They’re at it again with retrospective legislation
Unlike the Doctor, HMRC don’t have a TARDIS but they do have the ability to go back in time to seek to change the future. As the Eleventh Doctor put it, “Time can shift. Time can change. Time can be rewritten.” In a move similar to BN66, eight years ago now, a technical note published on Budget day this year announced retrospective tax charges on outstanding disguised remuneration avoidance schemes. This follows an earlier announcement about such schemes in Autumn Statement 2015.
What is a disguised remuneration scheme?
Although there are a number of variations on a theme, most schemes seek to pay an individual in the form of a loan that is not subject to Income Tax or NIC. These loans are often interest free and are designed so that it is unlikely that they ever be repaid.
Contractor loan schemes tend to involve the individual contractor receiving a token salary from an employer, normally parked offshore, with the greater part of their remuneration in the form of a loan. Although the loans are supposed to be repayable, the reality is that they rarely are. Whilst the contractor is subject to a benefit-in-kind on receiving an interest free loan, the benefit is only equal to the annual interest on the loan. As the official rate of interest has only ranged between 3 – 4% over the last six years, this is piecemeal in comparison to the substantial tax free remuneration that a participator in these schemes can enjoy.
Users of these schemes vary as much as the schemes themselves and include both employed and self-employed individual contractors, small businesses employing a few staff and highly paid individuals attracted by the lure of tax and NIC free remuneration.
Before 2011
In the main, most disguised remuneration schemes before this time involved the employer paying a contribution to a third party, which was often an Employee Benefit Trust (EBT), instead of paying remuneration directly to the employee. The third party would then usually provide the money to the employee in the form of loans. These loans were often interest free and were provided on terms that meant that they would never be repaid during the employee’s lifetime. In other cases, the third party would invest the money on behalf of the employee to be provided to them at a later date.
After 2011
The introduction of the disguised remuneration legislation in Finance Act 2011 but effective from 9th December 2010, attempted to put beyond doubt that these schemes were not effective. Whilst it was successful in stopping the promotion of schemes that existed at that time, new schemes popped up that sidestepped the 2011 legislation and continued to avoid Income Tax and NIC.
These later schemes have, according to HMRC, been more contrived and aggressive but nevertheless still involve the use of a loan or debt. There has also been an increase in the number of schemes that use an Employer Financed Retirement Benefit Scheme (EFRBS) as the third party rather than an EBT.
HMRC’s view, not surprisingly, is that these schemes do not work.
Despite a number of successful settlement opportunities, HMRC believe that there still remains a significant number of employers and individuals who are still to come forward and settle. Furthermore, the government is very concerned about the continuing promotion of disguised remuneration avoidance schemes.
The solution
A package of changes will seek to tackle the continued use of disguised remuneration schemes.
Finance Bill 2016
Promoters of these schemes claim that their products are effective because they exploit a perceived weakness in the disguised remuneration legislation at Part 7A ITEPA 2003 (Part 7A). To put beyond any doubt that such schemes do not work, an additional targeted anti-avoidance rule will be inserted with effect from 16th March 2016.
Finance Bill 2017
Further legislation will follow next year which, again, will attempt to put beyond doubt that schemes which result in a loan or other debt being owed by an employee to the third party, whatever the intervening steps, are within the scope of Part 7A.
PAYE regulations
Where the PAYE debt cannot ‘reasonably’ be collected from the ‘employer’ who was party to the avoidance scheme, then the PAYE regulations will be amended to allow for the tax and NIC to be collected from the individual. These transfer of debt rule changes will be discussed in a consultation document over the summer.
Outstanding disguised remuneration loans
A new tax charge will be imposed on all outstanding disguised remuneration loans where:
- The loan was made at any time prior to the amendments to Part 7A;
- If the same loan was made after those amendments came into force it would be taxable under Part 7A; and
- The loan, or part of the loan, is outstanding on 5th April 2019.
In the case of very old loans, HMRC acknowledge that it would be very difficult or impracticable to identify whether the loan was a disguised remuneration loan and the amount of the loan still outstanding on 5th April 2019. Consideration will therefore be given to such situations when the legislation is drafted.
