Insights

Disguised Remuneration (DR) arrangements which have attracted the interest of HMRC have involved the payment of loans to individuals (e.g. an employee or contractor), through an offshore company or a trust, in order to avoid incurring taxes (i.e. NICs or PAYE). The loans themselves are often interest free, have no repayment terms and are probably unlikely to be repaid.

Clearly the long term aim of these arrangements is to divert earnings and allow the individual to access income without it being declared as income, and hence subjected to taxes as the usual rates. Historically, such arrangements have been widely used, but in recent years, HMRC have introduced preventative measures and have encouraged people using these arrangements to rectify matters and pay the outstanding taxes due.

HMRC’s latest initiative is the Disguised Remuneration Settlement Scheme, which is open until 31 May 2018. Anyone who has any DR ‘structures’ in place to artificially reduce the amount of tax payable is advised to seek expert advice before making a disclosure and to potentially use this opportunity to limit their risk of penalties and public exposure.

HMRC’s new enforcement powers

It is effectively a final call for any taxpayers with Disguised Remuneration arrangements to declare their interests and negotiate a settlement. Failure to do so could mean facing an even greater tax liability and associated penalties, when HMRC’s new powers take effect. These are as follows:

1. Power to enforce a Loan Charge (LC) for any DR loans that were implemented after 6 April 1999 and outstanding on 5 April 2019. This charge is not a settlement and does not affect accrued tax liabilities or any penalties due, so could result in significantly higher taxes being due.
2. Power to enforce a Requirement to Correct (RTC), in the form of new compliance legislation requiring taxpayers who have previously held undeclared offshore assets that were still outstanding on 5 April 2016, to declare them before 30 September 2018. Anyone who has not declared their assets and does not have a ‘reasonable excuse’ will face a ‘Failure to Correct’ sanction, with a minimum penalty of 100% of outstanding tax to pay and the risk of being ‘named and shamed’. Notably, RTC applies to non PAYE related income taxes, capital gains tax and inheritance tax, including any historic IHT liabilities, e.g. 10 year charges imposed on trusts.
3. Power to enforce a Follower Notice whereby the taxpayer is required to amend tax returns to correct information relating to tax avoidance arrangements, or risk a penalty of up to 50% of the otherwise outstanding tax liability. Receiving a Follower Notice obliges the taxpayer to accept the claims relating to an unfair tax advantage and pay the outstanding amount in full. This is most likely to impact taxpayers who have taken advantage of employee benefit trusts.
4. Risk of being caught by the Serial Tax Avoidance Regime (STAR). This is for taxpayers who have previously participated in tax avoidance arrangements and exited from them after 5 April 2017. If you are caught by STAR, you will need to complete an annual information notice for 5 years detailing any tax avoidance arrangements. You could also face penalties of up to 60% of the tax outstanding and risk being publically ‘named and shamed’.

Our recommendation to all taxpayers who have Disguised Remuneration arrangements is to seek expert advice and take advantage of the settlement opportunity currently available. Although there are no special terms available to reduce the penalties, it will most likely be a lower risk strategy to adopt.

What are the terms?

A range of standard settlement terms are available, which will vary depending on the type of tax avoidance arrangement in place and your individual status e.g. individual contractor, employee or ex-employee, or an employer wanting to make a disclosure on behalf of employees or ex-employees.

When does the settlement need to be made?

The deadline dates to be mindful of are:

• 31 May 2018 –register an interest to make a settlement
• 30 September 2018 – submit supporting information to HMRC
• 5 April 2019 – complete the settlement i.e. pay income tax and NICs due plus any penalty fees.

Clearly there is a lot more than outstanding taxes at stake here and anyone using a Disguised Remuneration scheme is advised to consider their position very carefully. If you would like to discuss this settlement opportunity in more detail confidentially, contact RJP by emailing partners@rjp.co.uk.