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23 September 2017
Historically, many firms entered into planning that essentially were arrangements which allowed a company to reward its employees via a loan made by a 3rd party. This 3rd party would often take the shape of an Employee Benefit Trust (“EBT”).
In its simplest and historic form, a company would contribute to an EBT and receive a Corporation Tax (“CT”) deduction. The EBT would then go on to make a loan to the employee, and following the general principles of taxation, a loan is not income or earnings (on the basis that it would be repaid) and so would not be taxable in the hands of the recipient.
Today, such planning is largely ineffective due to specific changes in the legislation and case law:
Such steps, known as ‘relevant steps’, taken before the announcement of the new rules in December 2010 were not caught by the new provisions. This meant that existing schemes with loans outstanding were caught in a state of hibernation.
The 2019 Loan Charge will revisit these old schemes, and new ones which have sprung up in their place, and hit them with a retrospective PAYE charge. This will fall on the Employer in the first instance but there are moves afoot for this to be transferred to an Employee.
The 2019 Loan Charge provisions were part of Finance Bill 2017 first introduced to parliament in March 2017. However, following the announcement of the snap election, these rules were dropped into the ‘deal with later’ pile and now form part of Finance Bill (No.2) 2017 currently being ‘scrutinised’ by Parliament.
The draft legislation essentially creates a new ‘relevant step’ for the purposes of the Disguised Remuneration rules.
This will bring those loans entered into before the enactment of Part 7A within the charge to tax of that loan which remains outstanding at 5th April 2019.
For these purposes, a person (in this context the Trustees of the disguised remuneration scheme) is treated as taking a ‘relevant step’ if:
A relevant person is generally an employee (past, present or future) but can also include:
Therefore, loans made before 6 April 1999, loans made to non-employees or loans that have been fully repaid before 5th April 2019 will not meet the criteria required to be treated as a relevant step and as such, no charge to tax should arise.
However, there is in place an extension to the disguised remuneration rules from April 2017 that, rather counterintuitively, does not require an Employer/Employee relationship. This is outside the scope of this article.
Where the above criteria are satisfied, the provisions go on to provide the time at which that relevant step is deemed to have taken place, and so the year in which the outstanding loan becomes chargeable to income tax and NIC.
The relevant step is treated as occurring at one of two relevant dates, depending on whether the loan is an ‘approved fixed term loan’:
As such, any corresponding tax liability in relation to the historic loans will be treated as arising in the tax year 2018/2019, or in the tax year in which the approved repayment date falls where the loan is an ‘approved fixed term loan’. Clearly, one has the benefit of postponement of tax liability where such a loan is ‘approved’
1. The Qualifying Payments Condition:
2. The Commercial Terms Conditions:
A liable person may apply to HMRC for approval of such a loan. The legislation provides that an approval should be granted provided HMRC are satisfied that the loan meets two conditions:
Where a loan has not been repaid by the relevant date, the amount of the outstanding loan at that date will be treated as having been loaned (taking a relevant step) on that date.
Whilst one may have made repayments of the loan capital, any such payments which are made in connection with tax avoidance arrangements (other than the one in question) will be disregarded in determining the value of the loan outstanding.
An interesting stipulation is that the loan must be repaid in ‘money’. So, one cannot use an asset to repay the liability in kind. This seems harsh and will perhaps compel individuals to sell assets in a hurry to raise funds (albeit they have until 5 April to find the funds). This is clearly the draughtsman chasing shadows and I guess it is him trying to head off any sneaky techniques by the scheme providers who might be tempted to offer their clients an opportunity to magic an asset out of thin air.
One cannot replace the loan with another loan and fall outside the rules, as provisions deal with such ‘replacement’ loans.
Furthermore, the legislation envisages arrangements which might not technically be loans but, to all intents and purposes, are economically the same. The legislation refers to these as ‘quasi-loans’ and deals with these in the same way if they are outstanding at 5 April 2019.
Interesting, a loan by any other name is firmly in HMRC’s sights as can be seen from HMRC’s Spotlight 39.
An APN is a demand from HMRC to taxpayers involved in avoidance schemes which generally fall within the Disclosure of Tax Avoidance Schemes (“DOTAS”) or are counter-acted under the General Anti-Abuse Rule (“GAAR”) to make payments of tax on account.
They may also be issued to those who have received a Follower Notice.
The APN gives a taxpayer 90 days to pay any ‘disputed’ tax from the later of the receipt of the APN or following a response from HMRC in relation to a ‘representation’ made to HMRC. One may make such a representation to HMRC in response to an APN between the receipt of the APN and the repayment period.
So how do APNs raised in connection with such loan schemes interact with the new loan charge? One might assume that where an APN has been resolved, that this should be the end of any new tax liabilities. However, as an APN is not in fact a payment of tax but rather a payment on account, the loan charge will remain in point provided the necessary conditions are met.
Where the following conditions are met and any payments in respect of the APN have been repaid following the determination of an appeal or withdrawal of the APN then one may apply to HMRC to treat the relevant step as taking place at the later of 30 days from the repayment of the APN or, if later the end of 5th April 2019. The conditions are that:
If an APN has been paid (or partly paid) and the loan charge provisions create a new liability, one may receive a credit in respect of the APN payment to offset any liability created by the loan charge at April 2019.
If you would like to read more about the wider implications of Disguised Remuneration and the April 2019 loan charge, read Andy Wood’s analysis here.
If you are affected by the April 2019 loan charge then please do not hesitate to get in touch.