David Hadley reminds us that those who have taken advantage of employee loan schemes, and who want to settle their tax position, need to register their intention to settle with HMRC as soon as possible.
Under legislation introduced last year, HMRC will be able to tax any outstanding loans made to employees or contractors on or after 6 April 1999 via an Employment Benefit Trust (EBT), or similar structure, on the basis that it is disguised remuneration.
The new tax charge will apply to a loan (or loan transfer arrangement) outstanding at 5 April 2019, unless tax has already been accounted for on the loan, or it falls within one of the very limited exemptions. Thus, some employers may find themselves with significant liabilities in 2019 that they cannot afford to pay.
HMRC has announced a settlement opportunity for disguised remuneration schemes ahead of the new loan charge being introduced on 6 April 2019. It originally said that taxpayers must register their interest by 31 May 2018, but the latest statement from HMRC says taxpayers should register with HMRC as soon as possible. The taxpayers must then provide all relevant information to HMRC by 30 September 2018. The tax liability should be agreed and paid (or a payment arrangement must be in place) by 5 April 2019.
The settlement opportunity for employers will work as follows:
Income tax and NIC (employer's and employees') will be payable in respect of all loans made from trusts under the scheme where a tax assessment and/or determination has been raised, based on the tax rates and bands for the years the loans 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 the higher tax bands. There is also a risk that if the tax is paid under the loan charge rather than under the settlement provisions, HMRC could seek further tax on the loans under other provisions. A settlement is likely therefore to cost less than the 2019 loan charge, although the tax and NIC liabilities will need to be calculated to be sure there is a saving to compensate for the early payment.
Where a tax assessment and/or determination has not been raised, a voluntary tax payment must be made for those years.
- Where the employer pays the income tax and employee’s NIC, then the loan 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 (for the EBT) 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 that amount.
- In addition to the tax and NIC, interest on late payment will usually be due and in some instances, penalties will be levied 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 to the EBT (or similar), 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 it is out of time for an overpayment relief claim, then no deduction for corporation tax can be claimed. HMRC may allow a tax deduction in a year that a disguised remuneration charge arises, but this is subject to negotiation with HMRC.
- In certain circumstances, inheritance tax will be due and payable. 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 NIC, though it may be possible to enter into a time to pay arrangement with HMRC.
If an individual's 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.
The rules for settlement by contractors are slightly different. A contractor, for the purposes of these settlement terms, is someone who provides services to clients that do not directly engage them. They may provide their services through an umbrella company, agency, partnership or their own company. Contractors can be classed as either:
- Employed: they will have an employment contract, often providing their services via an offshore employer.
- Self-employed: they will have a contract for services, meaning they provide their services in a self-employed capacity
Income tax will be applied on all the disguised remuneration loans, or other payments on a net basis i.e. the fees paid under the scheme are tax deductible.
Employed contractors will not have to pay NI personally but HMRC may still pursue their employer or an other liable party. Self-employed contractors will need to pay Class 2 and Class 4 NIC as appropriate on all disguised remuneration loans and similar payments.
As with the employment situation in certain circumstances inheritance tax may be due and payable.
This article has been amended to reflect the revised deadline for registering an interst to settle with HMRC.