Contractors who have received disguised remuneration loans in the past could find themselves liable for retrospective tax charges if a new Government proposal is implemented.
In a technical note on disguised remuneration tax avoidance schemes which was published following the Budget 2016, the Government sets out plans to impose income tax and National Insurance Contributions (NICs) on any loans that are outstanding on 5 April 2019.
Chapter 5, paragraph 10 of the document notes that the tax charge will apply to any loan that was made before or after tax rules to stop disguised remuneration were introduced on 9 December 2010 and 6 April 2011 (ITEPA 2003, Part 7A). This means that contractors with existing loans from several decades ago may be hit with the retrospective charge.
Disguised remuneration loans typically come in two forms. Employee benefit trust (EBT) loans have been used by limited company contractors to extract money from their companies without paying high rates of income tax and have been circulating since the 1980s.
Contractor loans have been popular since 2000 and involve an individual receiving a loan and a small salary from an ’employer‘, often based offshore. The individual is taxed on the benefit in kind of receiving an interest-free loan, which would equate to 3-4%, depending on the rate of interest at the time the loan was taken out.
“HMRC have for a number of years made it plain that they will not tolerate tax avoidance in this area. However, they have often been very slow to act in practice, and this has left people with the feeling that they had dropped their cases,” notes employment taxes expert David Kirk.
However, contractors are warned against complacency, and are encouraged to act fast if they believe they may be at risk. HMRC has offered contractors the opportunity to settle by paying Pay As You Earn (PAYE) and NICs on the loans received. Those who decide not to settle may be issued with an accelerated payment notice (APN).
APNs will often be based on estimated figures. However, due to the fact APNs can’t be appealed, contractors will have no option but to pay the tax demanded. Any attempt to regain tax payments will need to be made through a tax tribunal.
Kirk warns that the aggressive new measures could result in many former contractors going bankrupt, and argues that HMRC should instead be targeting advisers who sold the loan schemes to the contractors.