Disguised remuneration: Year-end review
Anyone who has been following the lively debate on disguised remuneration (DR) in the comment sections of Accounting WEB will be aware that the subject continues to generate strong opinions.
With 20/20 hindsight, many would agree that at least some employment/contractor structures created in the past never passed the smell test. However, many also feel that DR itself crosses the line between legitimately tackling abuse and unfairly punishing individuals who entered into arrangements in good faith.
Whatever your views on the rights and wrongs of DR legislation, and of the Supreme Court’s decision in the Murray case, the reality is that HMRC now has a set of very powerful tools with which to challenge affected structures.
Historically, I was one of many advisers who believed that the transfer of funds into an Employee Benefit Trust (EBT) sub fund did not create employment income for the beneficiary. Even so, I have been advising clients to take advantage of HMRC settlement agreements ever since the first opportunities appeared in 2011.
Although I am aware that individual cases continue to be appealed, and that we may see further litigation over the next year, I find it difficult to see any realistic prospect of cases being settled outside the Supreme Court.
The cost of pursuing an action that far, coupled with the lack of sympathy shown by the judiciary to perceived avoidance of any kind, is enough to make me question whether it can ever be sensible to advise a client to continue to fight.
This inevitably leads to a consideration of the latest iteration of HMRC’s settlement terms, published on 7 November 2017. For the first time, these terms specifically include reference to contractor schemes, although in practice they reflect the position as it has stood for some time now.
In brief, for employment arrangements income tax, employer’s and employee’s national insurance contributions (NICs) and interest must be paid for all years under enquiry or “in time”, in which contributions were made or loans were taken out. Out of time years cannot be taxed in this way, but if the taxpayer wants to avoid future DR charges, it will be necessary to pay the tax, employee and employer NICs by way of voluntary restitution (although without interest).
For contractors, income tax and interest is payable on the value of loans made or benefits provided, rather than on the gross value of contributions. No NICs are payable by employed contractors, but HMRC may pursue the employer for these. Self-employed contractors will have to pay class 2 or class 4 NICs. Employed contractors must pay income tax for out of time years via voluntary restitution to protect against future DR charges. HMRC’s guidance states that self-employed contractors “may need to make voluntary restitution payments”, which raises the prospect that this may not be necessary for the self-employed in at least some cases.
HMRC always reserves the right to charge penalties, although in practice I have yet to see this happen. HMRC may also seek payment of inheritance tax (IHT) where trusts are involved, and this is certainly a cost that should be taken into account when considering whether to settle. Some employers may be able to claim tax deductions, and taxpayers can claim credit for previously paid tax to provide a very small plaster to cover the gaping wound.
It is not always going to be the case that settling will give rise to a lower liability than, for example, paying the DR loan charge in April 2019. In cases where no corporate tax deduction is available, it may also be preferable to trigger a DR charge now, on which the employer can claim relief. However, in many cases settlements spreading taxation of benefits over several tax years will reduce effective tax rates compared to suffering the whole charge in one go.
One final factor to consider when thinking about settling is the benefit of certainty. Taxpayers have had potential liabilities hanging over their heads for many years now, and even a settlement on unfavourable terms may come as a relief compared to the ongoing stress of not knowing what will eventually happen. For most of those still affected, the benefit of being able to get on with your life must weigh strongly in the scales against the tax cost of settling.
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Andrew Robins is a partner in RSM’s London private client tax team, advising on all areas of UK personal taxation. He specialises particularly in advising high net worth individuals, non-UK domiciled individuals, non-UK trusts, and members of corporate remuneration plans such as employee benefit trusts and international pension plans.