Government details scale of loan scheme tax avoidance

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  • HM Treasury will today (26 March 2019) detail the scale and nature of tax avoidance through disguised remuneration schemes, issuing a comprehensive report on government measures to stamp out the arrangements
  • the 49-page report offers the most detailed insight yet into the use of the schemes and the government’s approach to protecting tax revenues

Disguised remuneration schemes involve individuals being paid through loans, usually via an offshore trust in a low or no tax jurisdiction, which are designed never to be repaid. Because the money is claimed to be a ‘loan’ rather than earnings, typically all the income tax and National Insurance go unpaid, costing the taxpayer hundreds of millions of pounds a year.

Estimates suggest there were around 50,000 scheme users, and that the government’s action will bring in an extra £3.2 billion for the public finances over five years. Around 75% of this is expected to come from employers rather than individuals.

The government introduced a new charge on outstanding loans, which takes effect on April 5 2019, in the Finance Act (No.2) 2017. The loan charge works by adding together all outstanding loans and taxing them as income in one year. Where scheme users have repaid loans before the charge comes in, the charge will not apply.

HM Treasury was required to do a narrow review of the issue of time limits for tax assessments, as part of an amendment to the 2019 Finance Act.

But ministers opted for a more wide-ranging report, detailing the rationale for the government’s actions, the impact of the schemes on individuals concerned, and details of the way HMRC deals with vulnerable customers, in the light of issues raised by MPs and other stakeholders.

Where significant avoidance has occurred, some individuals may face large tax bills. For example, someone routing more than £100,000 through these schemes might have avoided £40,000 in income tax and National Insurance. HMRC will agree payment terms which take full account of individuals’ ability to pay.

Around two thirds of the scheme users work in the business services sector, including IT or Management Consultants. Less than 3% of people affected by the loan charge work in medical services and teaching combined.

HMRC understands that customers who face large tax bills, or checks into their tax affairs, may find this stressful to deal with and need extra support. HMRC will treat individual cases sympathetically and appropriately, and will not require people to sell their main home to pay their disguised remuneration tax bills.

To support loan charge users, HMRC set up a dedicated helpline, complemented by a team to provide extra support to those identified as vulnerable. It has redeployed staff to support scheme users and announced simplified payment arrangements.

The report details how HMRC is, as part of its continued work on support in this area, working to expand its Needs Enhanced Support (NES) service to vulnerable customers undergoing compliance checks.

It is also creating a network to support colleagues dealing with cases involving vulnerable customers, and is enhancing its training and guidance.

Financial Secretary to the Treasury Mel Stride said:

We introduced measures to tackle disguised remuneration schemes, an aggressive and contrived form of tax avoidance which cost the taxpayer hundreds of millions of pounds a year, depriving our vital public services of funding.

99.8% of people in the UK go nowhere near these sorts of schemes, and we know that many contractors looked at these arrangements, were appalled and ran a mile.

The report we are publishing today explains the background to our action, but crucially also sets out the work we are doing to support vulnerable customers, including those who face the loan charge but also the many others that HMRC deals with in its everyday work.

Further information

The schemes were used by both companies and individuals. HMRC will always seek payment of the charge from employers in the first instance. Since the loan charge was announced at Budget 2016, HMRC has settled over 6,000 cases, raising around £1 billion, with 85% coming from employers so far.

HMRC takes action against the promoters and enablers of tax avoidance and can charge penalties of up to £1 million. HMRC also now has additional powers at its disposal to tackle promoters and enablers of avoidance schemes, and as part of its strategy to further crack down on this activity, is doubling the resources devoted to this work. This includes identifying, challenging and pursuing in court scheme promoters, as well as using communications to better disrupt and deter promotion activity.

Where individuals are affected by the loan charge, HMRC will take full account of individuals’ ability to pay. People with an income of less than £30,000, who come forward to settle by April 5, and are no longer engaged in avoidance, can have a minimum of seven years to pay what they owe without the need to provide detailed supporting information. Those earning under £50,000 can have at least five years to pay. Those who earn over £50,000 or need longer than five or seven years to pay should speak to HMRC. There is no maximum period over which individuals are required to pay the tax due. Where people have taken reasonable care, they will not pay any penalties for inaccuracies on their tax returns.

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