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This publication is available at https://www.gov.uk/government/publications/disguised-remuneration-settlement-terms-2020/disguised-remuneration-settlement-terms-2020
This guidance has been written for agents. If you’re in a disguised remuneration scheme, there’s guidance on settling your own tax affairs.
Use this guide to help your clients understand how their disguised remuneration liabilities will be calculated under the 2020 settlement terms. They take into account changes to the loan charge following the Independent Loan Charge Review, but should be used for settlements in relation to all disguised remuneration liabilities.
How your client can expect to settle depends on the type of scheme they used and if they’re classed by HMRC for the purposes of these settlement terms, as a:
If your client has used more than one type of scheme you’ll need to look at the guidance for each type to arrive at the final possible settlement position.
HMRC recognises that disguised remuneration arrangements can be wide and varied. This guide therefore explains the general principles that apply to disguised remuneration schemes as it is not possible to cover how it applies in every particular situation.
All settlements will be subject to normal governance procedures that are tailored to the size of the case. This is to make sure compliance with HMRC’s responsibilities under collection and management powers and the Litigation and Settlement Strategy.
The terms of settlement in this guidance may not be available if your client’s appeal has been referred to a tribunal.
1.1 Open enquiries
Tax years that are subject to an open enquiry or assessment will need to be resolved, either by way of agreement with HMRC under the terms outlined in this guidance or through litigation. When you resolve your tax affairs, we’ll take into account any accelerated payment notices you’ve paid and if we need to collect any residual tax due.
A contractor, for the purposes of these settlement terms, is someone who provides services to clients that do not directly engage them. They may provide their services through:
- an umbrella company
- an agency
- a partnership
- their own company
Contractors can be classed as either:
- employed - they’ll have an employment contract, often providing their services through an offshore employer
- self-employed - they’ll have a contract for services, meaning they provide their services in a self-employed capacity
Different tax rules apply to different types of scheme use. The main differences in the settlement terms are highlighted in this guidance. If you’re not sure if the scheme your client has used means they’re classed as employed or self-employed, email: email@example.com.
2.1 Contractor settlement terms
Settlement will be on a ‘net of fees’ basis. Income Tax will be applied on all the disguised remuneration loans or payments received by the client. This means that the fees deducted from the gross amount by intermediaries (scheme expenses), will not be taxed as part of income or profits.
Income Tax is due for years in which:
- disguised remuneration loans were paid, or other payments were received
- HMRC has an assessment in place or there is still in time to make an assessment (referred to in this guidance as ‘protected liabilities’)
The tax is calculated at the rates and bands applicable in the year of the loan or payment.
As well as needing to pay protected liabilities to resolve open enquiries and assessments, and provide double taxation relief, an employed contractor can choose to pay voluntary restitution for unprotected liabilities to prevent future disguised remuneration charges. If voluntary restitution is included in a settlement agreement, it becomes legally enforceable along with the rest of the liabilities included in the settlement.
Late payment interest is due for protected liabilities. No late payment interest will be payable on voluntary restitution. Late payment interest will be charged from the date the tax was originally due until the expected date of settlement. A payment on account of tax due may be made to stop further late payment interest from accruing. Please contact us if you would like to make a payment on account.
Anyone who does not wish to settle protected liabilities can choose to appeal relevant enquiry conclusions or assessments and take their case to litigation.
Inheritance Tax may also be due dependent on the nature of the scheme and the amounts put through the trust.
2.2 National Insurance contributions - employed contractors
Employed contractors will not have to pay National Insurance contributions personally but HMRC may still pursue their employer or other liable party.
2.3 National Insurance contributions - self-employed contractors
Self-employed contractors will need to pay Class 2 and Class 4 National Insurance contributions as appropriate on all disguised remuneration loans or other payments.
Class 2 and Class 4 National Insurance contributions will be calculated using the rates and bands in the years the loans were made.
