Disguised remuneration: tax avoidance using capital advances, joint and mutual share ownership agreements (Spotlight 53)
Information on a number of schemes designed to avoid Income Tax and National Insurance contributions by using capital advances, joint and mutual share ownership agreements.
HMRC is aware of a number of schemes designed to avoid Income Tax and National Insurance contributions (NICs) through a combination of capital advances and complex offshore joint (or mutual) share ownership arrangements.
HMRC’s strong view is that these and similar arrangements do not work. We will challenge anyone operating them and investigate the tax affairs of all users.
How the schemes are claimed to work
Under the arrangements, a contractor becomes an employee of an umbrella company or a connected entity, such as an offshore company. The employee may sign a loan or capital advance agreement and a joint (or mutual) share ownership agreement, confirming how their salaries are to be paid, by the employer company.
The employee is paid through 2 separate payments, on a weekly or monthly basis. The first payment represents a nominal salary, resulting in payment of little or no Income Tax and NICs. The second payment may involve ‘capital advances’, paid in the form of weekly or monthly loans.
The employer company then carries out various share transactions, involving an offshore joint (or mutual) share ownership trust. These are said to result in financial gains for the employee. The shares may also attract a dividend for the employee. The employee has no direct involvement in the share transactions, but receives monthly or yearly summaries that show their outstanding loans have been repaid as a result of the capital gains and dividends.
Through this process, these schemes attempt to disguise an employee’s earnings, which would ordinarily be subject to Income Tax and NICs. By using capital gains or dividends that attract other tax reliefs, the employer company attempts to avoid its tax liabilities as well.
These types of schemes are never approved by HMRC and employers and employees are likely to end up paying additional tax and interest and may be subject to penalties.
What will happen if you use these schemes
HMRC’s view is that these and other similar schemes do not work.
If you’re using these or similar arrangements you will be challenged by HMRC and liable for Income Tax and NICs on the amount of the loans received.
For transactions that took place after 16 July 2013, HMRC will consider whether the General Anti-Abuse Rule (GAAR) applies.
Transactions after 14 September 2016, where the GAAR applies, are subject to a 60% GAAR penalty.
You may also be charged a penalty for an inaccurate tax return. For transactions after 16 November 2017, you may be charged a penalty because of carelessness, unless you can show us you took reasonable care when submitting your tax return.
What this means for tax avoidance promoters
Recent decisions confirm HMRC’s view that contrived arrangements involving employment income related loans are notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation.
Scheme promoters should carefully consider the DOTAS rules to decide if the arrangements they are marketing should be disclosed to HMRC.
HMRC will pursue anyone who promotes or enables tax avoidance.
This includes using the Enabler’s penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
The Enabler’s penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who persist with promoting tax avoidance schemes.
What to do if you’re using these schemes
If you’re using these or similar schemes, HMRC strongly advises you to withdraw from them and settle your tax affairs. If you do, you’ll:
- avoid the costs of investigation and litigation
- minimise interest and, where they apply, penalty charges on the tax you should have paid
If you’re already speaking to your contact in HMRC about the use of an avoidance scheme, get in touch with them.
You can settle your tax affairs if you do not have an HMRC contact and you’re in a tax avoidance scheme and want to leave.
Find out more about how to identify tax avoidance schemes.