On 7 November 2017, HMRC announced detailed settlement terms for all users of disguised remuneration (DR) arrangements.
The latest settlement opportunity follows on from the popular contractor loans settlement opportunity which closed in September 2015 and offers users the opportunity to settle with HMRC before the introduction of the new DR loan charge in April 2019. To participate, those wishing to negotiate settlements must register their interest to participate in the opportunity before 31 May 2018. All the information must then be provided to HMRC by 30 September 2018, to allow time for a settlement to be agreed before the 2019 loan charge arises.
HMRC categorises potential users of the settlement opportunity into three categories: contractors, employers and employees. The settlement terms for each differ and are detailed below. In all cases late payment interest will apply and penalties might be due, depending on the behaviour of the individual which gave rise to the loss of tax.
Why consider settling now ?
HMRC considers itself to be in a strong position given a run of related tax litigation successes, and the impending imposition of new 2019 loan charge. Whilst the proposed terms are complex, and may not suit all, they allow for pragmatic negotiation with HMRC so that liabilities may be determined and payment terms agreed. Under the settlement opportunity, amounts received are taxed in the year which they arise, rather than in one lump sum in April 2019. This allows users to take advantage of lower tax bands and may therefore be advantageous when compared to the April 2019 loan charge. We have outlined some of the other key features below.
Contractors
'Contractors' are defined as individuals who provide their services to clients that don’t directly engage them. Typically their services will be provided through an umbrella company, agency, partnership or their own company. Contractors can be either employed or self-employed.
Settlements with contractors will be on a ‘net basis’. This means that income tax will be applied to all DR loans and other payments made to the individual and not uplifted by fees paid to promoters, which are not strictly an allowable expense against earnings. Any beneficial loan tax previously suffered can be used to reduce the tax due where the relevant tax year falls within the last four years.
To prevent future DR charges and the 2019 loan charge, a voluntary payment must be made to HMRC which relates to any years where the time limit for assessment has passed but the user received DR loans or payments. National Insurance contributions (NIC) will not be due for employees, but Class 2 and 4 NIC will be due for the self-employed.
Employers
'Employers' for these purposes are anyone who has entered into a disguised remuneration scheme to reward their employees.
Employers will need to pay income tax, primary and secondary Class 1 NICs on the amount contributed to the DR scheme. Any tax suffered by the employees on beneficial loans (if within the last four years) or NICs paid by the employer can be used to reduce the tax due.
To prevent future DR charges and the 2019 loan charge, a voluntary payment must be made to HMRC where the time limit for assessment has passed.
Employers will be able to claim a deduction for corporation tax purposes for any income tax or NICs paid under the settlement.
Employees
Employees are defined as someone who has been paid through a DR scheme entered into by their employer, and they are not a contractor. This will typically apply where the employer does not wish to pursue a settlement but the employee does.
Employees will need to pay income tax and NICs due on the amounts contributed to the scheme. Employees will also have to pay Class 1 secondary NIC if the employer no longer exists. Any tax suffered on beneficial loans can be used to reduce the tax due where the relevant tax year falls within the last four years.
Inheritance tax
Inheritance tax (IHT) is likely to arise where a trust has been used under the DR scheme. IHT charges typically arise where there has been a loss of value to the trust, such as outright payments or loans to DR users.
IHT charges may be relieved if the payment from the trust giving rise to the charge is treated as income. However, in some circumstances the trust may be liable for ten year charges and an exit charge may apply if the structure is collapsed after a settlement has been agreed. Given the complexity of this area specialist advice must be sought before agreeing a settlement with HMRC.
Accrued interest
Where loans to users are interest bearing, if the trustee releases or writes-off the outstanding loan balance, a charge under Part 7A ITEPA 2003 may apply. Under the settlement opportunity relief against the Part 7A charge will be given if the trust is closed or collapsed as part of the settlement.
As part of the settlement terms, IHT will not be paid on accrued interest. However where funds contributed into a trust have been invested, any investment growth will be subject to a Part 7A and IHT charge as part of the settlement, or when the funds are distributed from the trust.
What to do now?
The settlement terms are complex, and advice on individual circumstances is key. The important point is to ensure that the options are considered before the terms elapse at the end of May 2018. To simply await risks the possibility that higher tax charges will follow in 2019, and that payment terms might not then be negotiable. We have already advised a number of clients so as to obtain optimal settlements – for further information please
contact a member of our team.