19 March 2020 – George Turner
This page provides some basic information on disguised remuneration schemes and the Loan Charge. You can download our full briefing on these issues here
What is disguised remuneration?
Disguised remuneration schemes are a form of tax avoidance where payments arising from employment are made in some form other than cash or to a person who is not the employee. These payments are not declared as income in the tax returns of the employee or contractor and so no income tax is paid.
These tax avoidance schemes were mass marketed to individuals by tax advisers, lawyers and accountants. Early iterations of the scheme were marketed by Big Four accountancy firms.
What is a loan scheme?
One particular form of disguised remuneration scheme was the loan scheme, which sought to transfer remuneration to employees in the form of loans. These loans were not declared as income, but in reality, there was no expectation on the part of scheme users the loans would ever be paid back. Often these loans were routed via offshore trusts, with the end result that contractors and employees ended up paying no income tax. On top of this companies using these schemes avoided employer’s national insurance and claimed corporation tax deductions for payments made into these schemes. Because the loans remained outstanding for an indefinite period, they could be written off against any future inheritance tax also.
Is disguised remuneration legal?
Under long standing legal principles in tax law, loan schemes should not have resulted in any tax benefit for scheme users or there employers. Government made it clear as long ago as 2004 that it would seek to close down disguised remuneration schemes and would be prepared to use retrospective legislation to do so.
Despite this, tax advisers, accountants and lawyers continued to market the schemes for many years, with some promoters and scheme operators becoming extremely wealthy in the process.
The Loan Charge
In order to recoup tax avoided via loan schemes, the government introduced the Loan Charge in 2017. This put a tax charge on any outstanding loans balances arising from loan schemes on 5th of April 2019. The government estimates that the loan charge will impact 50,000 people, Loan Charge campaigners put the figure at up to 100,000.
The Loan Charge has become one of the most controversial pieces of tax legislation in the UK in recent times. As such, it has sparked a great deal of debate on whether it is an appropriate response.
TaxWatch has produced a briefing on disguised remuneration and the Loan Charge which is available here. This briefing focuses on presenting some of the facts with regards to disguised remuneration schemes, the loan charge, and tax law relating to disguised remuneration schemes.
The Big Tax Case
Between 2001 and 2010, more than £47m was paid to players, managers, and directors of Scottish football club Glasgow Rangers in tax-free loans. These loans were made via an offshore trust, which had been created in order to provide the impression that the loans granted were independent of the club. It was part of the player’s pay agreements that the club would make payments into the trust on their behalf.
After a long legal battle with both sides claiming victory in the lower courts and the Court of Session in Scotland, the case went to the Supreme Court in 2017, which found in favour of HMRC. It is now considered the leading case in the area of disguised remuneration.
In the Court of Session, the court reviewed case law looking at tax avoidance and disguised remuneration going back to 1904. Lord Drummond, giving the judgment made the following observation:
“The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense.
This principle is ultimately simple and straightforward – indeed, so straightforward that in cases where elaborate trust or analogous relationships are set up it can easily be overlooked.