Wait. Can they really change the rules retrospectively?
It has long been held that the UK tax system, administered over time by various governments, would never apply retrospective rule changes.
As one prominent Finance Minister once remarked: “It’s just not good for our international business reputation.”
The reality is, everyone wants a consistent and predictable legal, political, and financial framework within which to operate. Therefore, making tax changes that impact on an individual’s historical actions after the event is not only unfair but would also seriously damage the UK’s appeal to outside business investment.
So, when HMRC announced its intention to introduce a rule that would attempt to do just this, the entire financial and tax advisory community waited with bated breath. And we weren’t disappointed!
Via a masterstroke, HMRC introduced a piece of legislation that would have a retrospective impact without being, well, retrospective.
Here’s how the legislation works
Recently, HMRC pledged to advance the ‘disguised remuneration’ legislation, originally brought about in 2011.
Under measures proposed in the Finance Bill 2017, HMRC will be able to tax any outstanding loans made as far back as 6 April 1999. Now, most tax planning – especially those involving EBTs – utilised some sort of arrangement that resulted in a loan to the trust that remains perpetually outstanding.
HMRC argue that such loans are never going to be repaid, so are not actually loans, but disguised pay.
The new loan charge will, therefore, apply to any outstanding disguised remuneration loans, and will result in a disguised remuneration charge (through PAYE and NIC). The charge can, in theory, be levied at 5 April 2019 if the loan is not repaid on or before that date, and no settlement has been agreed with HMRC.
A point of contention
One of the most controversial parts of the proposed legislation is how HMRC intends to treat loans attached to businesses that are either (a) no longer in existence, or (b) do not have the funds to pay the PAYE/NIC assessment.
HMRC have indicated that in this instance they will have the power to recover the amounts from the individual.
This effectively means that one of the bastions of corporate management, the corporate veil, is at risk of being exposed.
And so, we await both the confirmation of the legislation and how HMRC intend to implement it.
Who should be worried?
Basically, anyone that has undertaken any form of tax planning using any sort of loan arrangement as far back as April 1999.
The proposed legislation has plenty of potential ‘catches’ in it, so it’s naive to think that the easy targets like EBT planning schemes are the only target.
Any trust with an outstanding loan that was set up in conjunction with transactions that typically fall under disguised remuneration will be ‘caught’ under this legislation.
What’s more, any employer that is operating – or ever had operated – an Employer Benefit Trust (EBT) arrangement as part of a remuneration package needs to be extremely concerned; they will shortly find themselves smack bang in the centre of the HMRC crosshairs.
What can you do?
Well, you could repay the loan. That’s one option.
But even this radical step can’t guarantee success.
In reality, the first thing to do is not panic. The second, and most crucial, step is to get in touch with a professional tax advisor.
Here at Ten Forward Finance, we have extensive experience in unravelling historical tax planning and assessing risk based on current and proposed legislation.
We will be able to review your position and highlight any areas of concern, particularly with respect to historical tax planning and these proposed legislative changes.
More importantly, we can also provide solutions to mitigate any risks identified.
If you’d like to take the first step towards reviewing your current tax and financial position, contact one of our friendly tax advisors today.