The charge on disguised remuneration (DR) loans is targeted at artificial tax avoidance schemes where earnings were paid via a third party in the form of ‘loans’ which in reality were never repaid.
DR scheme users took home almost all of their pay tax-free. However, these schemes never worked and the amounts paid were always taxable under the law at the time.
The Government has taken this action to ensure that everybody pays the taxes they owe and contributes towards the public-funded services from which they benefit. HMRC has provided a number of opportunities for DR scheme users to settle their tax affairs, and is actively encouraging scheme users to come forward and settle their tax position ahead of the loan charge arising. HMRC will help those who are in genuine financial difficulty by allowing them to pay their tax bill over time. The charge on DR loans is specifically targeted at these contrived tax avoidance schemes and is not expected to have significant effects on the economy or the NHS.
The Government estimates that up to 50,000 individuals will be affected by the charge on DR loans. Further information can be found at the ‘Disguised remuneration: further update’ policy paper: https://www.gov.uk/government/publications/disguised-remuneration-further-update/disguised-remuneration-further-update.
The loan charge applies to all users of DR tax avoidance schemes. It does not single out a specific group or industry. No estimate of the number of individuals affected at sector level is available.
Fewer than 30 individuals declared the use of a loan scheme on their Self Assessment tax returns for the 2016/17 tax year. No estimate has been made of the number of schemes currently operating in the UK. HM Revenue and Customs (HMRC) continues to challenge avoidance schemes that are declared, and carries out extensive investigation work to track down those that are not.
Enquiries into DR tax avoidance cases can be time consuming and take several years because of the very complex nature of the arrangements. HMRC also relies on the cooperation of scheme users to provide information and agree to pay the tax they owe. A breakdown of the number of DR cases open by the number of years they have been open is not available, as HMRC’s operational data is not held in a way where this information is readily accessible.
Pay As You Earn (PAYE) liabilities fall on the employer in the first instance. The loan charge will not change this principle and HMRC will pursue employers who have used DR schemes for the tax that is due. HMRC will only go to the employee to settle their income tax liability in cases where it cannot reasonably be collected from the employer, for example where the employer is no longer in existence.
HMRC pursues those who promote or enable tax avoidance schemes to ensure that nobody profits from selling avoidance. HMRC is able to charge tough penalties of up to one million pounds where promoters do not provide clear and accurate information to their clients, and penalties of 100% of the fees earned by anyone who designs, sells, or otherwise enables the use of tax avoidance arrangements.
HMRC is proactively reporting DR scheme promoters to the Advertising Standards Authority and professional bodies where they make misleading claims about their products and services or provide misleading advice.
HMRC will also consider criminal investigation where appropriate. Promoters of tax avoidance schemes have been prosecuted, leading to convictions and jail terms.