2.4 County Court fees
If HMRC issued a County Court claim to pursue the National Insurance contributions liability resulting from a contractor’s use of a disguised remuneration scheme, the fee for issuing that claim will need to be included in the settlement amount.
2.5 Loans declared under benefit in kind legislation
The amount in settlement can be reduced by any Income Tax the contractor has paid because they declared a benefit in kind on the basis of receiving a beneficial loan. This reduction is only available if that tax year is in time to be amended or for an overpayment relief claim to be made.
2.6 Previous settlements
Some employment based contractor loans schemes operated until 5 April 2011. If someone settled their use of these schemes by 16 March 2016, they do not need to pay any further Income Tax or National Insurance contributions to obtain relief from a future disguised remuneration charge. This does not apply to any scheme which they asked HMRC to exclude from the settlement.
For any settlement after 16 March 2016, or any settlement for a scheme operated after 5 April 2011, the amounts of relief from a disguised remuneration charge will be restricted to those specified in the settlement agreement.
An employer, for the purposes of these settlement terms, is someone who has entered into a disguised remuneration scheme to reward their employees.
3.1 Employer settlement terms
An employer will need to pay Income Tax and primary and secondary Class 1 National Insurance contributions on the amount contributed to the scheme or, depending on the facts, the amount allocated within the scheme. They will need to pay all liabilities where HMRC has either:
- a PAYE determination or protective National Insurance contributions claim in place (as appropriate)
- time to make a determination or issue a protective claim
These are referred to as ‘protected liabilities’.
As well as needing to pay protected liabilities, an employer can choose to pay voluntary restitution for unprotected liabilities to prevent any future disguised remuneration charges. If voluntary restitution is included in a settlement agreement, it becomes legally enforceable along with the rest of the liabilities included in the settlement.
Where voluntary restitution is paid for disguised remuneration payments received by a director, the director may become liable to a tax charge under section 223 of the Income Taxes (Earnings and Pensions) Act 2003.
An employer will not have to pay Income Tax and National Insurance contributions on any contributions or allocations:
- where Income Tax and National Insurance contributions have already been paid
- in some circumstances where they have been used to pay scheme expenses, for example, trustee fees
Any protected liabilities not settled may be subject to litigation in the future.
If the trust deed allows, and the secondary Class 1 National Insurance contributions are paid to HMRC from the funds contributed to the scheme, HMRC will treat the contribution to the scheme as earnings plus secondary Class 1 National Insurance contributions on those earnings. This will reduce the amount of earnings on which Income Tax and National Insurance contributions is payable.
Income Tax and National Insurance contributions will be calculated using the rates and bands in the years the employer contributed to the scheme or when the amounts were allocated within the scheme, depending on the facts.
An employer will need to pay late payment interest for any protected liabilities. Late payment interest will be charged from the date the tax was originally due until the expected date of settlement. This is in accordance with the Compliance Operational Guidance manual COG908170 and COG915075. No late payment interest will be payable on voluntary restitution. A payment on account of tax due may be made to stop late payment interest from accruing.
Where appropriate, penalties will apply.
In certain circumstances Inheritance Tax will need to be paid. This will depend on the nature of the scheme and the amounts put through it.
The amount due in settlement can be reduced by any National Insurance contributions paid by the employer, and any Income Tax paid by their employees on the basis of receiving a beneficial loan from the scheme and declaring a benefit in kind. This reduction is only available if the tax year in which the benefit in kind was declared is in time to be amended or for an overpayment to be claimed.
Employees will also need to complete mandates allowing their tax repayment to be offset against the employer’s liability. HMRC will provide employers with a copy of a mandate.
Where a contribution to a disguised remuneration employee benefit scheme was made before 1 April 2017 and the relevant Corporation Tax return is open or capable of amendment, employers will be able to claim a deduction for the contribution, if they have not already done so.
