Following the Finance Act 2020 receiving Royal Assent, and HMRC publishing updated guidance on its settlement terms, users of EBTs, EFRBS and other disguised remuneration arrangements should note that urgent action may be required by 30 September 2020.
Background
Disguised remuneration legislation introduced in March 2016 aimed to tackle disguised remuneration arrangements including EBTs and EFRBSs where remuneration was provided by way of loans rather than salary or bonus by imposing a “loan charge” on the balance of such loans outstanding on 5 April 2019. As originally introduced, the legislation applied to any loans taken out from April 1999 onwards that had not been repaid by 5 April 2019 and attracted widespread criticism for its retrospective effects.
Following the publication of Sir Amyas Morse’s independent review in December 2019, the Government agreed that:
- the loan charge would only apply to outstanding balances of disguised remuneration loans made between 9 December 2010 and 5 April 2019 inclusive;
- the loan charge would not apply to loans made between 9 December 2010 and 5 April 2016 if those loans were fully disclosed to HMRC and HMRC had failed to take any action such as opening an enquiry;
- those impacted by the loan charge would be able to elect to spread the loan balance over the three consecutive tax years ended 5 April 2019, 2020 and 2021;
- late payment interest would not be payable for the period 1 February 2020 to 30 September 2020 on any 2018/19 self-assessment income tax liability provided the tax return is filed, and the tax paid, or an arrangement to pay the tax agreed with HMRC, by 30 September 2020.
The required changes to the original legislation were made in Finance Act 2020 which received Royal Assent on 22 July 2020 and HMRC recently published updated guidance to its settlement terms.
The updated legislation and HMRC guidance have important implications and actions may be required by 30 September 2020 depending on individual taxpayers’ circumstances.
HMRC has made clear that taxpayers should not hold out hope that special terms will be available for calculating or paying the loan charge and that settlements must be consistent with the legislation. It is therefore important that all those impacted review their position and take action if required.
Actions required by 30 September 2020
Taxpayers seeking settlement under the original terms
Taxpayers who commenced settlement discussions with HMRC by 5 April 2019, will still be able to settle under the original terms published in November 2017. However, they will need to engage with HMRC and reply to HMRC by any dates specified in HMRC correspondence to enable settlement agreements, and any extended payment arrangements, to be agreed by 30 September 2020.
If such taxpayers have non-disguised remuneration charge income for the year ended 5 April 2019 to report, they will need to submit a self-assessment tax return for that tax year by 30 September 2020 if they have not done so already.
Other disguised remuneration scheme users impacted by the loan charge
Those who have outstanding disguised remuneration loans at 5 April 2019, where those loans were taken out after 9 December 2010, and not fully disclosed to HMRC, will also need to take action by 30 September 2020. In particular, they will need to:
- report the loan balances outstanding at 5 April 2019, if they have not done so already;
- decide whether to elect to spread the loan balances over the three tax years ended 5 April 2019, 2020 and 2021 and if they decide to spread the loan amounts over these three tax years, to complete and submit an election by 30 September 2020;
- if they have not done so already, submit their self-assessment tax return for the year ended 5 April 2019 and report the disguised remuneration income for that year in the relevant section;
- pay the loan charge, together with any other tax due, unless they have agreed an extended payment plan with HMRC.
Taxpayers who have already settled
Taxpayers who have settled with HMRC and are not due a refund do not need to take any further action.
Taxpayers who have already settled with HMRC for those years that were otherwise “unprotected” because HMRC was out of time to raise assessments, and the payments were therefore voluntary restitution, will be able to reclaim the refund of any element of their settlement where the loan charge would not apply as a result of the post-December 2019 amendments.
HMRC should contact them automatically by 30 September 2020 with details of how to claim the refund and they will have until 30 September 2021 to submit their claim. However, if you think you are entitled to a refund and have not heard from HMRC by 30 November 2020, you should contact HMRC directly.
Other disguised remuneration scheme users
HMRC has also published new settlement terms applicable to loans not subject to the loan charge, essentially, those relating to periods before 9 December 2010 where HMRC has open enquiries.
HMRC intends to pursue such open enquiries to conclusion. HMRC has said that where taxpayers choose not to settle under its updated terms, it will continue its enquiries until it can issue conclusions and assessments which can be appealed before the tribunals. It notes that reaching finality in such cases might still take many years with legal costs and late payment interest continuing to accrue in addition to any tax that payable should HMRC succeed.
If you require assistance in respect of any of the above, please get in touch.