New charge on outstanding disguised remuneration loans

[TheDandy]

Sorry if I'm not understanding the technicalities of this discussion correctly. But since many people have been sent (and are in the process of paying) APN's, hasn't HMRC already decided that this money is not loans but in fact income, and taxed them accordingly.

The loans are outstanding because HMRC are not interested in getting the loans written off - although they dispute they are loans in the first place. The same money can't be both income and a loan.

Payment of APNs is not the same as payment of the tax - 'officially' the tax is still in dispute and the APN is a demand for payment on account until the dispute is decided. This new proposal clearly shows the APNs up for what they are and all they were ever intended to be. Their strategy is death by a thousand cuts. I doubt whether they had any intentions of litigating. It will be incumbent on you, me, us, whoever, and whatever form that takes to do the litigating. Just my opinion, IANAL.

[Iliketax]

So what happens if you had a loan of £195,000 that would be chargeable to tax, but HMRC has missed the enquiry/discovery assessment window?

That's not likely for years 11/12 onwards, but increasingly likely for years prior to that.

In that case, for example, 2007/08, no tax has been paid on the loan because there was no enquiry and the time limit has lapsed.

I think that where "Iliketax" and I differ is that my interpretation says, HMRC can raise a charge at 5/4/19 if the loan drawn in 2007/08 remains unpaid, trampling all taxpayer protections to dust.

My understanding is that in these circumstances there are the following choices (assuming an employee is involved):

1. Do not settle. PAYE and NIC on £195,000 on 5 April 2019 at whatever 2018/19 rates are. No relief for any tax on benefits in kind that you have already paid. No tax due for earlier years. Assuming PAYE paid promptly, no interest, no penalties. If you already have (say) £60,000 of income that year you and the current tax rates apply, you will (i) lose your personal allowance, (ii) pay £90,000 at 42% plus £105,000 at 47%, (iii) be limited to £10,000 of pension contributions (compared with £40,000) that would normally be the case on £60,000. For incomes less than £60,000 there may also be a clawback of child benefit. There is no sign of HMRC allowing time to pay-post April 2019 (although some may have a generous employer).

2. Agree a settlement with HMRC before 6 April 2019. Income tax and NIC due for whatever years the 'loan' arose at whatever the rates were in those years. So, if that was (say) £65,000 per year for three years on top of £15,000 of salary, there would be some at 32% (or 31%) and some at 42% (or 41%). Any tax paid on the benefit of an interest-free loan will reduce the tax due. Interest on late tax. Probably no penalties. No impact on personal allowance or pensions annual allowance. May be able to agree a sensible time to pay with HMRC. If HMRC come up with a more favourable settlement opportunity then you may get a better deal. But my personal opinion on that is there will not be a new, improved deal.

In either case the loan will be outstanding - that has nothing to do with HMRC. There is no clue what HMRC is going to do about IHT. There is also no clue as to how HMRC will deal with the employers' NIC in the "do nothing" situation if the employer has, for example, gone bust. If that gets transferred to the employee that'll really add to the expense.

If you are in this position (and are an employee) then you can put the numbers in the spreadsheet and (subject to the bits that are outstanding) it is easy to decide what is best from a cash perspective.

If HMRC has already opened an enquiry then there are a lot more ways it can go and there will be more things that are outside of your control.

a. Do not settle and HMRC choose not to pursue earlier years (or are unsuccessful in court). As per my (1) above.

b. Do not settle, HMRC pursue earlier years and are successful in court before April 2019. This is similar to settling for the full amount, as per my (2) above; although there may be a risk of more penalties and anything favourable you can negotiate in the settlement will probably not be available (i.e. things will be calculated strictly).

c. Do not settle, HMRC pursue earlier years and are successful in court after April 2019. This is similar to (1) above at April 2019. But then there can be more tax, NIC and interest to pay as a result of HMRC being successful in challenging the years when the 'loan' arose. The tax paid in 2019 will reduce the tax due for the year when the loan arose. This could be reduced to nil but you won't get a refund. It's not clear whether 2019 tax can offset interest on late tax when the loan arose. Again, there can be a risk of more penalties.

d. Settle now. This is the same as my (2) above.

In real life, it is harder than this as there may be APNs, FNs, hassle with HMRC asking for more info, and stress etc. With a spreadsheet, it is easy to work out your minimum exposure. But there can be much more uncertainty as to what your maximum exposure is (e.g. if HMRC are successful in the courts after April 2019).

If you were self-employed, HMRC's position is not yet clear.

[Whysoserious]

Don't be pushed

This proposed legislation is a massive stick to bully people into settling, nothing more. It strikes me that HMRC know they will lose most of the contractor schemes in court.

Most legal tax opinion sides with Murray and except those with HMRC tinted glasses, most fully expect the Supreme Court to rule in favour of Murray.
That would leave HMRC in a difficult position.

HMRC are desperate. Why would they need to introduce such legislation if they believed the schemes didn't work? Why would they have to issue APNs if they know in 2019 the 'tax' will be paid eventually? Why even wait for 2019, just introduce the 'tax charge' from 2016.

We now have a 3 year window of uncertainty. A big stick to bully people into settling on schemes that would otherwise have won in court.