Similar avoidance schemes
The government is aware of other avoidance schemes that have the same objective of avoiding tax and NIC on earned income. Some of these schemes do not involve a third party and may utilise an offshore employer or seek to avoid the involvement of, or claim not to involve, an employee. These schemes can include using a partnership but many often still utilise a trust.
Others do not use employment arrangements and seek to avoid tax and NIC on self-employed earnings.
Once again, HMRC considers these arrangements to be ineffective but Finance Bill 2017 will put the matter beyond doubt.
A technical consultation will be published in the summer inviting views from all interested parties and will include draft legislation.
Many freelancers have sleepwalked into contractor loan schemes in good faith, so it seems mightily unfair that HMRC are targeting the victims rather than the perpetrators who, at the first sniff of trouble, scarper and leave their poor client to the mercy of the Revenue. Contractors are both a soft and sitting target and HMRC know it and these new measures have the capability to financially ruin them.
>>Many freelancers have sleepwalked into contractor loan schemes in good faith
[quote]Many freelancers have sleepwalked into contractor loan schemes in good faith[/quote]The responsibility is with the contractor. They are hardly the victim in these schemes, they are the person that benefits from the tax avoidance. If they couldn’t see that the scheme was dubious, they only have themselves to blame. While they may be a soft target, they are certainly not innocent.
David Barrett , you’re kinda missing the point mate. Retrospective tax , APNS’ , double taxation , this is not how to collect tax , neither is putting the courts out of reach for people a good precedent. Yeah it’s fun to troll and say serves you right, good on you, but what happens when they come after you.
Contractors sleepwalking into the situation is what the HMRC want, a nice soft target that they can destroy to make their falling income tax figures. The government boasts about how many new businesses it has started, it would be interesting to see just how many people it has also destroyed over the same period. If you destroy an individual, you often destroy the marriage, home, family also, the government don’t care so long as their coffers benefit. It also takes the attention off the numerous wealthy individuals using the Panama route to avoid the HMRC, when we see a few imprisonments of wealthy individuals, then we might believe we all are treated fairly
I have very little sympathy for those who used these schemes. I saw the adverts and read about them at the timecand it was clear to me then as it is now, that these schemes were both very risky and morally dubious.
I think this is completely immoral from the HMRC. As an IT Contractor, who is not financially savvy, I put my faith in an accountant/tax adviser to get me the best compliant return on my earnings. If they’re legal and then subsequently declared illegal people need to move away, as quickly as possible, immediately even. However, if you continue to use the newly deemed illegal method then more fool you. However, retrospective action on something that was legal purely because a private Tax Adviser is more aware or creative isn’t fair.
Surely it’s no different to anyone being given 3 points because the Government have decided to retrospectively change the speeding laws on the motorway from 70 to 60 and start proceedings against those doing 70?
Most contractors I know operate in good faith and are still fearful of retrospective legislation.
The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses. The tax involved is small fry compared to Google who were offered a fantastic deal. Surely its better to give the same deal to those trapped in this mess and let them move on with their lives.
I’m approached about these schemes every month or so. Pretty obvious they’d be stopped at some point.
Struggling to feel sorry for anyone caught. Sorry if that hurts, but if it looks too good to be true…
I’m not convinced with the argument about retrospective tax either – it’s not as though these schemes had the blessing of HMRC.
[quote name=”Andrew Baines”]I’m approached about these schemes every month or so. Pretty obvious they’d be stopped at some point.
Struggling to feel sorry for anyone caught. Sorry if that hurts, but if it looks too good to be true…
I’m not convinced with the argument about retrospective tax either – it’s not as though these schemes had the blessing of HMRC.[/quote]
If you are a contractor Andrew , outside IR35 , you may be facing retro tax and APN’s next year. It’s not fun
Retrospective legislation is always bad.
If my wife does not work and I put my investments in her name – which allows her to use her tax allowance against the investment income – quite legally currently, but were HMRC suddenly to decide this is tax evasion and rettrospectively tries to claw back all the tax that was saved; that would be unfair. There must be certainty for the Tax payer otherwise there is the potential for ruining someone who played by the current rules.
