Disguised Remuneration | The Loan Charge
HMRC is constantly seeking to prevent the use of schemes, such as ‘disguised remuneration’ schemes, devised to enable taxpayers wishing to avoid paying the full amounts of Income Tax and NIC for which they are liable.
Very much under the spotlight at the present time are ‘Loan Based Remuneration Schemes’ whereby employees are paid for the work conducted in the form of non-taxable loans, rather than a conventional salary, with the intent of avoiding Income Tax and NIC.
In order to tackle an extensive problem which has existed for many years, the Government, in the 2016 Budget, announced the Loan Charge which became law through the Finance (No.2) Act 2017 (‘the Act’) aimed at recovering tax which had been avoided between December 2010 and April 2019.
HMRC is not only concerned about the level of revenue from which it is deprived but acknowledges that such tax avoidance activity is unfair to those taxpayers who pay the proper amount of tax due from them.
Additionally, HMRC warns of the potential financial disaster facing those who are drawn, either voluntarily or forcefully, into involvement in disguised remuneration schemes which it claims are ultimately unsuccessful. Any amounts avoided in the short term will eventually have to be repaid, together with interest accrued on the debt.
Tim Thompson of KANGS explains the nature of disguised remuneration schemes and the current review which is being conducted.
The Nature of Loan Schemes
Loan Schemes date back to 1999 when the Labour Government of the time introduced IR35, a tax law aimed at classing many self-employed freelance workers as employees, consequently requiring them to pay National Insurance contributions.
Many schemes suddenly appeared adopting a variety of formats, which to a considerable extent, were run by offshore trusts. They were promoted by advertising campaigns which often erroneously claimed these schemes to be compliant with HMRC regulations. With the advertised attraction of their net incomes being bolstered by payment through a scheme, tens of thousands of individuals signed up to them.
Rather than receive salary through traditional means, utilisers of the schemes received salaries by way of loans which it was intended would never be repaid. Such loans seek to avoid payment of PAYE and NIC.
What is the Loan Charge?
The Loan Charge introduced by the Act describes the amount which HMRC states it is owed throughout the period from December 2010 until April 2019. It applies to loans that are outstanding on 5th April 2019 and allows taxpayers a period of up to three years to rectify their tax position, whereafter the loan charge will apply charged at the rate of forty-five percent of the loan value.
The Act, by introducing retrospective legislation that affects events which occurred before it was passed, has caused enormous controversy given it has imposed a substantial tax burden on many thousands of individuals which they did not appreciate may arise and for which they were totally unprepared.
It would appear that many individuals believed at the outset, relying on the advertising material, that the arrangements were legitimate. It is also the case that many applicants were only accepted into employment on the basis that they agreed to be paid by way of such loans, because of financial gains available to the employers.
The Current Position
The imposition of the Loan Charge has resulted in a plethora of civil proceedings in which both the Supreme Court in 2017 and the Court of Appeal in 2022 have provided support for HMRC by stating that such schemes do not succeed in avoiding tax.
HMRC continues to pursue thousands of individuals for recovery of their debt despite opposition from over two hundred MPs and evidence of considerable mis-selling by employers, agencies and promoters including accountants and lawyers. There are constant calls for punitive action to be taken against those promoting the schemes, given the hundreds of millions of pounds which they are said to have earned by way of commissions.
There are many who maintain that the situation is similar to the ‘Post Office’ scandal and that the focus for punishment is being mis-directed.
Accordingly, as announced in the Autumn Budget 2024, the Government has commissioned an independent review of the Loan Charge which commenced work on 23rd January 2025.
This review will only consider all the circumstances surrounding the Loan Charge and is not concerned with the operation of other disguised remuneration schemes.
Objectives of the Loan Charge Review
The review will consider a number of topics including:
- nature of the advice provided to taxpayers who entered schemes,
- the manner of promotion and advertising of the schemes,
- the experiences of taxpayers generally.
It is intended that the review will:
- draw this protracted matter to a conclusion,
- achieve fairness for all taxpayers,
- provide appropriate support for those affected by the Loan Charge.
The review will examine the financial barriers preventing those subjected to the Loan Charge from resolving their issues with HMRC and paying their liabilities in full. It will recommend ways in which they can encourage taxpayers to settle with HMRC.
The reviewer will report and present their recommendations to the Exchequer Secretary to the Treasury by Summer 2025. The Government is to publish a response by the Autumn Budget 2025.
Official Comment
Ray McCann, appointed to lead the review. said:
“The controversy surrounding the Loan Charge has for too long acted as a barrier to bringing matters to a close for both the individuals involved and for HMRC.
I was pleased to be asked to help find ways whereby those involved can reach an agreement with HMRC that balances their right to be treated fairly with the expectation of the vast majority of taxpayers who have paid all of the tax and NIC due on their earnings. My review will be entirely directed to that end.”
How Can We Help?
As with most financial, or other inducements, if an offer seems too good to be true, that will almost certainly be the case and should be completely avoided. Any employment, pension, umbrella or other scheme which promises to increase income by the manipulation of the tax system runs a substantial risk that it will fail. Consequently, any avoided amount will have to be repaid together with interest and, quite possibly, additional penalties.
Serious tax evasion may even amount to a criminal offence resulting in prosecution. The general consensus is that the only beneficiaries will be the promoters of such schemes earning significant amounts of commission.
If you are involved in any disguised renumeration scheme currently receiving HMRC attention or one which you feel may become the subject of investigation, you should seek immediate expert legal advice and guidance.
The team at KANGS has vast experience gained over many years from assisting clients facing investigation by HMRC involving tax issues of every nature. We are accustomed to negotiating with HMRC seeking the most satisfactory dispute resolution available.
HMRC does acknowledge the plight of many people trapped in avoidance schemes and, whilst obliged to pursue its duty to recover tax, it does prefer to negotiate and settle in a manner which is achievable.
If we can be of assistance, our team would be delighted to assist, please contact us on the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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