Policy paper

Corporation Tax and Income Tax: tackling disguised remuneration - restricting tax relief for contributions to avoidance schemes

Published 5 December 2016

Who is likely to be affected

Employers using disguised remuneration avoidance schemes that seek to avoid payment of PAYE and National Insurance contributions (NICs) whilst claiming a tax deduction for an employment expense.

General description of the measure

This measure will deny deductions in computing an employer’s taxable profits for contributions to a disguised remuneration tax avoidance scheme unless any associated charge to PAYE and NICs is paid within a specified time.

This measure is being introduced alongside two others that also tackle disguised remuneration: ‘Tackling disguised remuneration: self-employed’ and ‘Tackling disguised remuneration: employment’. Tax information and impact notes have also been published to provide detail on those measures.

More detail on all the changes and measures can be found in the technical note and summary of responses also published on 5 December 2016.

Policy objective

This measure supports the government’s commitment to tackling tax avoidance and aims to deter the future use of disguised remuneration avoidance schemes.

Background to the measure

At Budget 2016 the government announced a package of changes to prevent and tackle use of disguised remuneration avoidance schemes.

Disguised remuneration avoidance schemes are used by employers and individuals to avoid tax and NICs. There are various types but they commonly result in a loan from a third party that is on such terms that mean it is unlikely to ever be repaid.

This measure was outlined in the Tackling disguised remuneration: technical consultation which was published on 10 August 2016 and closed on 5 October 2016. The consultation also outlined the related measures.

Detailed proposal

Operative date

This measure will have effect for contributions made on or after 1 April 2017 (for Corporation Tax purposes) or 6 April 2017 (for Income Tax purposes).

Current law

The current law is set out in Chapter 1, Part 20 of Corporation Tax Act 2009 (CTA 2009) and Chapter 4, Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to prevent an employer deducting a contribution into an employee benefit scheme when computing their taxable profits, unless any associated PAYE/NIC is paid within 12 months of the end of the relevant accounting period (or 12 months of the end of the relevant basis period in the case of a non-corporate employer). The relevant period is that for which the employer seeks a deduction in computing their taxable profits. This will not necessarily be the period in which the contribution is made into the scheme. The legislation will also apply where remuneration is paid within nine months of the end of the relevant period and that payment of remuneration is, or is connected with, an employee benefit contribution.

The changes will also impose an overarching time limit such that if the employer does not claim a deduction within 5 years of the end of the period in which the contribution is made, that amount cannot be deducted when computing taxable profits.

The measure also changes the definition of employee benefit scheme to include the close companies’ gateway that will be added to Part 7A of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) as outlined in the Tackling disguised remuneration Technical Consultation document.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
+10	+25	+180	+310	+40	+65

These figures are set out in table 2.1 of Autumn Statement 2016 as ‘Disguised Remuneration: extend to self-employed and remove company deduction’. These figures represent the combined Exchequer impact of ‘Corporation Tax and Income Tax: tackling disguised remuneration: restricting tax relief for contributions to avoidance schemes’ and ‘Disguised remuneration - self-employed schemes’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The costing also accounts for a reduction in the estimate of employers seeking to avoid the Budget 2016 disguised remuneration rules as a result of this measure.

Impact on individuals, households and families

This measure may impact the directors of companies who enter into tax avoidance schemes. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The proposed measure will affect those with legally protected characteristics as recognised in the Equality Act, engaged in disguised remuneration avoidance schemes. Aside from these, it is not anticipated that the measure will have a significant or disproportionate impact on other groups.

Impact on business including civil society organisations

This measure will have no impact on businesses and civil society organisations who are not involved in complex avoidance schemes. It will only impact on businesses that seek to avoid payment of PAYE and NICs whilst claiming a deduction for an employment expense.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

It is not anticipated that implementing this change will incur any additional costs or savings for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through the disclosure of new avoidance schemes seeking to circumvent the measure and through communication with affected taxpayers and practitioners.

Further advice

If you have any questions about this change, please contact the Business Profits Team by email: businessprofits.admin@hmrc.gsi.gov.uk.