Policy paper

Tackling disguised remuneration - update

Published 5 December 2016

Who is likely to be affected

Employers, companies and individuals using tax avoidance schemes that fall within the disguised remuneration legislation.

Employers, companies and individuals that have used a disguised remuneration scheme and have yet to settle with HM Revenue and Customs (HMRC).

General description of the measure

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

The first part of the package was legislated in the Finance Act 2016. This tax information and impact note (TIIN) details the next part of the package the government will introduce in the Finance Bill 2017.

This measure is being introduced alongside two other measures that also tackle disguised remuneration; ‘Tackling disguised remuneration: self-employed’ and ‘Tackling disguised remuneration: restricting tax relief for contributions’. TIINs 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.

This measure will prevent the future use of disguised remuneration schemes by strengthening the existing rules in Part 7A of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The changes will put beyond doubt that Part 7A of ITEPA 2003 applies to loan transfers and the remuneration of employees, and directors, who have a material interest in their close company employer. A new charge on the write-off, or release, of a disguised remuneration loan will also be added to Part 7A of ITEPA 2003.

The measure will also tackle the existing use of disguised remuneration schemes with a new charge (the ‘loan charge’) on disguised remuneration loans outstanding on 5 April 2019.

Legislation will also be introduced to ensure there is no double taxation.

Policy objective

This measure supports the government’s commitment to tackling tax avoidance and ensures users of disguised remuneration schemes pay their fair share of Income Tax and National Insurance contributions (NICs).

Background to the measure

These changes are part of a wider package of changes announced at Budget 2016 to tackle disguised remuneration 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

Changes to prevent the future use of disguised remuneration schemes, such as loan transfers, the close companies’ gateway and the release, or write-off, of a disguised remuneration loan, will have effect from 6 April 2017.

The loan charge will have effect from Royal Assent to Finance Bill 2017, and apply where a disguised remuneration loan, or part of it, is outstanding on 5 April 2019.

The new rules to prevent double taxation will be backdated to the introduction of Part 7A of ITEPA 2003 on 9 December 2010. However, where there are two, or more, existing liabilities arising under Part 7A of ITEPA 2003 the current rules at section 554Z5 of ITEPA 2003 will continue to apply. The new section 554Z5 of ITEPA 2003 will only apply where one of the multiple liabilities under Part 7A of ITEPA 2003 arises on or after 6 April 2017.

Current law

Finance Act 2011 introduced the employment income provided through third parties rules at Part 7A of ITEPA 2003, commonly referred to as the ‘disguised remuneration rules’.

These rules give rise to an employment income charge on employment income paid through a third party as if it were paid directly to the employee by the employer.

For a charge to arise there must be an arrangement that meets the ‘gateway’ conditions set out in section 554A of ITEPA 2003. There must also be a ‘relevant step’ as defined in sections 554B to 554D of ITEPA 2003. Section 554C defines relevant steps that involve payments by the third party, including the issue of a loan, to an employee, referred to as the ‘relevant person’. Exclusions are detailed in sections 554E to 554X of Part 7A of ITEPA 2003.

Proposed revisions

Preventing the future use of disguised remuneration schemes

A new close companies’ gateway will be introduced to put beyond doubt when Part 7A of ITEPA 2003 applies to remuneration of employees and directors who have a material shareholding in a close company. This gateway must be considered in addition to the existing gateway at section 554A of ITEPA 2003. However, it only needs to be considered if the employer is a close company, as defined in section 439 of the Corporation Tax Act 2010. The close companies’ gateway will not apply where the payment to the third party that provides the benefits to the employee is a distribution as ultimately defined by Part 23 of the Corporation Tax Act 2010.

Section 554C of ITEPA 2003 will be amended to put beyond doubt that Part 7A of ITEPA 2003 applies to loan transfers.

A further amendment to section 554C of ITEPA 2003 will result in the write-off, or release, of a disguised remuneration loan being a relevant step under Part 7A of ITEPA 2003.

