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This publication is available at https://www.gov.uk/government/publications/hmrc-issue-briefing-disguised-remuneration-charge-on-loans/hmrc-issue-briefing-disguised-remuneration-charge-on-loans
1. Disguised remuneration and the loan charge
Disguised remuneration schemes are tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions (NICs) by paying scheme users their income in the form of loans. The loans were never intended to be repaid, so they are no different to normal income and are taxable.
The charge on outstanding disguised remuneration loans – known as the ‘loan charge’ - was introduced to tackle the use of disguised remuneration schemes and came into effect on 5 April 2019. The charge applies to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019 and the recipient has not settled the tax due.
The loan charge policy package is expected to raise £3.2 billion and it has been estimated that 75% of this will come from employers, and 25% from individuals.
Since the loan charge was announced at Budget 2016, HM Revenue and Customs (HMRC) has agreed settlements on disguised remuneration schemes with employers and individuals worth more than £1 billion.
Around 85% of this came from settlements with employers and 15% from settlements with individuals.
HMRC has always stated that these schemes, which seek to avoid tax and NICs, don’t work and urged people to come forward and settle their tax affairs before the loan charge arose on 5 April 2019.
Who it affects
It is estimated that around 50,000 individuals, or less than 0.2% of individual Income Tax payers in the UK, used disguised remuneration schemes.
Based on the information available, 65% of those who used disguised remuneration schemes work in the business services sector. This includes professions such as management consultants and IT consultants. Ten per cent of those who used disguised remuneration schemes work in construction, while fewer than 3% work in medical services (doctors and nurses) and teaching.
2. Advising disguised remuneration scheme users - those settling the tax owed
Any user of a disguised remuneration scheme who has settled their tax affairs does not need to pay the loan charge. HMRC published settlement terms in November 2017 under which it would be prepared to settle, giving scheme users certainty about their disguised remuneration liability.
HMRC encouraged disguised remuneration scheme users to come forward and provide all the required information to enable them to settle their tax affairs by 5 April 2019.
Those scheme users who provided all the information needed to HMRC by 5 April 2019, can still settle their tax affairs under the November 2017 terms. HMRC will work to agree settlement in these cases so these users will not have to report and pay the loan charge.
Scheme users will need to agree settlement by the date set out in HMRC’s offer letter. If settlement is not reached by the date specified in the offer letter from HMRC, the November 2017 terms will not be available and these users will need to pay the loan charge.
For further support, scheme users can:
- call the dedicated HMRC helpline on 03000 534 226 for contractor loan schemes
- email HMRC at firstname.lastname@example.org for contractor loans schemes or at email@example.com for all other schemes
- speak to their usual HMRC contact
Scheme users who haven’t settled, or do not reach a settlement agreement with HMRC within agreed timeframes, will have to report and pay the loan charge.
Support for those who want to settle their tax affairs but might have difficulty paying what they owe
Whether users are settling under the disguised remuneration terms, or are subject to the loan charge, HMRC can help those who may have difficulty paying what they owe.
There are no time limits on how long payments can be spread, and each case is considered on individual circumstances.
For those scheme users settling under the November 2017 terms, HMRC has simplified the payment arrangements. Those no longer involved in tax avoidance and whose current year taxable income is less than £50,000, won’t have to provide detailed supporting information about their income and assets and will automatically be able to spread their payments over 5 years, and over 7 years if their income is less than £30,000.
Those with a current year taxable income of £50,000 or more, or who need to pay over a longer period, can also ask for extended payment periods. However, they will need to provide additional information so a suitable payment plan can be agreed.
Find out more
Disguised remuneration: settling your tax affairs guidance pages on GOV.UK help users understand what settling means for them.
3. Advising disguised remuneration scheme users - reporting and paying the loan charge
Scheme users who haven’t settled or haven’t reached a settlement agreement with HMRC within the agreed timeframes will have to report and pay the loan charge.
Where a scheme user was an employee and their employer still exists and is in the UK, HMRC collects the loan charge from the employer through the Pay As You Earn (PAYE) system.
Where a scheme user was not an employee, or their employer was offshore or no longer exists, the individual user will need to pay any outstanding loan charge liability or agree a payment plan by 31 January 2020.
All individuals who have outstanding disguised remuneration loan balances, and have not reached a settlement, must provide information on their loans to HMRC by 30 September 2019. They will also need to file a tax return for the year 2018 to 2019 by 31 January 2020.
There is further guidance on reporting and accounting the disguised remuneration loan charge on GOV.UK. If they are unsure of which circumstances relate to them, scheme users should contact HMRC using the details provided above.
Paying the loan charge
HMRC can help those who are genuinely unable to make a full payment of tax owed on time. We can agree payments by instalments and will carefully consider an individual’s ability to pay on a case-by-case basis. There is no maximum limit on how long someone can be given to pay what they owe, and this will be based on our assessment of income and expenditure.
A dedicated HMRC team is focused on working with those who are not able to pay the charge on disguised remuneration loans by the payment deadline and supporting them to agree a manageable payment plan.
Concerns about having to sell the main home and insolvency
Some users may be concerned that they might have to sell their home to pay their disguised remuneration liability. HMRC will not force anyone to sell their main home to pay their disguised remuneration debts or the loan charge.
HMRC does not want to make anybody bankrupt. Insolvency is only ever considered as a last resort and will only be considered where users are either at risk of accruing further tax debt or where they actively avoid paying what they owe.
HMRC considers each case very carefully and reserves the right to take appropriate action based on the specific circumstances.