Payroll insight
Transfer of liability The government intends to broaden the powers that allow HMRC to transfer liability for income tax and NICs liabilities from employers to employees where a disguised remuneration scheme is used. Users of schemes often receive income without tax and NICs having been deducted; HMRC argues that widening these powers will help ensure that users of DR schemes pay their fair amount of tax and NICs. However, HMRC accept the need for adequate safeguards to be in place. The loan charge A new charge on outstanding disguised remuneration loans (‘the loan charge’) is to be introduced to tackle the use of these schemes to date. It will bite where all of the following apply: ● a loan has been made to an employee or a director ● the gateway conditions are met on 5 April 2019 ● the loan was made on or after 6 April 1999, and ● the loan, or part of it, is outstanding immediately before the end of 5 April 2019. The new charge will not apply to loans made before 6 April 1999, even if they are still outstanding on 5 April 2019. Where the original loan has been replaced with a new loan, only the replacement loan is considered so the key date is the date of the replacement loan. The charge will only apply to the loan balance outstanding on 5 April 2019. Thus, it is possible to avoid the charge by repaying the loan prior to that date. Countering similar schemes HMRC is aware of schemes that have the same aims as disguised remuneration schemes but which do not fall within Part 7A; in particular, schemes that involve self-employed earnings. Such schemes typically operate by depressing the earnings of the trade and diverting the income to the individual in other form, such as a loan, which loses the characteristic of taxable business income. Other schemes involve claiming deductions where no actual expenditure is defrayed. Legislation is to be introduced in the 2017 Finance Bill to target schemes such as these. n
Legislation to be introduced by the 2017 Finance Bill will amend Part 7A to make clear that arrangements which result in the employee being indebted to the third party will be treated in the same way as those where the third party made the loan directly. However, as currently drafted, the proposed legislation includes an exception that prevents the loan transfer rules from applying where the original loan was made by the employer and the third party to whom the employee is ultimately indebted becomes the new employer. A situation envisaged in the consultation document where this may occur is where an employee transfers to a new employer who agrees to take on the employee’s season ticket loan. The existing exemptions available within Part 7A, including the exclusion for commercial loans (section 554F, ITEPA) will continue to apply. Close companies’ gateway To fall within the scope of the disguised remuneration legislation, an arrangement must meet the conditions of the `gateway’ in section 554A ITEPA (commentary on which can be found in HMRC’s Employment Income Manual at EIM45000). One of the key conditions of the legislation as it currently stands is that the arrangement is connected to the individual’s employment. Some schemes have sought to circumvent this requirement by arguing that disguised remuneration received by an employee or a director of a close company is not `in connection with their employment’. To ensure that this is not an effective defence against the operation of Part 7A ITEPA, the ‘close companies’ gateway’ will be introduced. This will ensure that a scenario such as that set out in Example 2 is within the scope of the disguised remuneration legislation. Example 2 Close company B contributes £10,000 to a trust for director A, and A later receives a loan of £10,000 from the trust paid for out of the contribution. B is wholly owned by A. All of the conditions of the close companies’ gateway are met. In particular, B has facilitated the arrangement as they contributed the money to the trust from which the loan was made. Therefore, the £10,000 loan is taxable under Part 7A.
It should be noted that if the employer is not a close company, they will only need to consider the existing gateway. Release of a disguised remuneration loan The draft legislation also includes a new provision which makes it clear that a disguised remuneration loan (‘a DR loan’) which is not taxed as employment income will be subject to a tax charge when released or written off. The release or writing off of a DR loan constitutes a relevant step for the purposes of Part 7A. It should be noted that where the release or writing off of the loan would also trigger a charge under the ‘benefits code’, any double taxation is prevented by section 554Z2(2) ITEPA which gives priority to the Part 7A charge. ...broaden the powers that allow HMRC to transfer liability for income tax and NICs liabilities... Fiscal symmetry Although payments to reward employees are generally deductible in computing the employer’s taxable profits, where an employer makes a payment to a disguised remuneration scheme the deduction is delayed until such time as the employee receives a taxable payment derived from the employer’s payment. (For commentary on the ‘fiscal symmetry’ provided for by sections 1288—1296 of the Corporation Taxes Act 2010, and sections 36—44 of the Income Tax (Trading and Other Income) Act 2005, see HM Revenue & Customs’ (HMRC’s) Business Income Manual at BIN44636.) In order to create a clear deterrent to employers thinking of using a disguised remuneration scheme, HMRC propose that relief for payments by employers to such schemes should be denied rather than deferred. The new rule would apply to contributions made on or after 6 April 2017, although existing legislative exceptions for certain commercial arrangements, such as accident benefit schemes, would continue to apply.
19
Issue 25 | November 2016
| Professional in Payroll, Pensions and Reward |
Made with FlippingBook flipbook maker