This will depend on the nature of the scheme and the amounts put through it.
Of course the offer of an early settlement requires the employer to have the funds to pay the tax and NI, though it may be possible to enter into a time to pay arrangement.
If their employer has not already settled and does not wish to settle, then the employee can settle without them. The employee will have to pay the same amount of Income Tax and NICs as if their employer was settling on the amount contributed to the scheme or, depending on the facts, the amount allocated within the scheme for their benefit. If the employer no longer exists, the employee will not have to pay any national insurance.
Transfer of liability to employee
Where income tax and NI becomes due on disguised remuneration it is the liability of the employer. However, in some circumstances it is possible for HMRC to recover the tax and NI from the employee. In particular they have this right where:
- there is a non-UK employer set up for the purposes of the disguised remuneration scheme and the employee provides services to a UK person;
- the employer exists at the time the disguised remuneration charge arises but is unable to meet the liability; or
- the employer no longer exists at the time the disguised remuneration charge arises.
HMRC intends to use the PAYE regulations to transfer the outstanding liability to the relevant employee where the employer is unable to pay. The direction only transfers the tax liability. The employer will remain liable for any NI due.
HMRC will consider the facts of each case when dealing with employers who are unable to pay. HMRC will first assess the employer’s ability to pay. HMRC will consider time to pay arrangements, especially where employers are in scope of the loan charge, and arrangements can be made to pay the liabilities over a number of years.
Where these options are exhausted, and it is clear that the employer is unable to pay the outstanding liability, HMRC will issue a determination in respect of the unpaid tax included in their Real Time Information (RTI) return. Once this determination has been unpaid for 30 days HMRC will direct the liability on to the employee. The unpaid tax will then be collected from the employee directly.
It is possible for a disguised remuneration charge to arise where the employer has been dissolved or no longer exists. In that case it is the employee who is responsible for reporting the income and paying the tax to HMRC. The employee will not be liable for any NI due.
Postponing the loan charge
Where the loan was made before 9 December 2010 and was for less than 10 years it is possible in some circumstances to apply for the 2019 charge to be postponed. Such a postponement application needs to be made by 31 December 2018.
Duty to provide information to HMRC
All individuals, regardless of whether they are a current employee, who have received a loan, or quasi-loan, from a disguised remuneration scheme must provide additional information before 1 October 2019 to HMRC where one of the following conditions is met:
- the loan charge arises on 5 April 2019;
- the loan charge would arise on 5 April 2019 but it has been postponed to a later date; or,
- the loan charge does not arise on 5 April 2019 but all the conditions of the loan charge were met on 16 March 2016.
The details required are:
- contact details;
- HMRC references so that they can identify the case; and
- the outstanding balance calculation.
Settling with HMRC
The delay in settling the tax and national insurance due to HMRC is like a ticking bomb. The debt will need to be paid relatively soon and if it is not HMRC’s actions could lead to the winding-up of the employer or the bankruptcy of the employee. Whereas there are likely to be restructuring remedies to both tax payers using an insolvency process, refinancing and restructuring the tax payers’ finances is likely to be much more palatable. The lending arena has become more competitive and diverse in recent years, with specialist lenders prepared to finance part of a borrower’s requirements under specific arrangements carved out of the trade or of personal assets. Alternatively, there may be opportunities to reschedule existing debt as part of a programme of refinancing to allow the amount owing to HMRC to be paid.
Conveying appropriate restructuring and refinancing initiatives will assist with the settlement negotiations with HMRC, particularly if there is a requirement for them to also join in refinancing arrangements through HMRC’s scheme of Time To Pay. In most circumstances it is anticipated that the employer will be HMRC’s first port of call; however in the event that all or part of the tax liability fall on the individuals, then they will need to consider carefully the opportunity for refinancing their personal assets as part of the negotiations for settlement with HMRC.
In summary, HMRC have made it quite clear that they intend to collect the taxes due on disguised remuneration and tax payers liable and potentially liable to HMRC’s future tax demands should be considering carefully how they will cope with HMRC’s tax demand. Considering the issues and formulating a plan will be key to minimising the financial impact on the tax payer, the employer or employee.
What can Mercer & Hole do to help?
Should you require advice on the procedures HMRC have set out for collecting the tax they believe will be due, or otherwise wish to consider restructuring and refinancing options as part of a negotiated settlement with HMRC, then do not hesitate to contact me or David Hadley.
Date: 23rd March, 2018
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