Disguised remuneration and time to pay

HMRC define time period for paying tax on loan schemes

In what appears to be a response to recent concerns that contractors may be forced into bankruptcy because of the disguised remuneration (DR) loan charge, HMRC have recently updated their guidance Disguised remuneration: settling your tax affairs. The department have now confirmed how long a freelancer, who wishes to settle their tax affairs before the DR loan charge becomes effective from 5th April 2019, can spread their tax payments.

Tax arising on loans ex contractor loan schemes can be paid over a period of up to 5 years, provided:

• An individual’s current year taxable income is less than £50,000. For employees, this is their expected gross earnings and for self-employed, this is their expected net profit; and
• That individual is no longer engaged in tax avoidance.

Where a person’s income is greater than £50K or they need a longer period to pay, then HMRC say they can still help. Whilst there are no minimum or maximum time periods for payment arrangements, HMRC will:

• take into account any changes in a person’s circumstances and discuss options to make sure they can manage their case in the best way;
• always take a realistic look at an individual’s income, assets and essential outgoings, alongside the tax arrears and any other debts, i.e. a means test;
• always consider how much a person is able to pay and over what period; and
• expect a person to pay the outstanding amount in the quickest possible time.

HMRC are very keen that contractors should contact them by 30th September 2018 with a view to settling their tax affairs as they claim this will give individuals certainty about the DR scheme they were involved in and may also mean that they:

• do not have to pay the new loan charge from 05.04.19
• pay a lower rate of tax on their DR loans as the loan charge taxes the aggregate of all loans in one tax year
• do not face extra costs if the scheme moves to litigation

Information required by HMRC

Freelancers wishing to settle their tax before the DR loan charge kicks in must provide HMRC with the following information by 30th September 2018:

• their unique taxpayer reference (UTR) and N.I numbers;
• the amount of contractor loans or contributions made in each tax year;
• whether they want to claim a benefit-in-kind offset and, if so, how much and for what years;
• the name of their employer; and
• their tax calculation for each year, if possible.

Trust information

If known, contractors must also tell HMRC of the:

• date any trust, sub-trust or other entity was created;
• amount of contribution paid into it; and
• assets held in that trust, other than cash or the loan agreements.

Contractor or employee?

A contractor is defined as someone who provides their services to clients that do not directly employ them, such as an umbrella company, agency, partnership or their own PSC.

Contractors will be required to pay:

• Income tax on the net amount of all DR loans or payments made, calculated by reference to bands and rates in force during the years the loans/payments were made;
• Late payment interest for any years where HMRC has an open enquiry into their tax affairs, is within time to open one or an assessment has already been made;
• NIC if a self-employed contractor, including through partnerships; and
• Any penalties and Inheritance Tax (IHT), depending on the circumstances.

Any Income Tax paid on a previously declared benefit-in-kind on a relevant loan will be used to reduce the tax arrears provided the relevant tax year is in time to be amended, or a valid claim for overpayment relief can be made.

An employee is someone who is not a contractor and was paid via a DR scheme used by their employer. If their employer has not already settled their tax affairs, then the employee could be left responsible for both the tax and NIC that the employer was responsible for paying, along with late payment interest, penalties and potential IHT.

For those that have not yet registered their interest in entering into settlement with HMRC, there is still time to do so by e-mailing:

Contractor loan schemes – cl.resolution@hmrc.gsi.gov.uk
Other disguised remuneration schemes – ca.admin@hmrc.gsi.gov.uk