The rules in Section 1290 of the Corporation Tax Act 2009, which determine the timing of relief for contributions to an employee benefit scheme, have changed for contributions made on or after 1 April 2017. Where a contribution was made on or after 1 April 2017, relief will only be available on the amended statutory basis.
Where the relevant Corporation Tax return is open or capable of amendment, employers will be able to claim a deduction for the promoter’s fee paid in connection with the use of the scheme, if they have not already done so.
Employers will be able to claim a deduction for Corporation Tax purposes, for the Income Tax and National Insurance contributions that they pay under the settlement agreement, in the year which the expense can be accounted for under Generally Accepted Accounting Practice (GAAP), subject to any tax rules that override that.
3.2 Allowing deductions for Corporation Tax purposes for contributions by an employer into a scheme where none was claimed
Historically there are some disguised remuneration arrangements where a Corporation Tax deduction was not claimed for the contribution to the scheme at the time the contribution was made. In some cases there is no open enquiry for the relevant year and the time limit for overpayment relief has expired. There is now no statutory route to claim relief for the contribution in the year the contribution was made by the employer.
In cases where the contribution to the scheme was made before 1 April 2017, if a relevant step under Part 7A of Income Tax (Earnings and Pensions) Act 2003 is triggered in the current year and the Income Tax and National Insurance contributions due on that relevant step is paid, HMRC can also allow the employer to make a deduction for Corporation Tax in the current year for the corresponding original contribution.
Where the contribution to the scheme was made after 1 April 2017, relief will only be available on the statutory basis.
3.3 Regulation 80 determinations
In some cases, HMRC has issued Regulation 80 determinations (Income Tax (PAYE) Regulations 2003) to charge tax only at the basic rate (BR) on disguised remuneration. This may be because HMRC did not hold enough information for an alternative determination to be made or, in some very rare cases, because a BR tax code had been issued for an employee.
To prevent future disguised remuneration charges, BR and any higher rate tax needs to be paid. No late payment interest will be payable on the amount of the higher rate of tax paid.
3.4 Section 222 and 223 of the Income Tax (Earnings and Pensions) Act 2003
If use of a disguised remuneration scheme or settlement of liabilities from the scheme results in a charge because of section 222 or 223 of this Act, this will also need to be paid. For both, the tax charge arises on the employee, not the employer.
A section 222 charge arises where the employer is required to account for the tax on a notional payment and the employee does not make good the tax within the time allowed, which will be dependent on the tax year in which the charge arises.
For a section 222 charge to be payable there needs to be an open enquiry for the relevant earlier year for the individual employee. If the relevant year is open, HMRC expects section 222 tax to be accounted for in the employer settlement or by an amendment to the individual’s personal tax return. If that year is closed or incapable of amendment then section 222 does not need to be paid.
A section 222 charge will not arise if, within the time allowed for making good (which depends on the tax year in which the charge arises), there is a legally enforceable obligation in place within the time allowed (dependent on the tax year in which the charge arises), on the part of the trustee to indemnify the employer for any tax and National Insurance contributions due as a result of the allocation. As well as this, the tax and National Insurance contributions included in settlement must be accounted for by the trustee or employee. HMRC accepts that this is ‘making good’ for the purpose of section 222.
Section 223 arises when Income Tax is paid by the employer and not deducted from the employed director. Where HMRC is in time to collect this, tax under section 223 will be chargeable for both protected and unprotected years for any amount not made good by the director.
An employer can choose to settle either the section 222 or 223 charge on behalf of the employee. Settling one or both of the charges will give rise to a further Income Tax and National Insurance contributions charge, which will also need to be included in the settlement amount.
3.5 County Court fees
If HMRC issued a County Court claim to pursue the National Insurance contributions liability resulting from an employer’s use of a disguised remuneration scheme, the fee for issuing that claim will need to be included in the settlement amount.