There has always been one rule for the rich and powerful – Was David Cameron’s Eton education funded by offshore – and one rule for the little man. Always was and always will be. I totally agree that IT and other industries (Film, TV, Medicine. even hairdressing) are soft targets because none of us have the wealth to fight back. I really hope that the Panama Papers finally show this up but I will give odds of 1 to 100 that no-one will be prosecuted and even less sent to jail for what is tax evasion and not avoidance. Unlike us poor people.
[quote name=”Nick P”]The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses.[/quote]
A time-honoured failing. 🙂
Prior to the “2 year” rule on expenses, I knew contractors who had put the money thru as expenses and spent it, chancing their luck (as we all did) . Spent the money, and then got caught owing big amounts.
If only they could defer their greed for 6-7 yrs, and then take the money after the deadline for routine investigation by the taxman expires.
And greed is the issue.
I am taking close to 80K out of 100K this year on a split of salary/pension/dividends. When you can do that with the current ltd company laws, why do most people fill the need to bet their shirt on getting more with a more risky arrangement.
If any contractor used these loan scheme thinking they were kosher, they had their head deliberately in the sand.
[quote name=”The Q”][quote name=”Nick P”]The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses.[/quote]
A time-honoured failing. 🙂
Prior to the “2 year” rule on expenses, I knew contractors who had put the money thru as expenses and spent it, chancing their luck (as we all did) . Spent the money, and then got caught owing big amounts.
If only they could defer their greed for 6-7 yrs, and then take the money after the deadline for routine investigation by the taxman expires.
And greed is the issue.
I am taking close to 80K out of 100K this year on a split of salary/pension/dividends. When you can do that with the current ltd company laws, why do most people fill the need to bet their shirt on getting more with a more risky arrangement.[/quote]
are you sure HMRC will be satisfied with the level of tax and NIC you’ve been paying. I hope so , but i would advise putting sufficient aside lest you recieve APN for disguised renumeration.
[quote name=”mark”]If any contractor used these loan scheme thinking they were kosher, they had their head deliberately in the sand.[/quote]
As with all tax avoidance means, there is the “letter” and “spirit” of the law. It may be ok in the letter, but hardly in the spirit.
And then when the taxman knee-jerks with legislation to remove the issue, a genuine use that was originally intended is removed for those who may really need to use it. 🙁
[quote name=”The Q”][quote name=”Nick P”]The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses.[/quote]
A time-honoured failing. 🙂
Prior to the “2 year” rule on expenses, I knew contractors who had put the money thru as expenses and spent it, chancing their luck (as we all did) . Spent the money, and then got caught owing big amounts.
If only they could defer their greed for 6-7 yrs, and then take the money after the deadline for routine investigation by the taxman expires.
And greed is the issue.
I am taking close to 80K out of 100K this year on a split of salary/pension/dividends. When you can do that with the current ltd company laws, why do most people fill the need to bet their shirt on getting more with a more risky arrangement.[/quote]
Many contractors were advised or simply did a quick google search when starting out, even if you do so now, its not greed, its simple to do, easy. For many they went this scheme route for this, not for greed, for the sake of a few % and the retrospection now being applied I am sure none would have gone this route in hindsight.
Lets hope they don’t change the rules and come after some of what you thought was legally yours via dividends etc…
[quote name=”Francis Burton”]
are you sure HMRC will be satisfied with the level of tax and NIC you’ve been paying. I hope so , but i would advise putting sufficient aside lest you recieve APN for disguised renumeration.[/quote]
They are by definition NEVER happy. 🙂
As my accountant says, they want everyone on the payroll, and nobody to have access to tax law expertise that reduces the tax liability.
We shall see how happy they are this year (my accountant always says that I do not have the “signature” of an abuser when the HMRC analytics sw runs on my accounts) .
And yes, I never spend that money (I am always living today off money earned at least 2-3 yrs ago) .
[quote name=”mark”]If any contractor used these loan scheme thinking they were kosher, they had their head deliberately in the sand.[/quote]
I couldn’t agree more. But I wouldn’t say deliberately. I would say seduced into the promised land which has now turned into famine and pestilence.
However my point was that we are the “small fry” and lots of them to HMRC. Easy pickings, but the REAL big evaders get away, we were/are merely trying to maximise our economic worth as portrayed by Marshall et all.
