The Finance (No. 2) Act 2017 has introduced a further opportunity for HMRC to collect tax on a wide range of disguised remuneration arrangements.
Given the significant implications of failing to apply the legislation it is important to consider if you have arrangements which fall within these rules.
Which loans are affected?
Whilst the disguised remuneration rules largely affect arrangements from December 2010, the loan charge will apply to all loans advanced from any disguised remuneration scheme from 6 April 1999 unless these have been repaid prior to 5th April 2019 or settlement has been reached with HMRC.
When do I pay and how much?
If a loan is outstanding at 5th April 2019, the person who made the loan is treated as having undertaken a relevant step in accordance with the disguised remuneration legislation so that the amount become employment income taxable in 2018-19 and calculated in the normal manner for employment income. This means that most loans would be subject to tax at 45% and employee and employer national insurance. In most instances the employer/company will be responsible for making this payment through PAYE. They are then expected to pass on these costs to the employee. Where the employee does not reimburse a further tax charge will apply.
What can I do if I do not want to pay the charge?
There are some exclusions that apply including certain fixed term loans. It is worth checking whether one of those applies in your circumstances.
You can repay the loan prior to 5th April 2019. Repayment made after 17 March 2016 must be in money if the loan charge is to be avoided. In many cases repayment may only delay the tax charge if there’s a need to extract funds from the trust in the future.
You can seek to settle with HMRC. The original date for registering an interest to settle was 31st May 2018 but HMRC have now extended this so that you can settle providing all information has been provided prior to 30th September. If the funds were provided and loans made over a number of different tax years this may result in a lower tax charge depending on the applicable tax rates in each year.
My arrangements have never been enquired into so this cannot apply to me?
Unfortunately if your loan meets the conditions a loan charge will apply. This is irrespective or whether or not there’s been an HMRC enquiry.
How will HMRC know?
Whilst there are a number of practical difficulties for companies and advisors in ensuring that all relevant loans have been identified for HMRC there is a simple answer as there is a duty for the trustee to provide the necessary information to the individual or their personal representative.
Employees will be required to provide HMRC information about themselves and the loan if certain conditions are met. Principally this will apply if the loan charge applied from 5th April 2019 or the loan charge would have applied if it was instead assessed on the 16th March 2016. The information to be provided includes, the individual’s name, NI number, UTR, as well as the name and DOTAS number of any relevant arrangement. The information must be provided after 5th April 2019 but before 1st October 2019. It is unclear precisely how the reporting will be completed.
This information must be provided to the company within ten days of the loan charge date.
HMRC will apply an initial penalty of £300 on discovering a failure to provide information. Also a further £60 per day up to 90 days whilst the failure continues. The careless or deliberate provision of inaccurate information will give rise to £3,000 penalty per inaccuracy.
But I have already paid tax under an APN?
In which case you can apply for a postponement of the 2019 loan charge or request that the APN payment is used to settle the loan charge. In that latter scenario, the APN ceases to be a “payment on account” and cannot therefore ever be repaid.
There are other reliefs to avoid a double charge to tax if a charge has already arisen under the disguised remuneration legislation.
My employer cannot pay so what happens?
As noted above the individual has an obligation to notify HMRC of the loan. HMRC have indicated that they will tax the individual who has benefitted if the employer is unable to settle. HMRC will allow an individual to settle their arrangements now if their employer will not do so.