3.6 Previous settlements
Many employers settled all, or part, of their employment Income Tax and National Insurance contributions liabilities resulting from their use of a disguised remuneration scheme as part of the Employee Benefit Trust Settlement Opportunity (EBTSO), which closed in 2015. Many others settled all or part of their liabilities before 1 April 2017 to benefit from the Part 7A relief on investment growth provided for in Paragraph 59 of Schedule 2 to the Finance Act 2011.
Provided that the payment terms of those agreements are met, there will be no further employment Income Tax or National Insurance contributions to pay for contributions, or allocations, included in those settlements. This will mean that any Part 7A charge will not apply to loans made from those contributions or allocations.
However, for settlements of employment Income Tax and National Insurance contributions liabilities entered into since the EBTSO closed there will be a potential Part 7A charge on any growth on the secondary Class 1 National Insurance contributions held in the scheme. Where those settlements were entered into after 31 March 2017 there will be a potential disguised remuneration charge on any growth held in the scheme.
Where there was only a partial settlement the employer can still settle the remaining liabilities under the 2020 terms.
For the purposes of these settlement terms, an employee is someone who has been paid through a disguised remuneration scheme entered into by their employer, and is not a contractor. If their employer has not already settled and does not wish to settle, then the employee can settle without them but will need to be a party to the agreement. A third party, for example the trustee, cannot settle on the employee’s behalf.
4.1 Employee settlement terms
The employee will have to pay the same amount of Income Tax and National Insurance contributions as if their employer was settling on the amount contributed to the scheme or, depending on the facts, the amount allocated within the scheme for their benefit. If the employer no longer exists, the employee will not have to pay any National Insurance contributions.
Late payment interest will have to be paid on any protected liabilities. This is in accordance with the Compliance Operational Guidance COG908170 and COG915075. No late payment interest will be charged where voluntary restitution is made. A payment on account of tax due may be made to stop late payment interest from accruing.
Where appropriate, penalties will have to be paid.
Inheritance Tax may also be due dependent on the nature of the employer’s scheme and the amounts put through the trust.
Employees can reduce the settlement amount by any Income Tax they paid because they declared a benefit in kind on the basis of receiving a beneficial loan. This reduction is only available if that tax year is in time to be amended or for an overpayment relief claim to be made.
Employees cannot reduce the settlement amount by any Corporation Tax relief or Class 1A National Insurance contributions repayment which their employer may be entitled to as a result of them settling their liability.
There is also information about previous settlements.
5. Double taxation relief
Disguised remuneration schemes can give rise to more than one Income Tax and National Insurance contributions liability on the same underlying income. For example, a liability can arise when the amount is contributed to the scheme and again at a later date when a Part 7A charge arises.
Part 7A contains comprehensive relief provisions to make sure there is no double taxation on the same sum or asset for employment income. S23H Income Tax (Trading and Other Income) Act 2005 contains the provisions to prevent double taxation of trading income.
The double taxation relief available in settlement will be calculated according to the facts of the case.
6. Residual tax
For open enquiries and assessments relating to loans subject to the loan charge, HMRC will take into account how much loan charge has been paid. Where there is an amount remaining to settle these enquiries and assessments, HMRC refers to this amount as ‘residual tax’. Residual tax is made up of Income Tax, National Insurance contributions and late payment interest.
We will not collect an individual’s residual tax where all the following criteria are met:
- the loan charge has been paid
- the average annual income provided to the individual through a disguised remuneration scheme to the individual is £75,000 or less in each tax year
- no litigation has been started before a court or tribunal in relation to the residual tax or loan charge
Where these conditions are not met, residual tax will need to be paid to settle open enquiries and assessments for the years in which the loans were made.
Penalties can apply where a person has made a return which contains an inaccuracy which leads to an understatement of liability to tax or National Insurance contributions (schedule 24 of the Finance Act 2007). A penalty is not payable if the inaccuracy was made despite the person taking reasonable care.
