Disguised remuneration contractors hit for not caving in

A new rule to hit EBT and ‘disguised remuneration’ scheme contractors who are yet to settle with the taxman is the “more concerning” of Budget 2016’s £12bn in anti-avoidance measures.

Issuing this alert, tax advisory WTT Consulting said the planned tax charge would bite where a loan was made before 2011 but remains outstanding - untaxed - at April 5th 2019.

Or as HMRC says, “all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven’t already been fully taxed or repaid on or before 5th April 2019.”

Unfortunately for affected contractors, the charge will be levied on any loan including those that would otherwise be beyond the Revenue’s reach due to the enquiry period expiring.

It will also apply at a rate that reflects interest charges from past years – a criterion that WTT’s Graham Webber believes runs contrary to taxation’s basic principles, the Financial Times reported.

Mr Webber also found fault with the government’s premise: “The government has continued its attack on contractors under its usual misguided justification of removing valid choices of business entity to compensate for lack of employee protection,” he said.

But Duncan Strike, a director of Intouch Accounting, points out that it is not just existing scheme users yet to settle who appear to be frustrating the taxman; it’s new users too.

“HMRC will be making serious moves on loan arrangements and EBT tax plans that are still being marketed,” said Mr Strike, referring to the new Targeted Anti-Avoidance Rule.

In force since Budget day, TAAR curbs relief in certain cases where the user would otherwise claim to reduce their tax bill by providing consideration in return for the benefits received.

“[HMRC] is widening the net to catch new avoidance schemes,” confirmed tax firm Smith & Williamson. “[But] taxpayers who refused to settle may now be targeted [too].”

It is these taxpayers – those who have refused to settle their disputes over existing untaxed loans – who WTT says are the hardest hit due to the proposed, April 2019 tax charge.  

“There are a set of provisions to avoid double taxation which promise to complicate the picture,” the advisory said. “[But] life [gets] particularly difficult where the individual borrower does not control whether the loan can be repaid or not.

“Often a loan is made by the trustee. The [relevant HMRC technical] note however assumes that an agreement for tax purposes will translate across to a settlement of the debt. It is well known that there is no such link and this was a major weakness in the ‘Settlement Opportunity’ that failed to attract a high take-up.”

The advisory’s Mr Webber says it is going to be “interesting” to see if HMRC now provides users with “certainty” on what happens where the loan cannot be legally repaid.

But he doesn't sound optimistic. “The measure looks more than a little desperate and far from solving anything,” he said. “It’s more likely to lead to more problems for contactors.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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