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Article:

Employers’ obligations on disguised remuneration loans

21 March 2019

Background

The disguised remuneration (DR) legislation was introduced to prevent the use of schemes whereby employers used third parties, often employee benefit trusts (EBTs), to make payments free of tax to employees. In many cases, payments were made by providing employees with loans which had no repayment date and often were not subject to interest.

The Finance Act (No 2) 2017 introduced a new tax charge known as the 2019 loan charge, which seeks to tax any DR loans made since 6 April 1999 if they are still outstanding on 5 April 2019. The rules affect employers, employees and self-employed individuals (including, for example, contractors or partners in a partnership). Arrangements that could be affected include EBTs, Employer Funded Retirement Benefit Schemes (EFRBS), Contractor Loan Schemes and Partner/Member Benefit Trusts. This article will focus on the issues for employers and employees.

How have employees reacted?

HMRC estimates that up to 50,000 individuals will be affected by the 2019 loan charge. Potentially affected employees had three options:

  1. Repay the outstanding DR loans before 5 April 2019
    Any repayments after 16 March 2016 need to be in the form of money to be counted as reducing the loan. This may create liquidity issues for affected employees.  
  2. Settle the tax due
    HMRC guidance states that “nobody will be disadvantaged if they provide the relevant information by 5 April 2019 but have not been able to settle due to a delay at HMRC”. Therefore, there are still a few days for affected employees to approach HMRC with a view to entering into settlement discussions.
  3. Pay the 2019 loan charge
    ie the income tax and NIC (as appropriate) on balances outstanding at 5 April 2019.

Deducting the loan charge through payroll

Where there is a UK employer, liability will fall primarily on the employer to operate PAYE income tax and both employee’s and employer’s NIC on any outstanding DR loans at 5 April 2019. However, payment of the 2019 loan charge arising as at 5 April 2019 does not clear historical tax liabilities in relation to the DR arrangements, so there may be still a historical problem to be resolved.

Reporting obligation

Employers, employees or any third party who made the loan must report details to HMRC by 1 October 2019 for:

  • Any loan outstanding as at 5 April 2019
  • Any DR loan which has been repaid between 16 March 2016 and 5 April 2019.

As usual, penalties apply for non-compliance and inaccurate submissions.

For help and advice on any employment tax obligations please contact Chris Chapple

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