This Technical Alert contains details on the upcoming disguised remuneration loan charge (known by HMRC as the ‘2019 loan charge’) which comes into effect on 5 April 2019.
R3 consider members should be aware of the potential liabilities and reporting requirements arising under the loan charge. In the absence of clear guidance from HMRC the impact on insolvency cases is uncertain, however there is nothing currently in the legislation that directly excludes an insolvent company from the loan charge nor negates its obligations for filing returns or settling the tax.
Due to filing and payment deadlines of 22 April 2019, R3 are seeking an urgent meeting with HMRC to set out our immediate concerns with a view to them releasing IPs from the loan charge obligations and/or issuing guidance for IPs on whether the loan charge would fall to be treated as an expense of the insolvency proceedings or as an unsecured claim.
Background
Employee benefit trusts (“EBTs”)
An EBT is a trust that can be established either in the UK or offshore by a company to hold cash or other assets for the benefit of employees. The purpose of the trust is to incentivise employees and help retain quality staff by providing a benefit to them and their families. An EBT and the company that creates it are two separate legal entities; this means that once the company has transferred property into the trust, it will be run by trustees who have ultimate control over trust property. It is the job of the trustees to distribute the trust, although they will often be guided by recommendations from the company as to how they should do so. As the trust is a separate legal entity from the company, it will continue to exist even if the company has a change of ownership or is wound up and liquidated.
During the 1990s, 2000s and early 2010s it was not uncommon for employers to pay bonuses to their employees by transferring the award money to an offshore employee benefit trust. The funds would sometimes be allocated to the employees in the form of an interest-free loan which, in practice, was to be left outstanding indefinitely. HMRC consider these to be tax avoidance arrangements that seek to avoid Income Tax and National Insurance Contributions. In the Revenue’s view, the loans were never intended to be repaid and as a result HMRC introduced a loan charge to tackle such schemes on the basis that a non-repayable loan is not a loan but disguised pay.
The loan charge
The loan charge was introduced by Sch.11 of the Finance (No 2) Act 2017 to tackle certain disguised remuneration tax avoidance schemes which paid employment earnings in the form of a loan from an EBT.
The charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019. The new rules allow distributions from an EBT or a similar structure to be taxed as income from employment, meaning that they will be liable for income tax and national insurance contributions.
The loan charge will not apply if by 5 April 2019:
- The loan has been repaid in full (or the individual has agreed settlement terms with HMRC) – The loan has been taxed in full under the disguised remuneration rules, as updated in 2016
- Any exclusions apply
- The loan is from an amount on which income tax has already been paid
HMRC have been encouraging individuals to settle their tax affairs before the loan charge on the outstanding loans comes into effect on 5 April 2019. Individuals affected should be advised to contact HMRC by emailing:
- Cl.resolution@hmrc.gsi.gov.uk for contractor loan schemes
- Ca.admin@hmrc.gsi.gov.uk for all other disguised remuneration schemes
Impact for insolvency practitioners
Insolvency practitioners should be notifying HMRC of any EBT schemes which they are aware of, or become aware of. The employer will be required to report the loan amount (and related information) to HMRC via the Real Time Information System. HMRC have confirmed this could be done by completing an Earlier Year Update submission on or after 20 April 2019 using HMRC’s own software, PAYE Basic Tools.
HMRC had previously advised R3 that they would not enter into direct agreements with individuals where the company was subject to insolvency proceedings, without informing the office holder and seeking to include them in the negotiations. We understand however that HMRC Policy team have advised that HMRC are unable to act in this way where individuals approach them directly for settlement negotiations and therefore members should be aware of this change in stance and be mindful that the individual may have entered into settlement terms directly with HMRC.
We are seeking to collate information to present to HMRC where such action has negatively impacted on the office holder and/or action being taken by the office holder to recover funds on behalf of all creditors. If you are aware of such cases please contact R3 Technical and Education Director, Caroline Sumner, with the relevant information on caroline.sumner@r3.org.uk
Reporting to employer
The employee is legally required to provide certain information to the employer (or former employer) by 15 April 2019 to allow PAYE and NIC liabilities to be calculated. HMRC guidance specifically confirms that where the company is insolvent, this information should be passed to the insolvency practitioner.
Liability to pay the loan charge
The current/former employer of the employee who has received the loan will generally be liable to operate PAYE and NIC withholding on the loan charge and account for this to HMRC.
The PAYE and NIC due on the loan charge should be remitted by the employer to HMRC by 22 April 2019. If the liability is settled late, late payment interest will be due. Penalties may also be levied.
HMRC has stated that exceptions to this rule will apply where:
- The employer is no longer on the Companies House register; or
- The employer was a non-UK resident company that never operated PAYE
Where either of the above circumstances apply, the employee will be required to settle the loan charge liabilities via their UK tax return and the employer should have no obligations to either the employee or HMRC (e.g. to report the loan charge).
It is unclear at present whether the loan charge arising on 6 April 2019 will fall to be treated as an expense of any insolvency proceedings or as an unsecured claim of HMRC. We have sought urgent clarification from HMRC in this regard and await a response.
Right of recovery
To the extent the employee does not reimburse the PAYE and employee NIC due on the loan charge, the employer should have a legal right to recover these costs from the employee under the legal principle of restitution.
Some companies may also be able to recover the PAYE and NIC under the terms of the trust deed (or another contractual document). The employer may therefore wish to review what agreements are in force.
Employer NIC due on the loans is not recoverable from the employee (except in very limited circumstances e.g. under an indemnity in a Sale and Purchase agreement).
HMRC guidance
Report and account for your disguised remuneration loan charge https://www.gov.uk/guidance/report–and–account–for–your–disguised–remuneration–loan–charge? Report on time limits and the disguised remuneration loan charge
https://www.gov.uk/government/publications/report–on–time–limits–and–the–disguisedremuneratin–loan–charge
Guidance for reporting a tax avoidance scheme (tax arrangements) can be found here:
https://www.gov.uk/government/organisations/hm–revenue–customs/contact/tax–avoidance
This only applies if you are using HMRC’s software, PAYE Basic Tools. If the IP’s current payroll software has the ability to process, the declaration could be done at any time after 6 April.