Loan charge & disguised remuneration? Start here...

When do the disguised remuneration rules apply? How do they apply? When does the loan charge apply? What options for settlement are available?

This is a freeview 'At a glance' guide to disguised remuneration and the loan charge.

At a glance

At a glance

What is the loan charge?

Disguised remuneration loans taken out since 9 December 2010 (1999 prior to the Morse review) which were not repaid by 5 April 2019 or settled by 30 September 2020 were subject to a Loan Charge on 5 April 2019.
- Unless they were taken out before 6 April 2016, were reasonably disclosed to HMRC and HMRC have not taken any action such as opening an enquiry or raising an assessment or determination.
Up until 1 January 2019, it was possible to postpone the loan charge in certain restricted circumstances. It is now too late to postpone. See How to apply to postpone your loan charge.
An election could be made to spread the Loan Charge equally across three years. The deadline was 30 September 2020 but HMRC will consider late elections in some circumstances. See Statement of Practice 1 for details.
In September 2019 the Chancellor commissioned an independent review of the loan charge by Sir Amyas Morse which was reported upon on 20 December 2019. This announced several changes included in Finance Act 2020 which excluded certain loans from the charge. See Disguised remuneration loan chargefor full details.

What is a Disguised Remuneration (DR) loan?

If you worked for someone as a paid director, employee or on a self-employed basis and you agreed to receive a loan instead of any salary or wages that you understood you would never have to repay, the loan is described as a disguised remuneration loan.
The aim of this is to avoid tax and NICs and where there is an employer they also avoid NICs.
In some industries, low-paid employees were paid with loans via umbrella and similar companies and some of these employees appear to be genuine victims and unintentional tax avoiders.

What settlement options are there?

30 September 2020 was the final settlement date under the 2017 settlement opportunity for outstanding disguised remuneration loans to which the loan charge applies. This settlement opportunity is now closed.
In August 2020 HMRC issued details of a new settlement opportunity for taxpayers with loans not subject to the loan charge. In October 2020 details were released of how this applies to loans subject to the loan charge. This settlement opportunity remains open but does not avoid the loan charge. See Disguised Remuneration 2020 settlement opportunity

Overview

What is a Disguised Remuneration (DR) loan?

Broadly, if you worked for someone as a paid director, employee or on a self-employed basis and you agreed with them to receive a loan instead of any salary or wages, and the understanding was that you would never have to repay that loan, such a loan is described a disguised remuneration loan.
The aim of paying someone via a disguised remuneration loan is that you avoid tax and NICs and the employer avoids NICs.
If you are self-employed it means that you might avoid Income Tax and Class 4 NICs.
Key features and selling points of disguised remuneration loans were that they would be written off 'tax-free' on death, meaning that no tax would ever be paid on your earnings. Alternatively, if you moved abroad the loan could disappear with you and the offshore trust making the loan might also disappear.
Tax schemes or 'tax strategies' including disguised remuneration loan schemes have been mass-marketed over the last 20 years. The government has now introduced legislation designed to tackle scheme promoters and has also introduced a General Anti-Abuse Rule (GAAR).
Many of the providers, promoters and originators of these schemes have now not unsurprisingly disappeared or folded. Some providers have sold the loans to third parties. During 2021 and 2022 some loans have been called in by these third-party lenders. See Don’t repay your Contractor Loans without taking advice
Many firms of accountants and advisers declined to sell these schemes. There is a fundamental difference of opinion between professional advisers as to whether it was ever ethical or morally right to advise people to avoid tax by converting earnings into non-repayable loans.

How much is the loan charge?

The loan charge is a charge on the amount of all outstanding loan balances on 5 April 2019. It falls into the 2018-19 tax year unless an election was made by 31 December 2020 to spread the loans over three tax years. Details of the election and instances where HMRC may accept late elections can be found in Statement of Practice 1.
The Rate of charge will depend on the amount of loans taken and your other income in the 2018-19 tax year. For example, if you are an employee and have other income of £50,000 and loans of £100,000, the Income Tax on your loan is likely to be £40,000 and employee NIC £2,000 and the loan charge will cause you to lose your personal allowance. If you are self-employed the tax will be the same and the class 4 NIC will also be £2,000.
It may have been better to settle with HMRC by 30 September 2020 than pay the loan charge. It is now too late to avoid the loan charge by settling with HMRC. A settlement can still be reached but if the tax due under the 2020 settlement opportunity is less than the loan charge already paid no refund will be paid by HMRC.
On 20 December 2019, it was announced that Time to Pay arrangements could be agreed for those with no disposable assets and income below £50,000.

Why did HMRC not act sooner?

HMRC and parliament seem to have been extremely slow in noticing the rise of a massive tax avoidance industry in the UK.
We observe that many people do not understand trusts and most loan schemes used offshore trusts.
HMRC has been litigating against the many different forms of disguised remuneration schemes since the 1990s: their view was that they did not work however litigation takes time.
The most high-profile DR court case in recent years involved the former Rangers football club. Players received loans instead of pay. The Supreme Court confirmed that the loans were disguised remuneration and subject to PAYE and NICs.
HMRC consequently offered loan settlement opportunities with the latest and current opportunity being launched in August 2020. Many people who used loan schemes realised that receiving pay via a loan is a form of tax avoidance not intended by the government and have consequently settled their loans with HMRC.

In more technical detail

What are the Disguised Remuneration rules and when do they apply?

The employment income through third parties rules also referred to as the 'Disguised remuneration' rules, are wide-ranging anti-avoidance rules in Part 7A ITEPA 2003 which:

Provide for an accelerated employment tax and National Insurance (NI) 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, contractor loan schemes and Employer Financed Retirement Benefit Schemes (EFRBS).

What is Disguised Remuneration?

Disguised remuneration is defined by part 7A as where:

Employees:

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

Self-employed and partners (from April 2017):

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 that 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.

See Disguised remuneration loan charge.

What is an Accelerated Payment Notice?

An Accelerated Payment Notice (APN) might be issued if there is an enquiry, dispute or appeal relating to your tax affairs, and you have:
- Received a Follower notice.
- Used a Disclosure of Tax Avoidance Schemes arrangement (DOTAS).
- Received a General Anti-Abuse Rule (GAAR) counteraction notice.
The APN asks you to pay the amount of tax that is in dispute and HMRC then hold the money until the matter is resolved. It is therefore a payment on account. APNs are separate from the loan charge.

How can I settle disguised remuneration, EBT or contractor loans with HMRC?

There is currently one settlement option available; the Disguised remuneration 2020 settlement opportunity was announced in August 2020 for loans not subject to the loan charge and amended in October 2020 to deal with loans that are subject to the charge.

There is currently no deadline for this though HMRC state that they could amend or withdraw it at any time.
The 2017 Settlement opportunity is now closed as settlements had to be completed by 30 September 2020.

What are the disguised remuneration settlement terms?

Income tax and Class 1 primary National Insurance (employees) or Class 2 and 4 NICs (self-employed and partners) on the amount of the loans, at your marginal tax rate for the year(s) in which the loans were taken out.
Interest on the above.
For loans subject to the loan charge in certain limited circumstances HMRC will not collect the additional tax (residual tax) due under the 2020 settlement opportunity.
Depending on the size of the loan and trust Inheritance Tax (IHT) may also be due.
See FAQs for Disguised remuneration settlements

Where to obtain human support

If you need assistance in dealing with HMRC enquiries, calculating your loan charge or negotiating a settlement with HMRC, contact the Virtual Tax Partner support team.

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