A salesman, an employee retention trust and a loan…
It’s a familiar story, a person reaches a point in their career where their skills are sufficiently specialised that they are able to become a self-employed contractor. They incorporate a company or perhaps provide their services as a sole-trader.
After reviewing their accounts they notice that, although they receive £118,000 the tax man is relieving them of £44,006.34 of their income (or £40,857.25 if they went down the company route).
Then one day they meet a nice man with a smile as wide as a bus, an expensive car and a watch to match. He advises that in exchange for a modest fee of £19,000.00 (less than half the tax!) he can reduce that liability to nothing or next to nothing.
The exact methodology will often vary. The transactions, which may take place or may occur ‘on paper’, will vary, but, almost invariably, the contractor receives an interest free loan from a trust or similar structure.
A chance to put right what once went wrong
HMRC has long since been attacking this type of structure under what is widely known as the Disguised Remuneration Rules, which seek to tax the loans as earnings subject to income tax and national insurance.
Over the past few years, efforts to enforce these rules have led to the introduction of a barrage of new anti-avoidance legislation, such as Accelerated Payment Notices and Follower Notices. The culmination of these efforts has (to date) been the introduction of the ‘2019 loan charge’.
Much has been written in connection with the forthcoming 2019 loan charge, but, broadly, the balance of all outstanding loans (made on or after 6 April 1999) will be subject to an immediate charge to PAYE or self-employment income on 5 April 2019.
The Revenue clearly regard this as the final nail in the coffin for loan schemes (which are still regularly being marketed to new taxpayers).
In advance of the 2019 loan charge, HMRC created Disguised Remuneration settlement opportunity. This gives individuals or their employers the chance to settle their tax affairs in respect of the use of loan schemes by 30 September 2018.
HMRC have been at pains to stress that this is distinct from the old Contractor Loans Settlement opportunity (“CLSO”) and it is largely coincidental that it is administered by the same staff, with the same email address and phone number. Indeed, the terms do differ and the inertia of the old CLSO seems to have fallen away.
It was anticipated that a great many taxpayers would come forth to settle their affairs under the latest opportunity and no further applications were to be permitted after 31 May 2018. However, either owing to an excess of efficiency or a deficiency of available work, the deadline to register and under the settlement opportunity has now been extended to 30 September 2018.
A balanced view and an informed decision
In line with the extended time frame, HMRC have recently been writing to taxpayers they believe have used loan schemes to draw their attention to the settlement opportunity, advising that:
“…it is likely that you will pay less tax than you would if you waited for the loan charge to arise”.
This is quite possible given that the total amount of loans received will be taxed in the same year which may lead to a complete loss of personal allowance and ‘income’ being taxed at 45%. However, they fail to mention that HMRC will also charge late payment interest meaning that, for example, £100 owed in respect of the 1999/00 tax year will have accrued £83.83 of interest.
It follows that it is important to consider the total liability (including interest) that would arise under the settlement opportunity and under the loan charge in order to make an informed decision of whether to settle now.
The future/the past
HMRC have advised that if a taxpayer chooses to wait until 5 April 2019 and pay the loan charge it won’t settle any open tax enquiries which will still have to be resolved and that in consequence you may be required to pay further tax and interest.
In practice, there does not seem to be legislation in place to allow HMRC to charge an amount to income in 2019 and then charge them late payment interest for the preceding twenty years. Whether there is substance to this treatment remains to be seen.