HMRC has been cracking down for years on the use of disguised remuneration schemes. From 5 April 2019, a new 'loan charge' will apply to outstanding loans from such schemes, treating employees as if they received an equivalent cash payment (with the income tax and National Insurance consequences that would follow). However, employers and employees that act by 30 September 2018 can settle their liabilities with HMRC on more preferential terms.

HMRC's view of disguised remuneration schemes

Disguised remuneration schemes have long been challenged by HMRC. Typically, such schemes involve an employer paying cash to a third party (such as the trustee of an employee benefit trust), rather than directly to an employee. The third party would subsequently pay cash to the employee in the form of a loan, or otherwise make the cash available for the employee's benefit. In this manner, the employee (indirectly) would have received the cash (or the use of the cash) without the employer first deducting income tax and National Insurance Contributions (as it would have been required to do on a direct payment).

Since December 2010, there have been various legislative changes to crack down on such arrangements (and the relevant legislation has a very wide scope, in broad terms biting on third party arrangements generally except where specific exclusions apply, e.g. for registered pension schemes). Those changes were, broadly speaking, prospective and imposed a tax charge on the creation of further such arrangements, the material variation of existing arrangements, and/or steps taken under existing arrangements. As a result, those employees who had already (before December 2010) received loans had the option simply to leave them outstanding, i.e. to do nothing.

HMRC have tended to regard such arrangements as taxable in any event, even if taxpayers chose to do nothing in response to the above. Generally, HMRC sought to assess a tax charge at the point money was paid to the third party (i.e. to impose the same tax charge as if the money had been paid directly to the employee).

HMRC's stance in this regard was emboldened by their success (on this basis) in last year's Supreme Court decision in RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC 45.

A recent legislative change has given HMRC a more significant weapon even than their success before the Supreme Court.

A so-called 'loan charge' will apply to loans from disguised remuneration schemes which remain outstanding on 5 April 2019 (although the charge only bites on loans which were made on or after 6 April 1999). In simple terms, if you received a loan from, for example, a remuneration trust and it has not been repaid in cash, the full principal value of the loan will be taxed at the end of this tax year, unless you take appropriate steps (see below). In other words, doing nothing is no longer an option.

Whilst the tax charge falls primarily on the employer (under PAYE), it is a common misconception that employees are therefore off-the-hook. Whilst the tax falls initially to be paid by the employer, it is a tax on the employee's income. Consequently, the employee is required to reimburse the employer for any payment it makes and, even if the employer does not pay, the employee's liability still exits. Employees, under self-assessment, must declare all liabilities correctly and honestly in their tax returns, and HMRC will pursue employees where the employer does not pay, or cannot pay (e.g. because the employer is insolvent). So, in essence, the loan charge is a concern for both employers and employees equally.

It is a further misconception for employees (separately) to think that they are off-the-hook where they have left the UK, having received such a loan in connection with a prior UK employment. Tax charges in relation to a prior UK employment will arise notwithstanding an employee's current non-UK residence. And HMRC often has the ability to pursue employees outside the UK (as many jurisdictions have signed up to multilateral agreements enabling this).


So, if you are an employer or an employee who has participated in a disguised remuneration scheme, what should you do?

The answer, in our view, is to approach HMRC as soon as possible with a view to settling any liabilities (especially in relation to outstanding loans) on the best terms possible.

HMRC have made a settlement opportunity available offering certain preferential terms, but have stated that all relevant details must be submitted by 30 September 2018 (at the latest) in order to settle matters in advance of the loan charge biting on 5 April 2019.

HMRC will generally require taxpayers to agree that the initial payments to the third party were taxable (as this has generally been their stance all along – see above), and then to pay the tax and late payment interest accordingly. However, a skilled and experienced advisor can assist in negotiating the best possible outcome with HMRC, and can help you navigate more generally through the various issues to consider.