Tackling the existing use of disguised remuneration schemes

The loan charge will apply to the outstanding balance of disguised remuneration loans on 5 April 2019 that were made after 5 April 1999. The amount of the loan outstanding is, broadly, the principal of the loan less any repayments. From 17 March 2016, only payments in money made by the relevant person are allowable as repayments. Any money repayment connected with a tax avoidance arrangement, excluding the arrangement under which the loan was made, will be disregarded. The loan charge will also apply to loan transfers, referred to in the legislation as quasi-loans.

The relevant person may apply to HMRC for postponement of the loan charge where the loan qualifies as an ‘approved fixed term loan’. An officer of HMRC may grant an application where:

• the loan was made before December 9 2010
• the loan has a term of 10 years, or less
• the loan has not been replaced, or varied, since it was made and
• the relevant person has made repayments of the principal at intervals not exceeding 53 weeks or
• the loan was made on commercial terms that fall short of the commercial transactions exemption

The relevant person can alternatively make a claim for postponement of the loan charge where they are unable to repay the loan because they have paid an Accelerated Payment. An Accelerated Payment is a payment of the disputed tax liability arising from an avoidance scheme, before the final amount has been agreed or determined. Postponement will only be available where the remaining loan balance is equal to, or less than, the Accelerated Payment. If the Accelerated Payment is later repaid to the relevant person, they will have 30 days to repay the outstanding loan balance, after which, the loan charge will apply.

Other technical changes

The current rule, in section 554Z5 of ITEPA 2003, provides for the value of the relevant step to be reduced by the value of an earlier relevant step if there is an overlap between the sum of money, or asset, which is the subject of the steps. The new section 554Z5 of ITEPA 2003 will only reduce the later relevant step by the value of the earlier relevant step where the liability from the earlier step is paid in full. The only exception will be where, before the later Part 7A charge arises, the relevant person has reached an agreement with HMRC to pay the earlier liability (for example, a time to pay agreement) or, the earlier tax liability is not yet due and payable.

Double taxation relief where the earlier charge has not been paid is provided for in the new sections 554Z12A to 554Z12C of ITEPA 2003. These only need to be considered where the new section 554Z5 of ITEPA 2003 doesn’t already apply. The new sections treat a payment of one, of the two liabilities, as also being a payment on account of the other liability. Where the two liabilities only partially overlap with each other, the double taxation provisions will only apply to the overlapping part of each liability.

Where an earlier liability is disputed, there may be an overlap with an Accelerated Payment. The new section 554Z12D will allow the relevant person to opt to use the Accelerated Payment to meet the Part 7A of ITEPA 2003 charge. Where the relevant person chooses this option the Accelerated Payment will no longer be repaid.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
+100	+335	+645	+1,235	+215

These figures are set out in Table 2.1 of Budget 2016 as ‘Disguised remuneration: tackling historic and new schemes’ and have been certified by the Office for Budget Responsibility.

These figures reflect the full package of changes to tackle disguised remuneration avoidance schemes announced at Budget 2016, some of which were legislated for in the Finance Act 2016 and so are not reflected in this note. More details can be found in the policy costings note published alongside Budget 2016.

Economic impact

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

Impact on individuals, households and families

This measure is expected to affect up to 40,000 individuals who have entered into disguised remuneration avoidance schemes. Some of these individuals will be unable to repay the loans, agree a settlement with HMRC before 5 April 2019, or pay the loan charge arising on 5 April 2019. The government anticipates that some of these individuals will become insolvent as a result.

This measure is not expected to have a material impact on family formation, stability or breakdown.

Equalities impacts

It is likely that this measure will impact on those with above average incomes. It is not anticipated that this measure will have a significant, or disproportionate, impact on groups with legally protected characteristics as recognised in the Equality Act 2010.

Impact on business including civil society organisations

This measure is expected to have no impact on businesses and civil society organisations who are undertaking normal commercial transactions. The measure is only intended to impact on businesses that are engaging in avoidance schemes.

Operational impact (£m) (HMRC or other)

HMRC received additional financial resources at Budget 2016 to resource this measure. HMRC will, however, require further additional financial resource in the region of £3.5 million for the IT changes to support this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through disclosures of new avoidance schemes and through communication with affected customers and practitioners.

Further advice

If you have any questions about this change, please contact the Employment Income Policy Team by email: employmentincome.policy@hmrc.gov.uk.