Disguised Remuneration Arrangements, the Loan Charge and Insolvent Employers
New tax liabilities came into effect on 6 April 2019 where an employee had been a participant in a disguised remuneration loan scheme and the loan remained outstanding at that date. The tax payable, also known as the loan charge, is required to be paid by the employer, but what happens when the employer is insolvent? David Menzies looks at guidance issued by HM Revenue & Customs (HMRC).
A loan charge introduced to tax users of disguised remuneration avoidance schemes where loans remained outstanding on 5 April 2019 has come into effect. The loan charge has attracted significant controversy and concern from MPs including those on the All-Party Parliamentary Loan Charge Group.
During a recent debate in Parliament, concerns were raised about suicides linked to the charge as well as fears that the charge could lead to mass bankruptcies or company failures.
Under legislation, loans which were received under tax avoidance disguised remuneration schemes since 6 April 1999 and which remained outstanding on 5 April 2019 will require to have PAYE and NI paid on them. It is the responsibility of employers to notify HMRC of the PAYE and NI liability and make deductions from employees. Where the employee no longer works for the employer, the employer may seek to recover the PAYE/NI from the former employee.
HMRC have issued guidance for insolvency practitioners setting out how employers who are subject to an insolvency process and who are required to notify HMRC of a liability to loan charge are to meet their obligations. The guidance also provides information on what further action HMRC may take and provides some information which might assist insolvency practitioners in assessing how to respond to any Regulation 80 determination (determination of liability due from an employer but remaining unpaid) issued by HMRC.
HMRC guidance statement in full:
What is disguised remuneration?
Disguised remuneration loan schemes are used to avoid paying Income Tax and National Insurance contributions (NICS).
Many schemes purport to reward employees for work in the form of a loan or other form of credit which was unlikely to be repaid. In a typical employer arrangement the employer company would provide funds to a third party (normally a trust) who would lend those funds to the employee.
What is the loan charge?
Where a disguised remuneration loan or credit was received by an employee on or after 6 April 1999 and was outstanding on 5 April 2019 it was subject to a tax charge, unless the employee or their employer has previously accounted for tax and NICs in relation to the loan.
This is known as the ‘Loan Charge’.
The legislation defines outstanding widely and includes loans which have been written off.
For further information see the guidance.
How is the loan charge reported and paid?
Where the employer who provided the funds for the loan or other form of credit existed on 5 April 2019 then the employer is responsible for accounting to HMRC for the loan charge via PAYE in accordance with Income Tax (Pay As you Earn) Regulations 2003 (“PAYE Regulations”).
To enable the employer to comply with its statutory obligations the employee who received the loan or credit, and any trust which provided the loan/credit, is required to inform the employer of any outstanding balance by 15th April 2019.
How does this apply where the employer is in a formal insolvency process?
An employer company is required to operate PAYE in accordance with the PAYE Regulations even if it is in a formal insolvency process and the employee no longer works for the employer.
However, HMRC understands:-
- Employers in a formal insolvency process may not be registered for RTI.
- The appointed insolvency officeholder may not know if the employer used a scheme to which the Loan Charge applies and if so, whether the loan is outstanding for the purposes of the legislation.
As a result it may be difficult for an insolvency officeholder to ensure the employer complies with the PAYE Regulations and operates RTI on any outstanding loan charge balances.
In the circumstances HMRC will accept initial notification of any Loan Charge balances received by an insolvency officeholder in relation to an insolvent employer via email. The email should confirm:-
- The name of the insolvent employer (including CRN).
- The name of the employee who reported an outstanding loan balance and the amount of their reported balance.
- The name of any trust who has reported any outstanding loan balances together with the name of the employees and their outstanding balances.
When making any notification please ensure the email subject header is marked “Insolvent Employer – Outstanding Loan Report”
Any officeholder who has received correspondence from HMRC indicating that the Loan Charge is expected to apply to a particular insolvent employer may also wish to confirm via email (at the above address) if they receive no outstanding Loan Charge balance information from an employee or trust.
If the insolvency officeholder would prefer to operate PAYE, returns via RTI will be accepted in the normal way.
What will happen next?
Where HMRC receives the information from an insolvency officeholder via email :-
- HMRC shall confirm receipt of the information submitted via email and acknowledge that a PAYE return is not needed at the current time, but may subsequently be required, and may be requested by HMRC.
- Penalties for a failure to operate will only be considered if HMRC subsequently requests the employer operate PAYE by completing an EYU (Earlier Year Update) and the employer fails to do so.
- HMRC may issue a Regulation 80 Determination in relation to the PAYE due in relation to the Loan Charge.
- HMRC may consider issuing a decision in relation to any NICs due in relation to the Loan Charge if appropriate.
What should an insolvency officeholder do if a Regulation 80 Determination is received?
An insolvency officeholder has a 30 day period to decide whether or not to appeal the Regulation 80 Determination. If the insolvency officeholder does appeal a Regulation 80 Determination he/she may also request that any or all tax charged by that Determination be postponed pending the outcome of the appeal.
These are decisions for the insolvency officeholder but the information below may help in any decision making.
Earlier tax liability
The Loan Charge applies to arrangements that may have already been subject to a Regulation 80 Determination when the arrangements were initially entered into, or as a result of a step taken at a later date (the Earlier Tax Liabilities). If so, any unpaid Earlier Tax Liabilities should be included on HMRC’s proof of debt.
The Earlier Tax Liabilities may have been subject to appeal at the date of insolvency and the appeal will remain unresolved unless the insolvency officeholder has taken steps to agree and finalise the Earlier Tax Liabilities and/or withdraw any appeals.
Tax in relation to the disguised remuneration arrangements cannot be paid/collected twice so that:-
- If the Earlier Tax Liabilities had been paid in full before 5 April 2019 then overlap relief applied and the Loan Charge did not arise.
- If the Earlier Tax Liabilities were partly paid then the part payment is treated as a payment on account of any subsequent Part 7A liabilities (including the Loan Charge) pursuant to the double taxation relief (DTR) provisions.
HMRC do not consider the Loan Charge liabilities to be an expense of the insolvency.
The Loan Charge may overlap with Earlier Tax Liabilities which should be included on HMRC’s proof of debt so that the establishment of the Loan Charge liabilities against the employer company may not create a new liabilities.
Once any Regulation 80 Determination (including one in relation to the Loan Charge) has become final and conclusive, HMRC can consider making a Regulation 81 Direction pursuant to the PAYE Regulations.
The Regulation 81 Direction relieves the employer of liability due in respect of the corresponding Regulation 80 Determination and effectively transfers the debt to the employee.
The employee has the right to appeal any Regulation 81 Direction in relation to the Loan Charge on the grounds that either:-
- The amount is incorrect; or
- There was no notional payment – this issue is integral to whether the Loan Charge has arisen so the employee has a route to challenge the imposition of the liability themselves.
If an employee pays the tax due on a Regulation 81 Direction in respect of Loan Charge, then this will reduce any Earlier Tax Liabilities due from the employer by a corresponding amount through operation of the DTR provisions.