Policy paper

HMRC issue briefing: disguised remuneration charge on loans

Published 18 July 2018

1. Disguised remuneration

Disguised remuneration schemes are tax avoidance arrangements that cost the Exchequer hundreds of millions of pounds each year.

They seek to avoid Income Tax and National Insurance contributions by paying scheme users their income in the form of loans instead of ordinary remuneration.

The loans are provided on terms that mean they are unlikely to be repaid, so they are no different to normal income and are taxable.

2. The charge on disguised remuneration loans

The charge on outstanding disguised remuneration loans, known as the 2019 loan charge, was announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017.

The charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019. The charge will not arise on outstanding loans if the individual has agreed a settlement with HM Revenue and Customs (HMRC) under existing law before 5 April 2019.

3. Why the loan charge has been introduced

The vast majority of people pay the right amount of tax on time, but a small number of individuals and businesses try to avoid paying what they owe through tax avoidance schemes.

The charge has been introduced to tackle the use of these schemes and ensure that users pay their fair share of tax and contribute towards the publicly funded services we all use. This policy is expected to raise £3.2 billion for the Exchequer.

Disguised remuneration schemes have always been an attempt to avoid tax. HMRC’s view has consistently been that these schemes are ineffective, challenging their use and publicising their risks.

4. Who it affects

The charge will affect users of disguised remuneration schemes who haven’t repaid their loans or signed a contract for settlement with HMRC by 5 April 2019.

It is estimated that up to 50,000 individuals, or less than 0.2% of individual Income Tax payers in the UK, will be affected by the loan charge.

Based on the information available, 65% of those affected work in the business services sector. This includes professions such as management consultants and IT consultants. Ten per cent work in construction. Fewer than 3% work in medical services (doctors and nurses) and teaching.

Disguised remuneration schemes users, on average, earned twice as much as the average UK taxpayer. Seventy per cent of users have used these schemes for 2 years or more. Repeated use of disguised remuneration schemes will inevitably result in large tax liabilities.

5. What the loan charge means for scheme users

Scheme users who don’t come forward and sign a contract of settlement with HMRC by 5 April 2019 could have to pay more when the loan charge is applied. Detailed settlement terms were published online on 7 November 2017 to help users understand what settling means for them.

HMRC is writing to those affected to encourage people to come forward and settle under existing law before the loan charge applies.

6. What scheme users should do

HMRC wants to make it as easy as possible for people to come forward and settle their tax affairs.

Users of disguised remuneration schemes should register their interest as soon as possible. All the information required to settle must be sent to HMRC by 30 September 2018.

Since the loan charge was announced, more than 5,000 individuals and employers have agreed to pay the tax they owe, contributing more than half a billion pounds of additional revenue to the Exchequer. A further 20,000 people have contacted us to register an interest in settling.

We appreciate that for some people who have used these schemes, paying the tax due will have a significant impact. Flexible payment arrangements are available to anybody who has genuine difficulty paying what they owe.

HMRC will allow scheme users to spread their payments over 5 years if their taxable income in 2018 to 2019 is estimated to be less than £50,000, as long as they are no longer in avoidance.

Those with higher incomes and those who need to pay over a longer period can also request for extended payment periods, which will be considered on individual circumstances.

If anyone is concerned that they have no realistic way of paying what they owe, they should call HMRC as soon as possible on 03000 534 226.

7. How HMRC is tackling promoters of disguised remuneration schemes

HMRC has a range of powers to tackle those who promote or enable tax avoidance, including imposing penalties of up to £1 million or the whole of the fees earned for attempting to enable avoidance.

HMRC reports promoters to the Advertising Standards Authority and professional bodies.

We also consider criminal investigations, which can lead to convictions and jail terms for those promoting of tax avoidance schemes.

8. Find out more

Disguised remuneration:settling your tax affairs pages help people understand what settling means for them and the process they should follow.

The Tax avoidance disguised remuneration pages help people recognise tax avoidance schemes and settle their tax affairs with HMRC.

Spotlights on tax avoidance identify features of tax avoidance that HMRC has started to investigate- these will be relevant to users of disguised remuneration schemes:

• Spotlight 33: Contractor tax: loan schemes can cost you more
• Spotlight 36: Disguised remuneration: schemes claiming to avoid the new loan charge
• Spotlight 39: Disguised remuneration: re-describing loans