With taxpayers needing to register by the end of May 2018, this is a key question to be answered. Many tax avoidance schemes as classified as Disguised Remuneration.
What is Disguised Remuneration?
There have been many different types of tax avoidance schemes over the years that fall under the heading of Disguised Remuneration. Put simply, Disguised Remuneration can be an employee (the taxpayer) receiving a loan instead or as part of their normal taxable income. The loan may or may not have interest on it which itself can be paid or rolled up. Often the arrangement involves a number of taxpayers, both individual employees (the beneficiaries), the employing company (the settlor) and typically a Trust.
What is the issue?
In April 2019, all outstanding loans will be taxed as income on the employee. As a consequence, the employee may suffer more tax at the higher rate or additional rate as the quantum of the loans is added to the amount of their gross remuneration. In addition, certain allowances will be lost by the employee. In other words, the amount payable under the Loan Charge will be higher than that which would be payable if they reached a Settlement with HM Revenue & Customs (HMRC).
What else may be of concern to taxpayers?
Paying the Loan Charge will not settle any earlier tax investigation. The amount of the Loan Charge will also set the minimum amount of tax and interest payable. Any amount paid under the Loan Charge can only reduce any subsequent liability to £Nil, none of the amount paid under the Loan Charge is refundable.
How can the Loan Charge be avoided?
There are only two ways in which the Loan Charge can be avoided:
- Cash is used to repay the loan(s). Repaying the loan by using any other asset does not qualify. For example, if the taxpayer transferred a property into the Trust of an agreed equivalent value does not avoid the Loan Charge; or
- A Settlement is reached with HMRC.
What other issues need to be borne in mind?
Inheritance Tax can be extended to the Settlor and each Beneficiary.
Repaying loans has an impact on the Loan Charge but not necessarily on any earlier tax charges. Those who don’t reach a Settlement with HMRC will need to comply with the on-going reporting requirements.
Time To Pay arrangements may spread the cost over a number of years but interest will be charged.
So what should I do now?
Don’t delay and seek advice. Taxpayers need to be registered by 31 May 2018.
If you want to discuss your options, you can contact me at firstname.lastname@example.org or Andy at amaxfield @hwca.com.