Previously a number of companies entered into tax avoidance schemes that primarily were arrangements allowing a company to reward their employees by way of a loan made by a third party such as Employee Benefit Trusts (EBTs). The company would receive a tax deduction for the contribution to the EBT and the EBT would make a non taxable loan to the employee – these loans were designed never to be repaid.
These types of tax avoidance schemes involving tax free loans were stopped by new legislations introduced in CTA 2009 and The Disguised Remuneration Rules introduced in FA 2011 in Part 7A of ITEPA 2003.
The rewarding of the employees in this manner also called ‘relevant steps’, taken before the new rules were introduced in December 2010 were not caught within the new anti avoidance provisions. This effectively meant that tax avoidance schemes already in place with loans outstanding were captured in hibernation mode and hence did not affect the users.
The 2019 Loan Charge is designed to revisit these tax avoidance schemes used previously, and any new tax avoidance schemes which have been brought, and apply a PAYE charge retrospectively. The PAYE charge will be payable by the Employer in the first instance and then to the Employee (under the proposals by HMRC).
The draft legislation for the 2019 Loan Charge effectively brings a new ‘relevant step’ as per the Disguised Remuneration rules. This will effectively bring those loans entered into before Part 7A was enacted within the PAYE charge of the loan which has not been repaid at 5th April 2019.
Accordingly, a “person” (i.e. the Trustees of the disguised remuneration scheme) is seen as taking a “relevant step” if:
a. The person has made a loan after 6 April 1999;
b. to a relevant person (ex, current or future employees or a person chosen by them); and
c. the loan remains partially or wholly outstanding at 5th April 2019.
This means that essentially the following loans will not meet the criteria for relevant step:
a. Loans or advances made before 6 April 1999
b. Loans made to non-employees
c. Loans or advances that have been fully repaid prior to 5th April 2019
The 2019 Loan Charge is a new form of retrospective legislation being introduced capturing loans made since 1999.
Disclosure / reporting requirements
HMRC have recently provided more details in relation to reporting requirements for such advances or loans.
By no later than 1 October 2019 all employees or relevant persons who have been in receipt of loans from such tax avoidance schemes are required to provide the following information to HMRC:
a. Their contact details
b. Case reference number if relevant
c. The amount of loan outstanding including repayments and write offs
The employer is required to report loan outstanding through PAYE.
Self employed contractors
Self-employed contractors that have used tax avoidance schemes using contractor loans are required to include the outstanding loan amount on their self-assessment tax returns. Providing inaccurate information or not declaring the outstanding loans is likely to result in penalties. There are also chances of criminal prosecution for deliberately making a false declaration.
What are the options
In our view, the best option is to agree a settlement with HMRC. We specialise in such settlements and will represent our clients throughout the process until matters have been fully concluded. If you are an employer, employee or a contractor and have previously used a scheme involving loans, please contact us on 0207 998 1834 to discuss your options.