Finance Bill 2017 proposes to introduce new charges on outstanding loans from disguised remuneration (DR) schemes. These charges apply to the total amount of DR loans made to employees and traders after 5th April 1999 and that are outstanding as at 5th April 2019. Those affected will be charged to tax at their marginal tax rates in 2018/19 on their value of all outstanding loans.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) are concerned about the potential misery that this legislation will cause, including those who were misled into using DR schemes, and has presented written evidence to Parliament.
The ICAEW warns that introducing a charge on transactions going back 20 years could lead to individuals going bankrupt which could limit the tax take and also leave the Government vulnerable to challenge under Human Rights Law.
For those who knew what they were getting into and deliberately avoided tax, the ICAEW have little or no sympathy and believe that HMRC should have acted much sooner against these schemes. However, for many others who were misled about contractor loan arrangements and had no appreciation of what they were doing, the Faculty maintains that they should not be so harshly penalised. Many of these individuals, say the Faculty, had little choice but to join schemes thrust upon them by employers and agencies, if they wanted to work.
Workers such as nurses, teachers, IT workers, cleaners etc were often paid a salary around the National Minimum Wage, with the balance and majority of their earnings being paid via loan arrangements. As unpalatable as this may have been for some scheme users, they put their faith in the advice they were given.
The Rangers Supreme Court case put the final nail in the coffin for DR loan schemes but why did it take nearly 20 years for HMRC to tackle these schemes and their architects in a decisive manner?
Reports from ICAEW members claim that HMRC are using unreasonable estimates to identify loan balances subject to tax. In some cases, HMRC are using 6 – 8 x salary despite evidence suggesting lower figures. As loan balances would have been reported to HMRC on forms P11D, then HMRC have no cause to be using estimates.
It is recommended by the Faculty that rather than HMRC forcing individuals into bankruptcy, the department would collect more tax if it were to take a sympathetic and flexible approach, where appropriate, and allow taxpayers to enter into longer time-to-pay arrangements.
The ICAEW recognises that it would only be fair if the tax collected under the loan charge broadly matched the tax that would have been paid had the loans been treated as earnings at the time and that the Exchequer has been left out of pocket.
As it stands, the legislation will tax all the loans in a single tax year, so individuals may end up paying higher rates of tax on their total value when, had they been taxed properly at the time only 20% tax would have been due. One solution proposed is to cap the tax at the rate that would have been due had the loan been properly treated as earnings for the tax year in which it was made, plus interest charged on tax paid late.
As an alternative to capping, loans could be top-sliced over the number of years they were granted and the tax charge limited to tax chargeable on these sums plus interest on tax paid late that would have been due had the top-sliced loans been properly treated as earnings at the time.
During the course of 4 years an IT contractor is granted separate loans of £15,000, £25,000, £35,000 and £45,000.
Total loans = £120,000/4 years = £30,000
Marginal rate of tax; £30,000 x 40% = £12,000
Total tax due; £12,000 x 4 years = £48,000