What is disguised remuneration? How can I settle disguised remuneration, EBT or contractor loans with HMRC? What are the disguised remuneration settlement terms? What is the loan charge?

Subscribers, see Disguised remuneration loan charge (subscriber guide).

This is an 'At a glance' freeview introduction to the Disguised Remuneration rules.

At a glance

What is disguised remuneration?

The employment income through third parties rules, also referred to as the 'disguised remuneration' (DR) rules, are anti-avoidance legislation in Part 7A ITEPA 2003 which:

When do the disguised remuneration rules apply?

The rules apply if:

A 'relevant person' is A, B or any other person acting as a trustee.

A 'relevant step' is:

  1. Earmarking a sum of money or an asset is set aside (e.g. a sum of money placed on trust).
  2. Payment of a sum of money or transfer of an asset, to a relevant person (e.g. a loan is made available).
  3. Making assets available: an asset is made available to a relevant person without the transfer of the asset. 
  4. From April 2017 loan transfers and write off/releases of a disguised remuneration loan.

When the rules apply Income Tax and NICs (employer and employee) are charged on the value of the money or asset.

Exclusions

These are listed in s.554E to 554X (about 18 pages of 'small print') and include:

The Loan charge

From 6 April 2019

The ‘loan charge’ applies to all outstanding third party disguised remuneration loans made since 9 December 2010 (prior to 20 December 2019 this was since 1999) which if they had been made on 5 April 2019 would have fallen within the disguised remuneration rules.

The charge did not apply if by 5 April 2019:

Other changes to the rules

From April 2017

Two new relevant steps were introduced and a charge arises when existing disguised remuneration loans are:

Loan transfers

Loan write-offs/releases

See Disguised remuneration (subscriber guide) for more details

Deductions for employee remuneration

Extending the rules to the self-employed and partners

New rules target the use of ‘similar’ avoidance schemes by the self-employed and partners from 6 April 2017.

Most of these arrangements seek to avoid a charge to tax and NICs by depressing trading income through diverting money which is ultimately received back as a loan or other non-taxable amount. They may involve a trust.

The new rules apply to ‘relevant benefits’ arising where:

Where these conditions are met the payment or benefit is taxable as part of T’s trading profits. 

See Disguised remuneration (subscriber guide) for examples of such schemes.

From 6 April 2018

Accelerated Payment Notices and disguised remuneration

National Insurance regulations

The regulations provide for amounts chargeable to Income Tax under Chapter 2 of Part 7A of ITEPA 2003 to be treated as earnings for the purposes of NICs if they would not already be earnings for NICs purposes. Where these regulations apply ordinary NICs principles will apply to the collection of NICs.

Part 7A charges: Recovery of tax from employees

Special rules apply to allow recovery of tax from employees where:

Dissolved employer and DR charges

In the event that the employer company has been dissolved:

Disguised Remuneration Settlement

HMRC created a Settlement opportunity in November 2017 for disguised remuneration schemes ahead of the loan charge being introduced on 6 April 2019. This set out the different positions for contractors, employees and also for employers where settlement is reached with them rather than their employees. 

Following the loan charge review, changes were announced on 20 December 2019 meaning HMRC will refund voluntary payments (‘voluntary restitution’) made to prevent the loan charge arising and included in a settlement agreement for any tax years where the charge no longer applies (see above). HMRC issued details of the repayment scheme on 22 July 2020. See Disguised remuneration loan charge (subscriber guide). for details on how to claim a repayment.

In August 2020 HMRC issued details of a new settlement opportunity for taxpayers with loans not subject to the loan charge. This was extended, on broadly the same terms, to taxpayers with loans subject to the loan charge in October 2020. See Disguised Remuneration 2020 settlement opportunity

If you need assistance in negotiating a settlement contact the Virtual Tax Partner support team. 

FAQs:

See FAQs for Disguised Remuneration settlement

Inheritance Tax (IHT)

Depending on the specifics of the planning the trust may be within the relevant property regime despite being, in most cases, an offshore trust.

Where a settlement has been reached with HMRC and IHT has not been properly dealt with, or not dealt with at all due to many EBTs being in territories outside the UK, there is a risk that it will be treated as offshore evasion which is subject to severe penalties.

Useful guides on this topic

Disguised remuneration loan charge (subscriber guide) 
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?
 

FAQs for Disguised Remuneration Settlements 
Can I just repay my loans? Which is cheaper: the loan charge or settling? How much will it cost to settle? And many other FAQs.

Disguised Remuneration final settlement opportunity 
An overview of the 2017 settlement opportunity for those involved in disguised remuneration schemes. What are the potential liabilities? What is the settlement process?

Disguised remuneration 2020 settlement opportunity
What is HMRC's position on disguised remuneration loans outside of the Loan Charge? Is there still a tax liability? Can this be settled?


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