We consider HMRC enquiries into contractor loans and outline some options when dealing with them.
This article was first published in the Globe Law and Business magazine HMRC Enquiries, Investigations and Powers, February 2017.
As some readers will be aware, HMRC have been undertaking a number of enquiries into contractors / freelancers in relation to certain arrangements that have been put in place regarding their remuneration. This article seeks to set out HMRC’s rationale for undertaking these types of enquiries and how they are looking to settle matters.
Background
The backdrop to all of this stems from the 2015 Autumn statement which was followed up in the 2016 Budget where it was stated that the government will ensure that those using disguised remuneration tax avoidance schemes pay their fair share of tax and NIC.
There are a number of disguised remuneration schemes, but most seek to pay a small salary, topped up by the use of a loan which is interest free and structured so that the loan is never repaid.
Historically, HMRC have offered individuals various voluntary settlement opportunities (EBT Settlement Opportunity, EFRBS Settlement Opportunity and the Contractors Loan Opportunity) to come forward and regularise their tax affairs. HMRC has deemed these opportunities a success with approximately £1.5bn being collected by the time they closed in 2015.
Additionally the disguised remuneration legislation was introduced in Finance Act 2011 (effective from 9 December 2010) to put beyond any doubt that these type of schemes are not effective.
Enquiry notice
HMRC will utilise the legislation at S9a TMA 1970 to open an enquiry into a tax return. This notice tends to be issued by HMRC’s Counter Avoidance Team and the first action upon receipt should be to check and ensure the enquiry has been opened in time. If the enquiry is out of time then HMRC will have to rely on their discovery powers at S29 TMA 1970. (It should be noted that S29 TMA 1970 relates to discovery assessments, and not to “discovery enquires” as some HMRC Inspectors believe.)
The enquiry notice will be accompanied by an informal request for information and documentation. On certain occasions, HMRC may just decide to issue a formal information notice under Schedule 36 FA 2008 instead of an enquiry notice. (It should be noted that whilst HMRC will ask for everything under the sun, it may not be appropriate to provide everything that has been requested, particularly if legal privilege is in point.)
Scheme Documentation
After receiving the enquiry notice or Information request, the next step is to obtain the documentation surrounding the arrangements. This will hopefully include details surrounding how the scheme works and also paperwork surrounding the loan. Based on this, a decision can be made on whether the arrangements will stand up to scrutiny by HMRC. Based on the author’s experience a large proportion of the loan arrangements could not be classed as genuine loans as they are either on uncommercial terms i.e. interest free over a long period, in some instances 99 years, or the terms of the loan are that it will never be repaid.
Available options
There are several options which are open to individuals when faced with the above issues. Firstly, (subject to the enquiry notice being in time) a response to the informal request for information / documentation could be submitted to HMRC. This will provide HMRC the details to consider the position and to potentially raise assessments for the year of enquiry and past years (subject to discovery provisions). If it is believed that the arrangements work, then appeals and postponement applications can be made and this will start the potential litigation process, ending up at the First-tier Tax Tribunal.
Secondly, although HMRC have closed the formal Settlement Opportunities, it is still possible to enter into a settlement with them to tidy matters up. In the first instance HMRC will usually still require certain information / documentation, but then it will be possible to discuss matters surrounding proposals for settlement. However a word of warning, the Counter Avoidance Teams are undertaking enquiries of numerous schemes and they are being directed by Solicitors Office on the terms of settlement. It is not unusual for the Counter Avoidance Teams to respond for a request for settlement by saying “Solicitors Office have not provided us with directions on this scheme and it is up to you to put proposals to us.”
Lastly, and not really an option at all is not to do anything and hope that HMRC have too many cases to deal with now. As indicated this is not an option as readers will find out later on.
Settlement
If it is decided to approach HMRC to settle the case, the terms for settlement are as follows. In general HMRC are looking to convert the amount of the loans received in a tax year to income. The specific nature of the income will be dependent on the directions provided by HMRC Solicitors Office. However, a slight precedent has been set by the Settlement Opportunities which just treated the loans as general income. This meant no further charges to NIC etc. However the author is aware of some push back to this proposal, as HMRC are stating that this approach was specific to the Settlement Opportunities.
Additionally, HMRC seem to be indicating that it is not the amount of the loans which have been received by the individual that should be taxed as income, but the gross amount of the loans (which include the amounts paid as fees / commission to the scheme promoters. HMRC’s rationale for taking this stance (apparently supported by HMRC’s Solicitors Office) is that the amount that should be taxed as income is the amount which would have been if the arrangements had not been in place. This is somewhat debateable as HMRC are seeking tax on monies which have not been received by the individual. This may be something which readers take into account when wishing to settle.
The author has also received verbal confirmation that HMRC will not be pursuing penalties on these types of cases. However, this has not been confirmed in writing by HMRC and the author suspects there may be occasions where it may be appropriate for a penalty to be charged.
Game changer
On 10 August 2016 HMRC issued a consultation document titled “Tackling disguised remuneration”. It closed for comments on 5 October 2016. This contains details of a new tax charge on all outstanding disguised remuneration loans. The charge will apply where the loan, or part of the loan, is outstanding on 5 April 2019. The new charge will not apply if:
- the loan has been repaid in full by 5 April 2019
- the loan is from an amount on which income tax has been accounted for in full, including all years settled under HMRC’s recent settlement opportunities, before 5 April 2019
- the loan has been taxed in full before 5 April 2019.
The new charge will fall on the relevant employer in the first instance.
If individuals believe they will not be affected by the new charge, they may need to think again, as it is likely that employers will be looking to individuals to either repay the loan in full or for the loan to be taxed in full, in order to avoid paying the charge.
For more information, please get in touch with your usual BKL contact or use our enquiry form.