An at a glance freeview introduction to the Disguised Remuneration rules. Subscribers, see Disguised remuneration loan charge (subscriber guide).

At a glance

What is disguised remuneration?

The employment income through third parties rules, also referred to as the 'disguised remuneration' (DR) rules, are anti-avoidance legislation in Part 7A ITEPA 2003 which:

  • Provide for an accelerated employment tax and National Insurance (NIC) charge on a range of remuneration arrangements.
  • Were introduced to ensure that tax on employment income is not avoided or deferred through the use of trusts or sub-trusts or other intermediaries, e.g. Employee Benefit Trusts (EBTs), remuneration trusts and Employer Financed Retirement Benefit Schemes (EFRBS).
  • Also apply to the self-employed in relation to contractor loan schemes since 2017.
  • Came into force on 6 April 2011, (with some anti-forestalling rules from 9 December 2010) and apply to employment rewards which are earmarked or otherwise made available to an employee on or after that date

What’s new?

The Loan charge

From 6 April 2019

The ‘loan charge’ applies to all outstanding third party disguised remuneration loans made since 9 December 2010 (prior to 20 December 2019 this was 1999) which if they had been made on 5 April 2019 would have fallen within the disguised remuneration rules.

  • Loans made in tax years before 6 April 2016 are exempt if the avoidance scheme use was fully disclosed to HMRC and they did not take any action. Prior to 20 December 2019 these loans were included in the charge.
  • The charge will be made up of income tax and NIC for the 2018/19 tax year unless the taxpayer elects to spread their outstanding loan balance across 3 tax years (2018/19 - 2020/21).
  • Time to pay is available to those with no disposable assets and income below £50,000.
  • For most employment related loans (e.g. EBTs) the charge should have been settled under PAYE for 2018/19.
  • Loans must be reported on the 2018/19 self-assessment return; the deadline for this and paying the tax (for the loan charge only) is extended to 30 September 2020 with no interest or penalties between 1 February 2020 and 30 September 2020.
  • Prior to January 2019 the loan charge could be postponed for ‘approved fixed term loans’ as at 5 April 2019. 

The charge will not apply if by 5 April 2019:

  • The loan was repaid in full;
  • The loan is from an amount on which income tax has been accounted for in full; or
  • The loan has already been taxed in full under the disguised remuneration rules.

Disguised Remuneration Settlement

HMRC created a final settlement opportunity in November 2017 for disguised remuneration schemes ahead of the new loan charge being introduced on 6 April 2019. This sets out the different positions for contractors, employees and also for employers where settlement is reached with them rather than their employees. 

  • Taxpayers must have registered their interest by 5 April 2019 and provided all information to HMRC by the deadline provided to them by HMRC.

Following the loan charge review changes were announced on 20 December 2019 meaning HMRC will refund voluntary payments (‘voluntary restitution’) made to prevent the loan charge arising and included in a settlement agreement for any tax years where the charge no longer applies (see above). Repayments will not be made however until the changes have been legislated for, sometime in 2020.

If you need assistance in negotiating a settlement contact the Virtual Tax Partner support team. 

FAQs:

  • What are the disguised remuneration settlement terms?
  • Why should I make a settlement with HMRC?
  • What happens if I do not settle with HMRC?

See FAQs for Disguised Remuneration settlement

From April 2017

Two new relevant steps were introduced and a charge arises when existing disguised remuneration loans are:

  • Transferred to a third party.
  • Released or written off.

Loan transfers

  • The rules on loan transfers confirm that schemes which result in a loan or other debt being owed by an employee to a third party (whatever the intervening steps) are within the scope of the disguised remuneration rules.
  • They target so called ‘loan transfers’ where arrangements result in an employee being indebted to a third party without the initial loan having been made by them.

Loan write offs/releases

  • Confirmation that the write off or reverse of such loans (including loan transfers) is a relevant step which gives rise to a part 7A charge and that this takes priority over any employment related loan charge.

See Disguised remuneration (subscriber guide) for more details

Deductions for employee remuneration

  • Tax relief is denied for employer’s contributions to disguised remuneration schemes unless employment taxes and NICs are paid within 12 months of the end of the period in which the contribution is made.
    • subject to an overarching rule that a deduction will not be allowed if more than 5 years have passed since the end of the period in which the contribution was made.
  • Any payments made after this time, including under a settlement with HMRC, will not qualify for relief.

Extending the rules to the self-employed and partners

New rules target the use of ‘similar’ avoidance schemes by the self-employed and partners from 6 April 2017.

Most of these arrangements seek to avoid a charge to tax and NICs by depressing trading income through diverting money which is ultimately received back as a loan or other non-taxable amount. They may involve a trust.

