Disguised remuneration schemes and the loan charge


The loan charge introduced by the Finance Act 2016 was an anti-avoidance measure to tackle disguised remuneration schemes. Under such schemes, directors and employees and their families benefitted from a loan rather than the payment of a salary or bonus directly. They were often established through the employer forming an Employee Benefit Trust (EBT) or other similar structure offshore, with the expected effect - normally based on advice from the scheme provider/others - being the loan was not classed as income and therefore not subject to income tax or National Insurance (NI) contributions.

Whether such loans were, in practice, expected to ever be repaid is part of the issue in such schemes as, very often, they had never been repaid and perhaps never would be.

From December 2010 the HMRC announced it would bring forward anti-avoidance measures for future loans. 

The loan charge

The introduction of the loan charge in 2016 was a further step that looked to all loans made after 1999 (whether made before or after December 2010). It meant loans remaining unpaid on 5 April 2019 immediately became subject to tax on that date. The loan charge would be payable by employers under PAYE; they would also be disclosable on individuals’ self-assessment tax returns due by 31 January 2020. HMRC guidance included provisions on how such loan charge liability might be transferred by an employer to directors of the employer.

Since 2016 we have seen a number of cases involving difficult and protracted negotiations between employees, employers and their new management or liquidators and HMRC. A combination of the threat of claims by HMRC to recover PAYE and NI contributions from employers in respect of the establishment of such schemes and the risk of personal liability falling on individuals under the loan charge have been two parts of that catalyst.

Alongside this, issues between the employer and former directors and employees that benefitted from such schemes have also had to be addressed, most notably where the employer has become insolvent. This flows from the notable Rangers case in 2017 when HMRC established a principle that such a scheme gave rise to PAYE and NI contributions liabilities when they were set up. This, in turn, overturned a long-standing precedent dating back to 2002.

This has led to many challenges by liquidators – often, since 2017, with encouragement from HMRC – that when established, the directors had acted in breach of fiduciary duty, outside the powers of the board, or that it amounted to an undervalued – and voidable - transaction.

Supported by the Rangers case, liquidators have also asserted that the use of such a scheme gave rise to tax liabilities for the employer when schemes were established that had not been paid and if not provided for in accounts, the financial position of the company was mis-stated (i.e. that it was less solvent (potentially insolvent) than had been reported). This has a material impact on liquidators’ claims that establishing these schemes may itself have rendered the employer insolvent or subsequent acts by the employer (such as declaration of dividends of establishment of later schemes) were made on a mis-informed basis and in breach of directors’ fiduciary duties.

Some of these cases led to conflict between the employer/liquidator and HMRC: where HMRC seeks the payment of the loan charge (or settlement of the original tax liabilities) by the employer or employee but where HMRC’s claim against the employer is, properly, a claim in the liquidation for a dividend only alongside all other creditors (perhaps for a considerably smaller sum). In the case of solvent employers, attempts may have been made to settle such tax liabilities as favourably as possible to the employer and employee between them and HMRC. Similar settlements have proved far more complex with insolvent employers. 

Independent review 

Many people - including many employees – view the loan charge as grossly unfair. There were a number of reported examples where some schemes were a condition of 'employment', or mis-selling or advice that properly reflected established case law decided before 2017.

There have also been several cases where the individual employee’s circumstances have so radically changed since the schemes were established that they became insolvent themselves in the face of these substantial personal tax liabilities.

Many employers also faced insolvency as a result of the Rangers case, where provisions had not been made against that possibility. The advancing threat of the loan charge (which would be easier to charge and collect) brought such issues to a head.

In 2019, an all-party parliamentary group investigated the impact of the loan charge, leading to an independent review by Sir Amyas Morse. The report broadly supported the philosophy of the loan charge to combat anti-avoidance schemes. It also made a series of recommendations to lessen the impact of the loan charge and to strike a fairer balance, especially for the earlier loans where the report noted that “taxpayers would need to have acted in a way that was perverse in light of a clear legal position” to have planned to pay tax on loans.

Almost all those recommendations were accepted by the Government in its response. HMRC has provided the following specific guidance:

  • the loan charge will now only apply to loans taken out on or after 9 December 2010: neither employer nor employee is liable for that charge and any payments or settlements will be adjusted (but the employer in particular could still be liable for any original tax when schemes were established);
  • if loans made in tax years before 6 April 2016 were disclosed fully and HMRC took no action at the time, the loan charge will not apply (but HMRC reserves the right to claim tax from individuals or employers where old returns remain subject to open enquiries);
  • scheme users can amend or defer filing their self-assessment tax returns and payment of the loan charge element of any tax liability due for 2018/2019 until September 2020;
  • taxpayers can split the liability for any loans that continue to attract the loan charge over three years to make it more affordable;
  • there is guidance to address cases of hardship and payment plans; and
  • specific guidance has been published by HMRC for a number of specific groups.

Continuing areas of complexity

 The review does not directly address:

  • HMRC claims to tax upon the establishment of such schemes (whenever established);
  • the loan charge on loans made after December 2010. Such claims are made against the employer (but may potentially be transferred by HMRC to the employee under established PAYE regulations for post-2010 loans) and/or under self-assessment tax returns;
  • the need to negotiate the payment of the remaining post-2010 loan charge liabilities and risks to employees’ and/or employers’ solvency;
  • disputes between employees/directors and employer/liquidators as to whether the former are liable to the employer in respect of voidable transactions or breach of duty or to reimburse the employer for tax paid or payable by the employer that has not been deducted;
  • the potential for additional tax charges on the individual where the employer has paid or now pays the original tax liability and/or the loan charge and the employee has not or does not reimburse the employer.

For further information and/or guidance on disguised remuneration schemes, the loan charge and associated issues, please contact Mark Cullingford.

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