HMRC slams door on two remuneration schemes used to avoid tax

HMRC has added two disguised remuneration structures which used annuities to avoid income tax and national insurance contributions (NICs) to its list of tax avoidance schemes

The first scheme involves the use of private annuities as an alternative method of paying people for their services to avoid income tax and NICs, while the second avoids a new loan charge on disguised remuneration.

The annuity scheme is mainly aimed at contractors and involves the scheme user being paid in two parts. The first part is a salary, so small that there is little or no income tax or NICs liability. The second part is claimed to be non-taxable, as it is a capital payment for a deferred annuity.

HMRC describes the scheme as ‘highly contrived’ as it involves the user agreeing to pay the promoter an income under the annuity from a date of their choosing, and says it does not work.

Schemes involving annuities are within the scope of the proposed new loan charge, which will apply to all outstanding disguised remuneration loans on 5 April 2019, introduced at Budget 2016.

HMRC says it will challenge all users of this scheme and investigate their tax affairs. Unless the capital sum for a deferred annuity is paid back in full by 5 April 2019, or the individual settles with HMRC, the new loan charge will apply to the outstanding sum.

GAAR

For transactions taking place after 16 July 2013, HMRC will consider whether the general anti-abuse rule (GAAR) may apply. After 14 September 2016, transactions where the GAAR applies will be subject to a 60% GAAR penalty.

HMRC says users of this type of avoidance scheme should settle with HMRC as soon as possible, or risk having to pay additional tax and interest on the outstanding disguised remuneration loans, plus a possible penalty.

Anyone who has not filed a return yet should do so on the basis that the payment for the deferred annuity is taxable income.

The second scheme highlighted by HMRC attempts to circumvent the new rules for tackling disguised remuneration avoidance schemes. Typically such schemes result in a loan from a third party on such terms that mean it is unlikely to ever be repaid.

HMRC says some promoters claim to have come up with schemes that enable users to get out of the loan arrangements and avoid the loan charge, in return for a fee.

The message from HMRC is that these schemes do not work, adding that

The only way to avoid the new loan charge is by making a repayment of the loan balance or settling the tax liability in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.

Using such a scheme and paying further fees to a promoter will not prevent the loan charge from applying to disguised remuneration loans outstanding on 5 April 2019, and HMRC says it will investigate any attempts to avoid the new loan charge.

For transactions taking place after 16 July 2013, HMRC will consider whether the general anti-abuse rule (GAAR) may apply. After 14 September 2016, transactions where the GAAR applies will be subject to a 60% GAAR penalty. So far, the GAAR has not been tested.

Users of these schemes can pay back the outstanding loan in full by 5 April 2019 or settle with HMRC to avoid accruing interest.

Guidance Disguised remuneration: tax avoidance using annuities (Spotlight 35) is here.

Guidance Disguised remuneration: schemes claiming to avoid the new loan charge (Spotlight 36) is here.

Published on: 06 March 2017 - By: CCH Daily