Disguised remuneration: self-employed schemes
Published 5 December 2016
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Who is likely to be affected
Individuals who are self-employed, trading on their own account or through a partnership, using schemes to avoid paying income tax and National Insurance contributions (NICs) on the earnings of their trade or profession.
General description of the measure
This measure is part of a package of changes to tackle existing and prevent future use of disguised remuneration avoidance schemes by individuals and employers. This particular measure applies to the self-employed and will prevent the future use of these avoidance schemes by introducing new legislation into the Income Tax (Trading and Other Income) Act 2005. This will ensure that the full earnings of the self-employment remain part of their taxable income subject to income tax and NICs and attempts to circumvent this position and still reward the individual are ignored.
The measure will also tackle the existing use of avoidance by the self-employed involving loans with a new charge (the ‘loan charge’) on outstanding loans taken out as part of the avoidance arrangements. This charge will apply if tax is not paid on the loan and the loan is not repaid by 5 April 2019.
More detail on all the changes and measures can be found in the technical note and summary of responses also published on 5 December 2016.
Policy objective
This measure supports the government’s commitment to tackling tax avoidance and ensures that users of these types of avoidance schemes pay their fair share of income tax and NICs.
Background to the measure
Disguised remuneration avoidance schemes are used by employers and individuals to avoid tax and NICs. There are various types but they commonly result in a loan from a third party that is on such terms that mean it is unlikely to ever be repaid.
At Budget 2016 the government announced that legislation would be introduced in Finance Bill 2017 to tackle the use of avoidance schemes by the self-employed. This was alongside a package of changes to prevent the future, and to tackle the existing, use of disguised remuneration avoidance schemes by employees.
Following a technical consultation in the summer, this tax information and impact notice details the part of the package that relates to the avoidance by the self-employed. Other tax information and impact notes have also been published on the wider package of disguised remuneration avoidance measures, covering employment income and employer deductions.
Detailed proposal
Operative date
Changes to prevent the future use of disguised remuneration schemes by the self-employed will have effect from 6 April 2017.
The loan charge will apply where a disguised remuneration loan, or part of it, remains outstanding and tax has not been paid on it by 5 April 2019.
Current law
Trading profits of the self-employed are subject to income tax by virtue of the provisions of Part 2 Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Earnings are subject to tax on the full amount of profits arising in the tax year. Profits are calculated, for the purposes of tax, either on principles of generally accepted accountancy practice or the cash basis and are subject to adjustments for tax as required by law.
Proposed revisions
Preventing the future use of disguised remuneration schemes by the self-employed
Legislation in Finance Bill 2017 will introduce new provisions into ITTOIA to counter schemes that are intended to exclude from tax all or part of the income arising to self employed persons and enable all or part of the earnings to be excluded from their taxable income.
The legislation will counter arrangements that are intended to secure a deduction from income where such a deduction ultimately is used to provide a loan or other benefit to the individual or anyone connected to them.
The legislation will also counter arrangements involving the self-employed that seek to exclude an element of the taxable earnings of the self-employed individual whilst at the same time using that element to provide a loan or other benefit, either to themselves or persons connected with them.
Tackling the existing use of disguised remuneration schemes by the self-employed
Legislation in Finance Bill 2017 will also introduce a charge to apply to any balance of disguised remuneration loans made after 5 April 1999, as used by the self-employed as part of the avoidance arrangements. The charge will apply on 5th April 2019 to any such loans still outstanding on that date. The amount of the loan outstanding is, broadly, the principal of the loan less any repayments. Generally, only money payments will be recognised as repaying the loan. Any money payment connected with a tax avoidance arrangement, excluding the arrangement under which the loan was made, will be disregarded. The loan charge will also apply to situations where one loan is replaced by another loan, some other form of credit or a payment purporting to be a loan, referred to as quasi-loans in the legislation.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| +10 | +25 | +180 | +310 | +40 | +65 |
These figures are set out in Table 2.1 of Autumn Statement 2016 as ‘Disguised Remuneration: extend to self-employed and remove company deduction’. These figures represent the combined Exchequer impact of ‘Corporation Tax and Income Tax: tackling disguised remuneration: restricting tax relief for contributions to avoidance schemes’ and ‘Disguised remuneration - self-employed schemes’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
As well as preventing future use of this type of avoidance this measure is expected to affect up to 10,000 individuals who have previously entered into disguised remuneration schemes for the self-employed. Some of these individuals will be unable to repay the loans, agree a settlement with HM Revenue and Customs (HMRC) before 5 April 2019, or pay the loan charge arising on 5 April 2019. The government anticipates that some of these individuals will become insolvent as a result.
The households and families of these individuals are likely to be affected by the consequences of them entering into these avoidance schemes. The extent of the impact will vary from case to case.
Equalities impacts
There is no reason to suppose this measure will have a significant or disproportionate impact on groups with legally protected characteristics as recognised in the Equality Act 2010.
Impact on business including civil society organisations
This measure is expected to have no impact on business or civil society organisations who are undertaking normal commercial transactions; it will only impact businesses that are engaging in avoidance.
Operational impact (£m) (HMRC or other)
The operational resource costs to enable implementation of this measure will be in the region of £16 million.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through disclosures of new avoidance schemes to circumvent the measure, and through communication with affected customers and practitioners.
Further advice
If you have any questions about this change, please contact the Business Profits Policy team by email: businessprofits.admin@hmrc.gsi.gov.uk.