Disguised remuneration – Paying HMRC what you owe

ANTI-AVOIDANCE

March 2018

Years ago you used a popular disguised remuneration scheme to reduce the tax on your income. It appeared to work, but you’ve now read that you should tell HMRC about it by 31 May 2018…

Tax schemes

In the early 2000s tax-saving schemes involving what HMRC refers to as disguised remuneration were marketed as a safe way to reduce or avoid tax altogether. The schemes took various forms, but typically involved your business passing money to an employee benefit trust (EBT) or similar arrangement, instead of paying it to you as salary etc. The EBT then lent you money for an indefinite period, or invested it on your behalf. It was thought that this avoided income tax and NI.

If you used a disguised remuneration scheme, anti-avoidance rules now mean that a tax charge may be triggered in 2018/19.

Anti-avoidance rules

HMRC’s view has always been that the schemes didn’t work and that the disguised remuneration was taxable. In reality the law was less clear, so in 2012 anti-avoidance rules were introduced to block any tax advantage, but not for payments into schemes before 2011. Therefore, further anti-avoidance rules in 2016 created a special tax charge for all disguised remuneration past and present. The charge will apply on 5 April 2019 to all schemes where the disguised remuneration hasn’t yet been taxed.

HMRC attack

Regardless of any promises made about the legality and effectiveness of schemes, the courts have sided with HMRC. HMRC is not aware of every business which has used a scheme, but it actively enforces anti-avoidance rules when the opportunity arises.

Cumulative remuneration

The terms of the catch-all anti-avoidance rules introduced in 2016 mean that any disguised remuneration which hasn’t been taxed by 5 April 2019 will count as income on that day. Therefore, income which relates to more than one year will be taxed as income for 2018/19 alone. This might result in a higher rate of tax being paid than if the income were taxed in the years it arose. However, HMRC is offering an alternative.

There’s a small window to disclose to HMRC if you used a disguised remuneration scheme and avoid the April 2019 tax charge. You have until 31 May 2018 to notify and then until 30 September to provide full details.

What to expect

Disclosing that you’ve used a scheme doesn’t mean you’ll escape scot-free, but at least any income will be taxed for the years to which it applies (instead of all for 2018/19) and penalties will be lower than if you wait for HMRC to come to you.

 

For more information visit the HMRC’s pages on this topic:

https://www.gov.uk/guidance/disguised-remuneration-settling-your-tax-affairs#pay-what-you-owe

A4C Supported by Regional Growth Fund

AAT Members in Practice

Members Surrey Chamber of CommerceXero accredited silver partners