What are disguised remuneration schemes?
Disguised remuneration schemes seek to avoid paying both national insurance contributions and income tax. This is done by paying scheme users income via loans or third-party payments rather than ordinary taxable remuneration.
These loans or payments are unlikely to ever be repaid, regardless of the terms on which they are made. These schemes have cost the Government hundreds of millions of pounds in unpaid PAYE each year.
Disguised remuneration schemes are used by employers and individuals alike, typically more by owner-managed and controlled businesses. If they are used by contractors, they are better known as ‘contractor loans’.
The now bankrupt and convicted criminal Paul Baxendale Walker infamously sold some particularly aggressive forms of these schemes.
The new loan charge was announced at Budget 2016 and legislated for in Finance (No2) Act 2017. It will apply to all disguised remuneration loans that are outstanding on the 5th April 2019.
If you or your company is involved in one of these schemes, you should settle your tax affairs with HMRC as soon as possible in order to avoid this tax charge and possible penalties.
The 2019 loan charge
This charge will apply to all disguised remuneration loans made since the 6th April 1999 if they are still outstanding on the 5th April 2019. However, the charge will not arise on outstanding loans if the individual has agreed on a settlement with HMRC under existing law before 5th April 2019.
HMRC are urging individuals to register to settle with them (and to send relevant documentation) before 30th September 2018. So, if you are involved in a disguised remuneration scheme then it is paramount that you act fast.
When was disguised remuneration introduced?
The Finance Act 2011 introduced the disguised remuneration rules with effect from December 2010.
Ever since then, it has been clear that anyone engaging in a disguised remuneration scheme has been acting contrary to the intention of Parliament. The 2019 loan charge aims to kill these schemes for good.
Some of the promoters of these schemes and their counsel are still trying to sell these or updated schemes and are claiming that they will succeed in avoiding the disguised remuneration rules. It would be very unwise to accept such assurances without taking very detailed legal and tax advice.
How to settle your disguised remuneration scheme
If you believe you are involved in a disguised remuneration scheme then you should work quickly to settle your tax affairs and of course pay what is owed using the disguised remuneration settlement opportunity available.
HMRC are currently allowing payment plans to help settle disguised remuneration schemes. Making your reparations now will mean that you:
- Do not have to pay the new loan charge that is being introduced next April.
- Will pay a lower tax rate on your loans than you will next year.
- Pay a reduced (or possibly no) penalty
HMRC have stated that in order to settle your tax affairs, you must move quickly and provide all of the required information by the 30th September 2018. You should register your interest with HMRC and then yourself or your agent should begin to gather the required documents, of which include:
- Your unique taxpayer reference (UTR).
- National Insurance (NI) number.
- The number of contractor loans or contributions made in each tax year.
- Whether you plan to claim for a ‘benefit in kind’ offset. (If this is the case then you should include how much and for how many years).
- The name of your employer.
- Your company name and reference number.
- Your PAYE reference number.
- The amounts and dates of funds paid into the scheme.
- Details of any Corporation Tax relief you claimed through contributions to the scheme.
- Whether you want to claim a ‘benefit in kind’ offset. (Including how much and the number of years for relevant employees).
If known (for both employers and contractors), you must also include
- A date in which any trust, sub-trust or other entity was created.
- The amount of contribution paid into it.
- Assets held in that trust other than the set cash or loan agreements.
It’s worth noting that it is vital to tell HMRC the correct amounts paid though disguised remuneration schemes. If they later find that incorrect details have been provided then the case may be reopened and further action can be taken. Penalty charges may be incurred.
For users of Baxendale Walker (also known as Minerva) schemes, HMRC seem to be seeking penalties as a condition of settlement because of the very aggressive nature of these schemes. Although it may be possible to negotiate on this aspect of a settlement.
HMRC will not, however, negotiate on the actual amounts of tax and national insurance (and where appropriate inheritance tax) due.
Penalties can normally range from 20% to 70% of the tax at stake depending upon whether the client themselves seeks a settlement and how co-operative they are.
Patrick Cannon has experience of representing clients in achieving settlement of disguised remuneration schemes and can assist clients in making direct contact with a designated HMRC officer who will be responsible for their case in order to achieve a settlement of their tax affairs and allow the client to move on from what is a distressing and costly episode.
If you would like support during a disguised remuneration settlement, or more information on these schemes then contact Patrick Cannon today who has an extensive knowledge in the field.