Many companies and contractors have established employee benefit schemes which resulted in loans or advances being paid to employees allegedly tax free. In order to counter this, HMRC introduced the disguised remuneration rules which seek to challenge these schemes and charge tax on the income received. This had the effect of limiting the number of new schemes, but didn’t resolve the issue of outstanding loans which had never been taxed.
Last year, HMRC introduced the 2019 Loan Charge which effectively seeks to tax all outstanding untaxed loans in one hit on 6 April 2019. For those individuals and companies that have used such schemes for a number of years this can result in an enormous tax charge.
However, last week HMRC have announced a new settlement opportunity for disguised remuneration schemes (EBTs, EFURBS and others) ahead of the new loan charge being introduced on 6 April 2019.
This provides individuals and employers the ability to reach a settlement with HMRC which is likely to be on better terms than being subject to the loan charge, although it is unlikely that HMRC will negotiate anything further than an acceptance of full liability.
- It includes but is not exclusive to Employee Benefit Trusts (EBTs).
- Taxpayers must register their interest by 31 May 2018.
- They must then provide all information to HMRC by 30 September 2018. This is to allow HMRC enough time to complete the settlement before 5 April 2019.
For employees (or employers on behalf of employees), the settlement will be as follows:
Income tax and NIC (employers and employees) will be payable in respect of all loans taken from trusts under the scheme for protected years, that is all years where an assessment and/or determination has been raised based on the tax rates and bands for the years the loan were taken.
This is in contrast to the Loan charge which will tax all loans in one year (2019/20) and will therefore push most scheme users into additional rates.
An effective rate of 60.8% is expected under the loan charge before IHT and interest and penalties (45% IT, 13.8% employer NIC, 2% employee NIC). A settlement is likely to cost less than the loan charge because loans are taxed in the year taken and relief is available for BIK charges in many cases.
Relief will be given for tax paid on Beneficial loans but only to the extent that the relevant tax year remains open or is in time for an Overpayment relief claim to be made.
Late payment interest will be due for protected years.
Penalties will be due where it can be shown that Reasonable care was not taken in filing returns.
Where the relevant Corporation Tax return is open or capable of amendment employers will be able to make a deduction for the original contribution and the fee paid to the promoter for entering into the scheme if they have not already done so.
There may be IHT charges and this will be especially so if as a result of settlement the trust is wound up. The IHT position should not be overlooked, if special rates apply the charge could be much more than a standard exit charge at 6% because no nil rate band will be available. Simply paying the loan charge instead of settling will not deal with the IHT issue.
If you or your company are concerned about this please get in touch to see how we can help with this process.