KEY POINTS
- New measures designed to collect tax from old and new EBTs and EFRBS
- New tax charge on all outstanding loans to employees if not repaid or taxed by 5 April 2019
- New disguised remuneration legislation to stop current schemes and catch loan or debt devices
The Chancellor announced in last week’s Budget that the Government will take action to recover £12 billion by 2020 by tackling tax avoidance and evasion. The first part of that strategy appears to be focused on “disguised remuneration” schemes; arrangements that involve employment income or benefits being paid through a third party such as an EBT or an EFRBS.
In FA 2011, the Government introduced provisions designed to stop disguised remuneration schemes but pre-9 December 2010 transactions were not affected by the changes and HMRC has been challenging earlier transactions by opening enquiries into employers’ corporation tax and/or PAYE & NIC returns and by litigating in the tax tribunals and courts. A significant number of historic cases have been resolved through the EBT and EFRBS Settlement Opportunities by payment of PAYE and NICs on amounts paid into the schemes by the employer.
However, new schemes have been created by promoters with the aim of exploiting perceived weaknesses in the FA 2011 legislation and continuing to avoid Income Tax and NICs on payments into the schemes by employers. The Government views these schemes as generally more contrived and aggressive than those that existed before 2011 and which often also involve “remuneration” paid by way of a loan or debt.
The Government intends that the new legislation will put beyond doubt that 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 5 April 2019.
The proposed new legislation will address two situations:
- “Old Schemes” put in place before 9 December 2010 and
- “New Schemes” designed to exploit weaknesses in the FA 2011 legislation.
The first part of the package will be enacted in Finance Bill 2016 with the remainder to follow in later Finance Bills following a technical consultation over the summer 2016.
Old Schemes
Finance Bill 2016 will introduce a restriction on the “transitional relief” under paragraph 59 of Schedule 2, FA 2011 which prevents investment growth on contributions made to an EBT or EFRBS from being treated as potential employment income which could be taxed under the disguised remuneration rules if a “relevant step” is taken by the trustee. The transitional relief will continue to be available only if the original payments into the scheme by the employer have been fully taxed under PAYE on or before 30 November 2016.
Finance Bill 2017 will introduce a new tax charge on all outstanding “disguised remuneration loans”. The charge will apply where:
- The loan was made at any time prior to the introduction of the disguised remuneration rules on 9 December 2010 or, if a loan was made after that date it was not within the charge to tax under Part 7A;
- If the same loan was made after the new legislation comes into force it would be taxable under the new rules;
- The loan, or part of the loan, is outstanding on 5 April 2019; and
- It has not otherwise been taxed by 5 April 2019 (typically under the terms of one of HMRC’s settlement opportunities).
The Government also intends to amend the PAYE regulations to allow, “where appropriate”, recovery of any PAYE under the new earnings charge from the employee where it is not possible to recover from the employer. What is “appropriate” will form part of the wider consultation on the new legislation in the summer.
New Schemes
An immediate change (to address a specific tax avoidance scheme) will remove a potential loophole in the FA 2011 legislation in relation to “an exchange of assets” between the scheme trustee and an employee with effect from Budget Day, 16 March.
Further legislation will follow in Finance Bill 2017 to put beyond any doubt that schemes which result in a loan or other debt being owed by an employee to a third party, whatever the intervening steps, are within the scope of Part 7A.
What might employers, scheme beneficiaries and trustees do now?
It seems clear, should the new earnings charge for loans be enacted as proposed in the Budget (in Finance Bill 2017), that it will affect a very significant number of employees who have taken loans from EBTs or EFRBS. Many may not be able to repay the loans and some of the employing companies which made contributions to the EBT or EFRBS may no longer exist.
There will also be companies and their owners who will need advice in understanding whether they should now consider settling PAYE and NIC liabilities with HMRC and, if that is a viable option, whether those liabilities would be materially lower if they settled with HMRC before 30 November 2016 (when the transitional relief on investment growth is withdrawn). Others may want advice on their options for funds held by an EBT or EFRBS if they repay their loans prior to 5 April 2019.
Also, given recent experience with the APN legislation introduced in FA 2014, we anticipate the new legislation being the subject of both significant representations from professional bodies and other interested parties during the consultation process and, if still enacted in Finance Bill 2017 as currently proposed, the very real possibility of legal challenges through the judicial review process. It is difficult to see how the new legislation as it is currently proposed would be compatible with human rights legislation.
We may be in for a bit of a bumpy ride as the Government’s proposals for the new earnings charge make their way through the consultation process into draft legislation and eventually into the Finance Bill 2017. We will, of course, keep a very close watching brief as the position develops over the course of the next 12 months. We will provide an update through our Newsletter of any significant developments as they unfold.