The new rules apply to ‘relevant benefits’ arising where:

  • A person (T) is or has been carrying on a trade as a sole trader or partner.
  • There is an arrangement connected with that trade which is wholly or partly a means of providing ‘relevant benefits’ to T, someone connected to T or any other person where T will have the enjoyment.
  • The relevant benefit is connected directly or indirectly with a ‘qualifying third party payment’.
  • A tax advantage will be obtained by T (or a connected party) as a result.

Where these conditions are met the payment or benefit is taxable as part of T’s trading profits. 

See Disguised remuneration (subscriber guide) for examples of such schemes.

From 6 April 2018

  • A close companies gateway test to make it clear the DR rules apply to close company participators.
  • This includes an avoidance purpose test to ensure it does not catch genuine commercial arrangements or those with no avoidance purpose.
  • Where a s455 CTA 2010 Loans to participators charge arises at the same time as a part 7A charge under the close companies’ gateway, the Part 7A charge is relieved if the s455 charge is fully paid by the due date.  
  • See Disguised remuneration (subscriber guide) for more details.

Accelerated payment notices and Disguised Remuneration

  • Since July 2014 an Accelerated payment notice (APN) can be issued if there is an enquiry, dispute or appeal relating to your tax affairs, and you have:
  • The APN asks you to pay the amount of tax that is in dispute and you have 90 days to pay.
  • There is no right of appeal against an APN, though you can make representations to HMRC if:
    • The conditions to issue the APN have not been met, or
    • The amount is wrong.
  • Failure to pay may result in a penalty. The minimum penalty is 5% of the tax unpaid.
  •  You could apply to postpone the loan charge where APN's have been paid if you applied by January 2019.

When do the Disguised remuneration rules apply?

The rules apply if:

  • A person "A"  is a living employee, either former, existing or prospective, of another person "B".
  • There is an "arrangement" which A (or anyone linked to A) is a party to, or which otherwise covers / relates to A.
  • The arrangement is wholly or partly a means to provide rewards, recognition or loans in connection with A's employment.
  • A "relevant step" in pursuance of the arrangement is taken by a relevant person.

A “relevant person” is A, or B acting as trustee, or any other person.

A “relevant step” is:

  1. Earmarking: a sum of money or an asset is set aside (e.g. a sum of money placed on trust)
  2. Payment: of a sum of money or transfer of an asset, to a relevant person (e.g. a loan is made available)
  3. Making assets available: an asset is made available to a relevant person without the transfer of the asset. 
  4. From April 2017: loan transfers and write off / releases of a disguised remuneration loan.

When the rules apply income tax and NICs (employer and employee)are charged on the value of the money or asset.

Exclusions

These are listed in s554E to 554X (about 18 pages of "small print") and include:

  • Loans made on a commercial basis (same terms as to the public)
  • Steps necessary for the implementation of approved arrangements e.g. for share and pension schemes.
  • From April 2017: payments of tax to HMRC.

National Insurance regulations

The regulations provide for amounts chargeable to income tax under Chapter 2 of Part 7A of ITEPA 2003 to be treated as earnings for the purposes of NICs if they would not already be earnings for NICs purposes. Where these regulations apply ordinary NICs principles will apply to the collection of NICs. .

Recovery of tax from employees

Special rules apply to allow recovery of tax from employees where:

  • An offshore employer is created solely for the purposes of an avoidance scheme.
  • The employer still exists but cannot pay.
  • The employer has been dissolved.

Dissolved employer and DR charges:

In the event that the employer company has been dissolved:

  • It is the employee’s responsibility to return the employment income to HMRC under self-assessment and to pay the tax to HMRC.
  • The employee will not be liable for Class 1 NICs unless it is shown that they received payments knowing that the employer wilfully failed to deduct tax.

Inheritance tax

Depending on the specifics of the planning the trust may be within the relevant property regime despite being, in most cases, an offshore trust.

  • s86 IHTA 1984 which relieves EBT's from IHT may not apply depending on how the trust deed is drafted.
  • If there are revocable sub-trusts HMRC's view is that an appointment to these can trigger an IHT charge.
  • HMRC have never provided details of who they regard as the settlor for these types of trusts, the employer or the employee. This will affect the IHT position.
  • Where the trustees are offshore the liability for the IHT can fall on the settlor and beneficiaries. 

Where a settlement has been reached with HMRC and IHT has not been properly dealt with (or not dealt with at all), due to many EBTs being in territories outside the UK, there is a risk that it will be treated as offshore evasion. 

Links to our useful guides:

Disguised remuneration (subscriber guide)

FAQs for Disguised Remuneration Settlements

Disguised Remuneration final settlement opportunity

 

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