We have all been aware of the coming of the dreaded Loan Charge for quite some time and there has been uncertainty all around about what impact it would have on everybody who has been involved in Schemes designed to reduce the tax burden for contractors and others operating throughout the UK and overseas. Now that it is here, has anything changed and are we any nearer understanding its impact, whether it can be avoided or even whether it is only the first step in a march against such tax planning?
The Schemes caught by the Loan Charge are generally known as Disguised Remuneration which, put simply, could be described as arrangements to change the appearance of payments which are wages, salary etc from reward for work to loans. This was done, of course, because loans, unlike wages etc, are not taxable and, as such, an individual could almost work tax-free but would have to pay a small fee to the Scheme Provider. There were many variants to the Scheme but they all relied upon the individual receiving his wages in the form of loans from a third party and, as such, tax-free whilst the employer made a payment to the third party, usually a Trust, and claimed a tax deduction in respect of the appropriate amount.
All of the Schemes had the backing of eminent barristers who advised that the loans would not be taxable but HMR&C has successfully dismantled Schemes and established at the Tax Tribunal that the loans are wages and are taxable. Not all Schemes have been tested at Tribunal and some are ongoing but the stark fact is that the loans are taxable. There is nothing in the ongoing cases to suggest that the Tribunal will ever take an alternative view and those who used the Schemes are faced with large tax and NIC bills. The Loan Charge has been introduced to bring matters to a head with those people who have used Schemes but who have not settled their liabilities with HMR&C.
Settlement Opportunities have been offered by HMR&C since 2011 and take-up initially was quite slow; however, as Tribunal Cases were lost by appellants, the rate of people wanting to settle increased and further Opportunities were presented. All of those Opportunities had time limits on them but even today, after the Loan Charge has been introduced, there is still sometimes the possibility of reaching a negotiated settlement with HMR&C.
The impact of the Loan Charge is that anyone who has not reached settlement with HMR&C and who has not repaid the loans that he received as Disguised Remuneration will have to self-assess and pay the appropriate duties. The Charge cannot be avoided but more favourable terms for payment may be achieved by dealing direct with HMR&C now. If the original loans came from a Trust it will be necessary to break the Trust as part of the settlement arrangements. A Deed of Release may be required.
The Government is determined that HMR&C should stamp out the use of Schemes to avoid or lessen taxes and the Loan Charge is only one of many initiatives that are under way to achieve that. It is necessary to take independent professional advice from a firm such as CM Accounting before considering using any Scheme as the penalties for using such methods to reduce your tax bill in future are extensive and can exceed the amount of tax saved. Similarly, these swingeing penalties will apply to people who fail to fully disclose loans under the Loan Charge legislation.
If you have used a Disguised Remuneration Scheme and have not settled with HMR&C, we can help you resolve matters in the most efficient way and can liaise with HMR&C on your behalf.