By the way do you have an offshore company/bearer bonds/shell company /nominees??
[quote name=”Rhys Williams”]I have very little sympathy for those who used these schemes. I saw the adverts and read about them at the timecand it was clear to me then as it is now, that these schemes were both very risky and morally dubious.[/quote]
Morally dubious? What special authority do you have to preach from your pulpit of immaculate morality ?
[quote name=”Nick P”]
Many contractors were advised or simply did a quick google search when starting out, even if you do so now, its not greed, its simple to do, easy. For many they went this scheme route for this, not for greed, for the sake of a few % and the retrospection now being applied I am sure none would have gone this route in hindsight.
Lets hope they don’t change the rules and come after some of what you thought was legally yours via dividends etc…[/quote]
At what point does “for a few %” become greed ??
Are all those industrial tax avoiders not also in the former category ??
As for retrospective dividend legislation, if HMRC do it, they do it. I take comfort however knowing that I have never abused these particular law to warrant the wrath of the taxman (my ‘do not take the p*ss’ mantra) .
[quote name=”Francis Burton”][quote name=”The Q”][quote name=”Nick P”]The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses.[/quote]
A time-honoured failing. 🙂
Prior to the “2 year” rule on expenses, I knew contractors who had put the money thru as expenses and spent it, chancing their luck (as we all did) . Spent the money, and then got caught owing big amounts.
If only they could defer their greed for 6-7 yrs, and then take the money after the deadline for routine investigation by the taxman expires.
And greed is the issue.
I am taking close to 80K out of 100K this year on a split of salary/pension/dividends. When you can do that with the current ltd company laws, why do most people fill the need to bet their shirt on getting more with a more risky arrangement.[/quote]
are you sure HMRC will be satisfied with the level of tax and NIC you’ve been paying. I hope so , but i would advise putting sufficient aside lest you recieve APN for disguised renumeration.[/quote]
Well said Francis, if you’re a contractor and having been using anything other than a PAYE system for remuneration, you could be caught up in this at some point. Ltd company outside IR35 is the obvious next target for HMRC and retrospective tax laws.
[quote name=”Rhys Williams”]I have very little sympathy for those who used these schemes. I saw the adverts and read about them at the timecand it was clear to me then as it is now, that these schemes were both very risky and morally dubious.[/quote]
Morality and legality are separate issues. Morals are subjective on a personal, cultural, regional, religious, or any other basis. You can’t legislate according to disparate moral outlooks. If something is generally accepted as immoral, it can and should be made illegal. At that point, and only that point, do businesses and you have a definitive reference to base current and future decisions on. Accountancy, like everything else, must operate within the law. If you rely on an accountant, it’s your responsibility to be sure they’re not doing anything illegal on your behalf. If you make a decision in good faith abiding with current laws which is later deemed illegal, punishing you retrospectively is not just morally dubious but categorically morally reprehensible, and should be illegal with immediate effect.
[quote name=”The Q”][quote name=”Nick P”]The problem with this is that none of the people who used these schemes has put the money aside, therefore we will see a lot of bankrupt contractors, people and families losing their houses.[/quote]
If only they could defer their greed for 6-7 yrs, and then take the money after the deadline for routine investigation by the taxman expires.
And greed is the issue.[/quote]
Greed is not always the issue. If you’re in the enviable position of being financially comfortable, where any extra money from tax savings is just a welcome bonus, then yes, but this isn’t always the case. Other contractors were hit hard by the “credit crunch”, struggled to find work at the time, and found themselves using future income to repay debts. To them, the tax savings were something that enabled them to accept lower day rates and still feed their kids and keep a roof over their heads. For HMRC to reach back in time to claw back what they perceive at lost tax revenue is nothing more than a cruel punishment.
[quote name=”Neil”][quote name=”Rhys Williams”]I have very little sympathy for those who used these schemes. I saw the adverts and read about them at the timecand it was clear to me then as it is now, that these schemes were both very risky and morally dubious.[/quote]
Morally dubious? What special authority do you have to preach from your pulpit of immaculate morality ?[/quote]
My own of authority ofcourse! Are you telling me that you set morals from some other higher authority than your own???
