If you’ve never heard of the disguised remuneration April 2019 loan charge, you’re not alone. Last year, when the Finance (No2) Act 2017 was published, the only thing that seemed remarkable about it was the length. Hidden way in the voluminous text, however, was a rather disturbing tax change that could affect any business that has taken advantage of the EBT or employee benefit trust since April 1999.
While many tax experts feel that HMRC and the Government may have gone a little too far here, there are no signs that its introduction is going to be changed in any way. Opposition will undoubtedly come from legal intervention. In other words, businesses taking the government to court on the issue.
What Are EBTs?
Employee benefit trusts or EBTs were used as a way for businesses to ‘reward’ employees. Essentially it meant providing a loan via a third party, most usually in place of giving a salary payment. That third party was usually based abroad. There have been obvious advantages to this as an avoidance scheme: the loan isn’t considered salary or income and is therefore not liable for income tax while the company itself benefits from paying less Corporation Tax.
Now, this ‘relevant step’ loophole was mostly dealt with by the Government under the new disguised remuneration rules introduced back in 2010. The trouble is that the 2019 Loan Charge in the latest Finance Act is going to give HMRC the chance to take a historical look at any EBTs. In essence, it allows them to ask for retrospective PAYE tax and, in some cases, issue penalties.
While there are sometimes legitimate reasons to use EBTs, there’s no doubt that they were used by many businesses in the past to avoid paying tax. What HMRC must do, if they are going to take retrospective account of these transactions, is show that a business was using the EBT for this avoidance purpose.
Employees have until October 2019 to reveal if they have benefited from an EBT and provide details of repayments and the loan details. The employer and trustee also need to reveal the existence of these schemes. The problem is that the retrospective part of the new regulation applies to any EBT entered into from 6th April 1999 and which is still outstanding by 5th April 2019. That means there could be many employees and business who have long forgotten that they used such as scheme in place.
You might think that, with 15 years or so having passed, that any EBT transaction is carefully hidden away in the mists of time. HMRC has, however, been gradually improving its technology and introducing AI measures that are capable of tracking and picking up these kinds of transactions. Staying quiet, therefore, is not much of an option, even if HMRC doesn’t have a particularly good track record with introducing new tech.
The EBT April 2019 Loan Charge
There are plenty of people in the tax industry and businesses who are not happy about this attempt to clear up past tax avoidance by companies and employees, including the Institute of Chartered Accountants for England and Wales.
First of all, the EBT has been used by a large number of large corporations, family businesses, start-ups and the self-employed in the belief that there was nothing ‘illegal’ about them. They came to light in recent times including with the release of the Panama papers and the troubles of Rangers Football Club which used EBTs quite regularly. The Rangers case was dismissed by the court, which caused the Government to introduce these further measures to combat the use of EBTs as a tax avoidance scheme.
New legislation in 2010 meant that EBTs have been on the decline as a tax saving measure in recent years, though there have been creative workarounds. This attempt to ‘play the system’ possibly more than anything else led to the EBT April 2019 Loan Charge. The key point is this: If you have an EBT Loan and it is not paid back by 5th April 2019, then you may be liable for PAYE on the outstanding amount. This applies to any EBTs implemented from April 6th 1999.
It’s the fact that the retrospection will go back to 1999 that has made many think the Government has overstepped the mark. Furthermore, HMRC are looking at ways to move the burden from employer to employee as easily as possible. That means some employees could find themselves with an additional tax burden when they had essentially forgotten about the EBT they had benefited from 15 years or so ago.
There are those who believe that this retrospective gathering of revenue does not meet the conditions of being ‘wholly exceptional’ under the law and that it may well be against the Human Rights Act anyway. EBTs haven’t just been used by the rich and famous, they were utilised by many ordinary business owners and employees who could be severely impacted if further claims for tax are made.
That means there are bound to be legal challenges to the new rules over the next 12 to 18 months that could well see a roll back if the courts back the assertion that this move is not entirely fair or legal.
What You Should Do Now
If you are affected by the disguised remuneration 2019 loan charge or believe you may be, it is a good idea to get some sound taxation advice as quickly as possible. One option, of course, is to ensure any repayment is completed before the end of the tax year in 2019 but for many people and businesses this may not be possible. HMRC are offering a settlement option which you need to register for by the end of May 2018, but it offers little in the way of concession for either employers or employees.
The EBT April 2019 Loan Charge is set to come into effect next year and it will have significant consequences for businesses, contractors and employees who have used EBTs in the past. Getting advice now is important rather than waiting until nearer the date or hoping that court challenges will come to the rescue. Call us today to inquire about your options.