Penalties are based on the additional amount of tax and National Insurance contributions payable as a result of correcting the inaccuracy in the return. Disguised remuneration schemes can result in users submitting more than one inaccurate return containing an understatement of tax on the same income or earnings.
Where there is more than one inaccurate return and liability to tax relating to the same person and earnings, and the comprehensive double taxation relief rules in Part 7A apply, HMRC will only charge one inaccuracy penalty.
HMRC will take the same approach if the penalty is payable under section 98A(4) or section 95 of the Taxes Management Act 1970, where a taxpayer has negligently or fraudulently made an incorrect return which was due to be filed before 1 April 2009.
The legislation on penalties for avoidance scheme use has been updated. Guidance on this can be found within the compliance handbook.
8. Inheritance Tax
Many disguised remuneration schemes use a trust as the third party, and therefore Inheritance Tax charges can arise.
An Inheritance Tax charge can arise when there is a payment, or disposition, resulting in a loss of value to a trust. This includes outright payments or distributions to beneficiaries, and occasions when settled property is no longer held in section 86 of the Inheritance Tax Act 1984 compliant trust.
It also includes where a loan is released and in certain circumstances where a loan is made, as well as other charging occasions where payments and distributions are made to participators and settlors.
Inheritance Tax charges may be relieved if the payment from the trust giving rise to the charge is also treated as income. So if funds leaving the trust or moving to a sub trust are also treated as income at the same time, relief against the Inheritance Tax charge may be due.
However, any Inheritance Tax charge will need to be paid if funds leaving a trust are not income at the same point in time. For example, charges may arise under section 72 of the Inheritance Tax Act 1984 if a contribution to a trust is taxed as earnings at that time and your client has transferred funds to a sub trust more than 3 months after that date.
There is no relief under section 70(3) of the Inheritance Tax Act 1984 as the funds transferred are not, at that second date, income nor will they become income for the purposes of Inheritance Tax relief.
Further charges may arise under section 64 of the Inheritance Tax Act 1984 where sums have been held in a non-section 86 of the Inheritance Tax Act 1984 compliant trust structure for more than 10 years. This tax is calculated on the value of assets held in the trust on the 10th anniversary of the settlement. Your client will need to agree the value of assets and the tax due with HMRC as this must be included in any settlement amount.
If your client plans to collapse their structure immediately after settlement with HMRC, then HMRC is happy to calculate Inheritance Tax exit charges. These will be calculated on the value of the assets leaving the trust and HMRC will need to agree that value if your client wants to include the taxes from winding up the trust as part of the settlement amount.
In some circumstances there can also be Inheritance Tax ‘entry’ charges on participators of close companies when the company makes a transfer of value, typically when a payment is made into trust. Inheritance Tax liabilities which become due at the date your client settles with HMRC must be paid as part of the settlement amount.
9. Accrued interest
Many disguised remuneration schemes involve a loan to the employee from a third party. Some of these loans are interest bearing and require the borrower (the employee) to pay interest to the lender, the trustee. Often, this interest is unpaid and either accrues or is added to the loan balance (capitalised).
When a disguised remuneration scheme is closed the trustee may release or write-off the outstanding loan balance. This will give rise to a Part 7A charge on the accrued and capitalised interest, whether this has been paid or not.
As part of these settlement terms, HMRC will allow relief against the Part 7A charge that would otherwise arise in connection with accrued interest. This only applies where the trust is closed, or collapsed, as part of the settlement.
Inheritance Tax applies to capital in the trust, but it is generally removed when an Income Tax charge arises on the same transaction. There are some situations where a release, or write-off of a debt by the trustees may give rise to Inheritance Tax despite an Income Tax charge being due. In the absence of an Income Tax charge, Inheritance Tax is due.
As part of these settlement terms Inheritance Tax will not be paid on accrued interest. This only applies where the trust is closed or collapsed as part of the settlement. This is subject to all other Inheritance Tax liabilities that have already become due or will arise on closing or collapsing the trust, being paid as part of the settlement.