My point being, I investigated the schemes and decided that a)they were very risky as they were based on a loophole and b) against my morals as I believe in fair taxation.
I don’t need anyone’s authority besides my own to come to that conclusion.
[quote name=”Stephan J”]
Greed is not always the issue. If you’re in the enviable position of being financially comfortable, where any extra money from tax savings is just a welcome bonus, then yes, but this isn’t always the case. Other contractors were hit hard by the “credit crunch”, struggled to find work at the time, and found themselves using future income to repay debts. To them, the tax savings were something that enabled them to accept lower day rates and still feed their kids and keep a roof over their heads.[/quote]
A legitimate use. And one that may soon be gone.
However all my colleagues in such schemes, entered the scheme well before those times, and certainly not because they were in similar financial situations.
[quote]For HMRC to reach back in time to claw back what they perceive at lost tax revenue is nothing more than a cruel punishment.[/quote]
Nothing more than admittance of their institutional incompetence. But seeing as the PAC report last year has already passed judgement on that, the HMRC actions are nothing more than the usual “class war” + “beat up the little man” knee-jerk.
The Q,
Don’t want to be Personal BUT I really find your angle on this really difficult. If for 6 to 7 years you put ALL of your income into schemes (possibly Panama and offshore) for 6-7 years what the F*** are you living on????
Get real wealthy B*. By the sound of it you’ve got an awful lot hidden. Classic case of being over righteous to cover deception.
As I asked before have you got anything offshore. Answer will always be NO, but TRUTH will out eventually.
Sorry to be aggressive about this but I do not find your comments helpful to other people.
Has anyone looked at the real reason people use aggressive tax strategies? Call it greed if you like, but when you are paying 65% of everything you invoice out in tax one way or another (CT, VAT, PAYE, NI, VAT on your personal spending, Council Tax, Insurance permiumm tax, fuel duty, stamp duty, income tax on interest outside an ISA, air passenger duty, VAT on domestic fuel). I suggest everyone does an excercise to add all your own tax up and then ask – is it fair I pay £40,000+ per year in tax for even just 1 lazy f***er to be handed £20k and a free house? Is it now morally right to try and hand money to government just because they say so, or do you use the rules to balance what they say you owe? I stopped using an EBT as soon as they said they were going after them. But to try and backdate legislation 5 years after I left one is goping to make a lot of people contribute to a legal fund, if nothing else to buy some time to save up the owed taxes.
I’d like a new principle of law that says of the earnings you generate in a year – the government is NEVER allowed to take more than 50% off you in direct or indirect taxes. So they owe me at least 15% for the years I’ve been working – retrospectively.
[quote name=”Reggie Ford”]The Q,
Don’t want to be Personal BUT I really find your angle on this really difficult. If for 6 to 7 years you put ALL of your income into schemes (possibly Panama and offshore) for 6-7 years what the F*** are you living on????
Get real wealthy B*. By the sound of it you’ve got an awful lot hidden. Classic case of being over righteous to cover deception.
As I asked before have you got anything offshore. Answer will always be NO, but TRUTH will out eventually.
Sorry to be aggressive about this but I do not find your comments helpful to other people.[/quote]
My “angle” is WHY do contractors feel the need to indulge in risky schemes that to be honest are usually the preserve of the very wealthy, when the current ltd company structure serves you well ??
I have not indulged in such schemes, domestic or overseas.
I take pension and dividends when the amount of revenue makes it applicable (not often as I rarely work all year) , otherwise just PAYE.
Doing this over 25 yrs enabled me to get 200K into UK life policies, which enables me (if I choose) to take ~10K pa tax free (no chargeable gains) for 20 yrs. Which paid for 20% deposit on my house, and > 30% capital repayment on the mortgage.
Is this the “awful lot hidden” that you seek ??
[quote name=”Reggie Ford”]The Q,
Don’t want to be Personal BUT I really find your angle on this really difficult. If for 6 to 7 years you put ALL of your income into schemes (possibly Panama and offshore) for 6-7 years what the F*** are you living on????
Get real wealthy B*. By the sound of it you’ve got an awful lot hidden. Classic case of being over righteous to cover deception.
