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Disguised remuneration: 2019 loan charge

Caroline Harwood, Partner, Head of Share Plans and Reward
12/03/2019
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If you, or your employees, have ‘disguised remuneration loans’ outstanding on 5 April 2019, a charge to PAYE and NIC will arise. If you are involved in such arrangements, you can take any necessary action before 5 April 2019.  

On 1 April 2019, HMRC issued guidance on how to calculate and report the PAYE and NIC due on these payments. See our news update on Disguised Remuneration loan charge. 

Who is caught?

The charge applies where a loan was made to an employee/officer (or person connected to them) at any time if it was made on or after 6 April 1999 and part or all of it is outstanding (i.e. the principal has not been repaid in full) at the end of 5 April 2019 and it falls into one of the following three categories:

Employees: there are five elements for the new charge to apply:
  1. A, an individual, is or was an employee or officer of B.
  2. B, the employer (does not have to be a corporate body).
  3. P is a third party (includes an EBT, a shareholder who is not a group member, any other third party, the employer or employee if acting as a trustee).
  4. A relevant arrangement (any arrangements, schemes etc. that are 'in essence'" concerned with providing rewards, recognition or loans in connection with an employment).
  5. A relevant step (in this case the making of a loan).

Participators in close companies: similar to the provisions for employees but:

  1. A, an individual, is or was an employee or officer and 5% participators of B within three years of the relevant transaction.
  2. B is a close company (or would be close if it was UK resident).
  3. There is a relevant transaction (the broadly means that B funds the arrangement)
  4. The relevant arrangement does not have to be in connection with employment – simply it must be reasonable to suppose that the relevant arrangement is a means of providing 'A-linked' loans, benefits or payments.
  5. Elements 3 and 5 for employees are broadly the same.

Self-employed (sections 23A to 23H ITTOIA 2005): applies if an individual provides their services to clients that do not directly employ them. they may provide services through:

  1. an umbrella company
  2. a partnership
  3. an agency
  4. their personal company
  5. payment is by way of a loan normally paid from a 'remuneration trust' or other third party (HMRC calls this the 'contractor loan scheme').

If the arrangement does not fall into one of the three 'buckets' above the 5 April charge will not apply. But where it does

Will the loans, where you are in negotiation with HMRC, be subject to the 5 April 2019 charge?

On 14 February 2019, HMRC published a new policy paper on the DR loan settlement arrangements. There is one comment in particular which we believe is helpful. This is as follows:

“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 user has agreed or is progressing towards settlement with HMRC before 5 April 2019.” 

Therefore, a charge will not arise on 5 April 2019 in respect of the amounts where you are currently progressing the settlement. HMRC are encouraging taxpayers to commence settlement discussions if they have not already done so. If you would like to settle and avoid the 5 April 2019 charge you need to submit the settlement pack as soon as possible. This will close the matter for earlier years whereas the loan charge will not.

If you are already speaking to someone in HMRC about their use of a disguised remuneration scheme, or if you have a customer compliance manager, you should tell them they want to settle their disguised remuneration tax affairs.

If you are not already speaking to someone at HMRC but want to settle, you can contact HMRC by emailing:

  • cl.resolution@hmrc.gsi.gov.uk for contractor loan schemes 
  • a.admin@hmrc.gsi.gov.uk for all other disguised remuneration schemes

What about any amount where a settlement is not in progress?

The taxpayer would have to declare the outstanding loan in order to pay the PAYE due on 5 April 2019. HMRC issued guidance on what has to be done on 26 February 2019 (this is very new guidance), so the obligations are now clear:

  • An employee is required to report the 'non-settled' loans to HMRC by 1 October 2019 and to their employer by 15 April 2019. This also applies to directors. So the amounts of any loans where the settlement is not in progress must be formally reported to HMRC by 1 October and to the employer by 15 April 2019 by all relevant individuals. If the employee does not notify the employer they are required to inform HMRC of that fact. If they do not repay the disguised remuneration loan tax liability the employer should have accounted for by 5 July 2019 and they could not deduct this from the relevant employees’ normal salary, a benefit in kind charge will be due. The employer must then complete a P11d for the tax year 2018/19.

  • An employer has 'a legal obligation to operate PAYE on the amount of the outstanding disguised remuneration loans for each employee or former employee'. The employer must report any outstanding loan balance through Real Time Information (RTI), using an Earlier Year Update (EYU) submission which will be available from 20 April 2019. The company must calculate and pay the PAYE tax and National Insurance contributions due by 22 April 2019 if paying electronically, or 19 April 2019 if paying by post.

  • Penalties: If an individual does not personally report details of their outstanding disguised remuneration loan to HMRC before 1 October 2019, or the information is not complete and correct, they may be liable to:
  • an initial penalty of £300
  • further daily penalties of up to £60 a day for as long as the information remains outstanding, up to a maximum of 90 days
  • a penalty not exceeding £3,000 for each inaccuracy deliberately or carelessly included within the information provided, or discovered after the information has been submitted and you do not tell HMRC.

    HMRC have also stated that the employing company may be subject to penalties if it does not report outstanding disguised remuneration loans for employees and pay the tax and National Insurance due.

What next?

If you are concerned that you may have facilitated or received disguised remuneration loans then it is important that you follow the steps above. HMRC have issued helpful guidance for tax payers and tax advisors:

If you have queries on technical points please contact Caroline Harwood or your usual Crowe advisor.   

Contact us

Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax
London