This Part 7A and Inheritance Tax treatment applies to interest on loans made to employees or contractors. It can also apply to interest on loans made to the employer company, if the interest has not been paid and no tax deduction has been sought for the interest.
Where funds added into a trust have been invested in any other way, any investment growth will be subject to a Part 7A and Inheritance Tax charge as part of the settlement, or when the funds are distributed from the trust.
10. Late payment interest
Late payment interest will apply from the date the tax was due until the expected date of settlement. A payment on account can be made to avoid accruing interest.
11. Capital payments and benefits
This section relates to capital payments and benefits received by beneficiaries where investment income has arisen within the trust.
If your client receives a capital payment from the trust and there is unmatched relevant income, the capital payment may be subject to Income Tax under section 731 Income Tax Act 2007 to the extent that it can be matched with the relevant income.
For most disguised remuneration arrangements any capital growth will not be subject to Capital Gains Tax. However, where the capital distribution can be matched against relevant income within the structure, there may be an Income Tax liability under section 731 on the distribution.
Where there is no growth on the initial contribution to the scheme, or the growth is limited to accrued interest on loans to employees, there will be no Income Tax liability under section 731.
If a settlement is reached on the basis that a relevant step under Part 7A occurred after 5 April 2011, and the value of which includes the trust income and gains, these will be taxed as part of the disguised remuneration charge.
12. Voluntary restitution
Voluntary restitution is the payment of a liability which has arisen, for which HMRC does not have:
- an assessment in place, a PAYE determination or protective National Insurance contributions claim in place (as appropriate)
- time to make an assessment, a determination or issue a protective claim
Voluntary restitution for unprotected liabilities can be included in a settlement agreement so that double taxation relief will be available to set against any future Income Tax and National Insurance contributions charges.
Where there is more than one Income Tax and National Insurance contributions charge on the same underlying income, and one of those charges is protected, or we are in time to protect it, we will require tax and National Insurance contributions to be paid in full.
Double taxation relief will be available to make sure tax and National Insurance contributions are not paid twice on the same income.
13. Instalment arrangements
For individuals who do not have disposable assets and who have income less than £50,000 in the 2017 to 2018 tax year, HMRC will agree instalment arrangements without the need for providing income and expenditure information. Arrangements will be agreed for a minimum of 5 years for individuals who have income less than £50,000 in the 2017 to 2018 tax year, and for a minimum of 7 years for individuals who earn less than £30,000 in the 2017 to 2018 tax year.
For those earning more than £50,000 or who need longer than the minimum term to pay, then we will ask for income and expenditure information, so we can arrange a payment plan for the right length of time.
Those who require instalment arrangements will not pay more than 50% of their disposable income, unless they have a very high level of disposable income. The amount someone will pay into an arrangement each month will depend on their own individual circumstances. There is no maximum time limit for an instalment arrangement, but forward interest will be added for the duration of the arrangement.
Instalment arrangements to pay the loan charge that have already been agreed can be included in a settlement agreement. This can be discussed during settlement talks.
Find out more information on time to pay.
14. 3 year spread election
If an individual made a valid election to spread their outstanding loan balance evenly across 3 tax years (2018 to 2019, 2019 to 2020 and 2020 to 2021), they can include this arrangement in their settlement.
The way a valid 3 year spread election is taken into account depends on if the disguised remuneration loans were received through an employment or trade based scheme. For both types of scheme use, loan charge amounts already paid will be included in a settlement and double taxation relief will be given.
15. Availability of these terms
HMRC reserves the right to amend or withdraw these terms at any time, including to reflect any precedents in case law, or changes in law.
16. Contact us
If you have any questions, you should contact us on Telephone: 03000 534 226 for contractor loan schemes.
For all other disguised remuneration scheme users, speak to your usual HMRC contact or email: firstname.lastname@example.org