As I asked before have you got anything offshore. Answer will always be NO, but TRUTH will out eventually.
Sorry to be aggressive about this but I do not find your comments helpful to other people.[/quote]
I think my (longish) reply has been lost, so in summary :
– All my financial dealings/investments are done in the UK (pensions, life assurance etc) .
– any overseas gigs I have had, I have (within the confines of local tax laws and UK/X tax agreements) , been taxed in the UK.
I don’t understand how HMRC can claim tax back retrospectively.If such schemes were non-compliant then they should have been shit down years ago and the companies fined. If they were compliant then…..whats the problem? Fair enough if the law has changed since but how can laws be backdated? Makes no sense to me. I was in such a scheme for a couple of years and we are now in the appeal process. I retired a few years ago and only have a pension income now, so if we lose I don’t have any way of paying the bill. All very worrying.
MPs have made themselves exempt from this retrospective taxation which will impact thousands of contractors
http://www.telegraph.co.uk/finance/businessclub/8437118/MPs-given-exemption-from-tax-avoidance-rules.html
Moral issue aside this is simply retrospective taxation. How can anyone manage their finances if they have no idea whether HMRC are going to introduce legislation that increases tax for last 10 years, today. It is easy to knock this because of the moral issue, but if HMRC get away with this it opens the door to any and all retrospective taxation.
If these schemes are so blatantly illegal then why hasn’t HMRC simply argued these in court. Short answer is because they don’t believe they would win. Through this they will be judge, jury and executioner.
Its bulls***!
Basically, no-one gave a sh!t when 2000 of us on the Montpelier IR35 scheme were the first contractors to be affected by retro tax in 2008 (Section 58 of the Finance Bill).
That set a precedent and now HMRC are free to use retrospective legislation whenever they so wish.
If you’re a contractor affected by the above, it’s worth looking at joining an action group to collaborate on a response.
If you’re interested, take a look at: http://www.wttconsulting.co.uk/#!big-group/ci09
“Basically, no-one gave a sh!t when 2000 of us on the Montpelier IR35 scheme were the first contractors to be affected by retro tax in 2008 (Section 58 of the Finance Bill).
That set a precedent and now HMRC are free to use retrospective legislation whenever they so wish.”
A lot of us did give a shit. We wanted the book thrown at you. And it looks like you’ve finally got your comeuppance.
Same goes for any other greedy idiot who joins these preposterous schemes.
You alone are responsible for your actions. Pleading ignorance just doesn’t wash. You were greedy, and stupid and deserve everything you get mate.
Karma.
[quote name=”Shacklady”]”Basically, no-one gave a sh!t when 2000 of us on the Montpelier IR35 scheme were the first contractors to be affected by retro tax in 2008 (Section 58 of the Finance Bill). …”
A lot of us did give a [censored]. We wanted the book thrown at you. And it looks like you’ve finally got your comeuppance.
Same goes for any other greedy idiot who joins these preposterous schemes.
You alone are responsible for your actions. Pleading ignorance just doesn’t wash. You were greedy, and stupid and deserve everything you get mate.
Karma.[/quote]
What about the people who entered such schemes who had full understanding of the pros/cons ??
Are they exempt from your wrath ?? 🙂
Retrospective legislation should apply to the organisers of these schemes – not the victims. The company that sold me this EBT have run off with 25% of my money and have launched another scheme aimed at ‘Tax Planning’ by inviting me to repay the loans in full then return the sum back to me through another avoidance scheme where they cream off yet another 25%. The buggers are basically informing HMRC about all their clients who ever had an EBT with them to force them into yet another scheme where only they profit. These people are happy and willing to bankrupt their previous clients who cannot afford to re-pay EBT loans. Where it the protection we should be offered to shield ourselves from these vultures.
Hi
Totally agree with Ivor above, I entered into an EBT unknowing back in 2010- after 8 months I realised this wasnt right in principal so I stopped. Then the HMRC were going after me for a lot more tax than I had actually earned- income figures were way more than actual. So again I trusted accountant to deal with this for me and exactly as Ivor has put it- only option given is to go into another scheme or face having HMRC sting me for more tax than I actually owe.