If HMRC truly believes this legislation will be enacted in its current form they would pack up their belongings and wait for 2019 to steal/collect their winnings.

Instead it will be another failed implementation from HMRC that will be successfully challenged all the way to the supreme court. The complexity of introducing such a 'tax charge' goes against everything UK tax law upholds.

Huff puff and bluff from HMRC. Don't be bullied.

[DonkeyRhubarb]

I think that where "Iliketax" and I differ is that my interpretation says, HMRC can raise a charge at 5/4/19 if the loan drawn in 2007/08 remains unpaid, trampling all taxpayer protections to dust.

I agree with you.

The 5/4/19 charge can be levied against any outstanding loan going back to the dawn of time.

It's a very devious move by HMRC since it enables them to tax loans which have slipped through the enquiry net.

It's a bitter blow for anyone, who thought they were in the clear, because HMRC missed the enquiry/discovery window.

[webberg]

The longer (and excellent) piece from "Iliketax" above I would generally agree with except that under his scenario 1 I think that the tax charge will be the higher of:

a. the tax as calculated, or

b. the tax that would have been due in 2007/08 plus interest from the due date for that year.

That is how I read paras 5 and 6 of Chapter 6 of the Technical Note.

As DR says, a bitter blow to all those who thought that they had escaped a liability due to HMRC administrative incompetence.

I can't help but think that HMRC is terrified of going back to PAC and being hauled over the coals for letting some people "get away with it" due to such incompetence and therefore would rather ignore all legal protections for taxpayers by introducing a retrospective law as a bandaid.

[webberg]

I would add that if the situation was a tax charge in respect of 2018/19, due say 31/1/20 (or even 5/5/19) without interest but with a capacity to pay over say 4 years in instalments, then I think many would take that.

That would go some way towards HMRC admitting that after 10+ years of "enquiry" they have not proven anything and are to a degree culpable.

What I don't get is that the primary liability falls on the employer. By giving 3 years notice of action, they are allowing the employer to extract themselves legally, leaving the contractor carrying the can.

By employer, I mean the employment intermediary in the first instance (scheme provider).

What could be more interesting is if HMRC regard the end client as the employer and seek PAYE from them. That end client is far less likely to have disappeared (especially if they are a big bank), have deep pockets and a reputation to rebuild.

Take some time over the weekend to look at your documents and see if there is any form of tax indemnity or warranty in your pack and whether that is legally enforceable.

If you have a scheme that has "insurance" attached, look at that as well.

[DonkeyRhubarb]

I maybe missing something but if HMRC go ahead with this they say that they would go after the 'employers' first and if they aren't around then the employees or something along those lines?
Who are the employers? Are these the trustees of the EBT scheme as regardless of whether the promoters are around (which they wouldn't be) the trustees would still be there? Of course these trustees could never in a million years have the funds to pay this so they could in principle declare bankruptcy? If that happens then the financial burden stays with them as HMRC couldn't then go after the beneficiary? Would HMRC even know who these trustees are? The stupid thing is the contractor will have to declare bankruptcy and the biggest creditor isn't HMRC but the Trust where the loan came from right?
It's all very confusing...

The 'employer' is the (IoM Ltd) company you had a contract of employment with; the company that paid you a small salary, and deducted PAYE and NICs; the company that was named as your employer on your tax return.

I'd be surprised if many of these are still around.

[webberg]

They may not be around but the Trustees would be? I guess it is the same if a IR35 tax dispute came up in regards to a Ltd. company that has now closed? Can HMRC pursue it if the company has closed and still go after the Director?

Very unlikely that the Trustee could be the employer under the terms of Part 7A ITEPA 2003.

The intermediary agency is more likely but with 3 years notice of a massive tax bill, chances of them being around are close to zero.

That is why the Technical Note promises changes to who is liable for the PAYE liability (tax and NIC) where it "cannot reasonably be collected from the employer" [Chapter 4 para 13 of Technical Note].

What if the end client is the employer?

If HMRC make that stick and the client pays up, can that end client recover funds from you?

[webberg]

They may not be around but the Trustees would be? I guess it is the same if a IR35 tax dispute came up in regards to a Ltd. company that has now closed? Can HMRC pursue it if the company has closed and still go after the Director?

In some instances, mainly close companies, yes.

A close company is one owned by 5 or fewer participators.

A participator is usually a shareholder with more than 5% or a person who with their connected parties can own more than 5%. Where that person is also a director, the chances of liability shifting to the individual increase.

[webberg]

Enough now

The Technical Note on Disguised Remuneration is the first stage of the process.

We will in due course see a Consultation document and then draft legislation and then final legislation.

It occurs to me that speculating about how the rules might work or be interpreted and suggestions about who is/is not liable is giving HMRC an insight into how to construct the next stages and plug gaps that they have not thought of.

I'm going to speak with some of my more IT literate colleagues and see if we can't put together a more private forum to discuss this issue, away from public gaze.

In the meantime, I shall stop speculating here and I would urge others to do the same.

if I can get a private forum together (any offers of help will be gladly accepted), I'll post joining details here.

For now though, I'm out of here.