Disguised remuneration loans

Contractors could have to repay tax retrospectively on loans

5 April 2016

A mammoth technical policy document published alongside the Budget on March 16th contains a measure that will be unnerving to any contractors who have outstanding loans from an ‘employer’ or a company that they own.

Chapter 5 of this policy note contains details of a new charge to be served on ‘outstanding disguised remuneration loans’.

The new charge forms part of the government’s commitment to retrospectively tackle the use of disguised remuneration schemes. The new rules state that tax and national instance contributions will be made payable on any ‘employee’ loans that are still outstanding on 5 April 2019.

By ‘disguised remuneration’ loans, the document is referring to two types of loan commonly used by some contractors. These are employee benefit trust (EBT) loans, where company owners extract money from their business without paying income tax; and contractor loans, where an individual receives a loan and a small salary from an (usually offshore) ‘employer.’

In both cases the loans were previously subject to low rates of interest and while, technically,  they were to be repaid, they rarely were.

Setting out what needs to be repaid, the technical note clarifies that the new charge will apply first where loans have been made prior to the introduction of the Finance Bill 2016, which effectively bans disguised remuneration. Secondly, repayment will be required where the loan is still outstanding by April 2019.

The 5 April 2019 deadline gives any contractors who have taken out these loans some time to straighten their affairs. As the policy document says: “there will be a period of grace in which the loan can be repaid in full, or the user can settle with HMRC, to avoid the new charge being triggered.”

Importantly, this charge has no cut-off date. So theoretically, a contractor who took out a loan decades ago could still be liable to pay the charge.

Neil Armitage, Director at Umbrella.co.uk said: “These kinds of arrangements have previously been very popular and I think there will be a number of contractors operating in the past who will owe money. Although this policy might hurt some contractors, I think it goes a long way to show that most of the aggressive tax avoidance schemes do not pay in the long-run.”

Examples from HMRC

If you are unsure whether this will apply to you, HMRC has offered two examples to illustrate the new charge which have been copied below.

Example 1

An employer ‘B’ directly placed £200,000 into an EBT ‘P’ prior to December 2010 in order to remunerate an employee ‘A’. Shortly afterwards P made a loan of £195,000 to A.

If that loan is outstanding on 5 April 2019 the new measure will charge the loan amount of £195,000 to income tax and NICs. The £5,000 not borrowed by A is not subject to the charge but may be caught by Part 7A at a later date.

If A repays the debt to the P before 5 April 2019 there is no charge under the new measure as there is no debt outstanding. However, the £200,000 now held by P may be caught by Part 7A at a later date, for example if it were distributed to A.

There could be an earnings charge on the contribution to P prior to December 2010. More detail is provided in Chapter 6.

Example 2

The facts are the same as in Example 1 above.

However, before 5 April 2019 a settlement is reached between B and HMRC on the basis that the £200,000 was earnings of A.

On the 5 April 2019 B does not have to pay the new charge as the same amount has already been taxed as earnings.