Policy paper

Technical note

Updated 22 December 2022

Chapter 1 - overview of changes for scheme users

1. The Chancellor announced at Budget 2016 that the government will take action to ensure those who have used disguised remuneration tax avoidance schemes pay their fair share of tax and National Insurance contributions (NICs). This follows an earlier announcement about these schemes at Autumn Statement 2015.

2. There are many types of disguised remuneration schemes. Most seek to pay an individual in the form of a loan that is not subject to Income Tax or NICs. These loans are often interest free and are designed so that it is unlikely they will ever be repaid, meaning the individual is free to use the money in the same way most people would use their salary.

3. The users of these schemes vary as much as the schemes themselves. They include both employed and self-employed individual contractors, small businesses employing a few staff, and highly paid individuals seeking to avoid large sums of tax and NICs.

4. The government’s view is that these schemes don’t work and it is committed to ensuring it is clear to promoters and users that these schemes don’t work. The government will continue to take action, including changing the law, to prevent these schemes from being used.

5. The government is also committed to ensuring that those who have used these schemes in the past aren’t allowed to get away with it. To meet this objective, the government will introduce legislation to put beyond doubt that all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven’t already been fully taxed or repaid on or before 5 April 2019.

6. Therefore the government will ensure that if you have used, or continue to use, a disguised remuneration scheme you will have to pay tax and NICs on your remuneration if you have not already done so.

7. If you think you are affected by these changes you should contact HM Revenue and Customs (HMRC). We have dedicated teams who can help you extract yourself from tax avoidance schemes and to settle what you owe.

8. If you are already speaking to someone at HMRC about your involvement in a disguised remuneration scheme you should contact them in the first instance.

9. If you don’t have a contact, and you think you might have used an avoidance scheme as an individual or contractor, you should email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk. If you’re an employer, you should email ca.admin@hmrc.gov.uk.

Chapter 2 - what the government intends to achieve

1. The package of changes announced by the Chancellor at Budget 2016 will ensure that those who have used or continue to use a disguised remuneration tax avoidance scheme will pay tax and NICs on that remuneration as Parliament intended.

2. More information on the background to disguised remuneration schemes is in Chapter 3.

3. The package of changes will tackle:

• the continued use of disguised remuneration schemes (see Chapter 4)
• the use of disguised remuneration schemes to date (see Chapter 5)
• the use of other similar avoidance schemes, including any involving self-employment (see Chapter 7)

4.This is not an exhaustive list and the government is committed to tackling all schemes that aim to disguise payments or other income to individuals in order to avoid paying tax and NICs.

5.The first part of the package will be enacted in Finance Bill 2016 with the remainder to follow in later Finance Bills. This will allow time for consultation to ensure the legislation is targeted and effective.

6.The government will take further action in the future if it becomes aware of other avoidance schemes or new schemes that are used to try and circumvent these changes. This could include retrospective action where appropriate.

7.The government’s message for promoters and users who try and avoid tax is clear – those who use avoidance schemes to try and get out of paying their fair share of tax and NICs should never ‘get away with it’.

Chapter 3 - background

1. Disguised remuneration tax avoidance schemes were historically used by employers and individuals to attempt to reduce the amount they had to pay in Income Tax and NICs on remuneration for employees and directors.

Before 2011

2.Disguised remuneration schemes came in many varieties, but generally 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.

3.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, instead of providing a loan, the third party would invest the money on behalf of the employee to be provided to them at a later date.

4.Users and promoters of these schemes believed that the overall effect of the arrangement was that no Income Tax or NICs was due and that there were Inheritance Tax benefits.

5.HMRC’s firm view is that these schemes have never worked and has made this view clear on many occasions including through highlighting tax avoidance schemes via its ‘Spotlight’ series.

6.HMRC is pursuing unpaid tax and NICs liabilities through the courts and will continue to do so.

After 2011

7.The disguised remuneration legislation was introduced in Finance Act 2011 to put beyond any doubt that these schemes are not effective. This legislation came into effect from the date it was announced on 9 December 2010.

8.The legislation was successful in stopping the promotion of schemes that existed at that time and many users have not used a disguised remuneration scheme again. However, since then new schemes have been created by avoidance promoters with the aim of sidestepping the 2011 legislation and continuing to avoid Income Tax and NICs.

9.These schemes are generally more contrived and aggressive than those that existed before 2011 but often also take the form 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.

10.These schemes have grown in popularity in recent years and are being used by an increasing number of employers and individuals.

11.HMRC’s firm view is that these schemes also do not work and has also continued to warn would-be avoiders about the risks associated with these type of schemes, most recently in ‘Ten things about contractor loan schemes’.

12.HMRC is pursuing unpaid tax and NICs liabilities through the courts and will continue to do so.

Settlement opportunities

13.Alongside the 2011 legislation HMRC announced a settlement opportunity for employers who had already used certain disguised remuneration schemes before 2011. This was known as the ‘EBT Settlement Opportunity’ and it offered incentives for scheme users to settle with HMRC.

14.This was followed up with the ‘EFRBS Resolution Opportunity’. This was for employers that, prior to 2011, used an EFRBS instead of using an EBT.

15.A similar opportunity, called the ‘Contractor Loans Settlement Opportunity’, was also offered. This allowed many individuals, who had used a scheme without a UK employer, to come forward and settle with HMRC.

16.Those settlement opportunities were a success and closed in 2015 after collecting approximately £1.5bn.

Need for action

17.Despite the success of the settlement opportunities, a significant number of employers and individuals are still to come forward and settle. The government is very concerned about the continuing promotion of disguised remuneration avoidance schemes.

Chapter 4 - tackling the continued use of schemes

1. Part of the package of changes will tackle the continued use of disguised remuneration schemes. Additional technical details, which are common to most of the changes, are set out in in Chapter 6.

Overview of changes

2.Promoters of these schemes claim that their products are effective because they exploit perceived weaknesses in the disguised remuneration legislation at Part 7A ITEPA 2003 (Part 7A). The government’s view is that these avoidance schemes are ineffective and will put beyond any doubt that the schemes do not work by amending Part 7A.

3.This will begin with legislation introduced in Finance Bill 2016 and further legislation will follow in future Finance Bills following a technical consultation over the summer.

4.At Autumn Statement 2015 the government made clear that retrospective action back to 25 November 2015 will be considered if new schemes to avoid paying tax and NICs on earned income are created following any of these changes. Users of avoidance schemes should be aware of that possibility if they use or are considering using a new avoidance scheme in the future.

Finance Bill 2016

5.The legislation introduced in Finance Bill 2016 includes a change to tackle one type of scheme from Budget day, 16 March 2016. The scheme seeks to exploit a perceived weakness in Part 7A and to put beyond any doubt that the scheme does not work an additional targeted anti-avoidance rule will be inserted with effect from 16 March 2016.

6.Three minor technical clarifications to Part 7A are also being made in Finance Bill 2016 to ensure the legislation works as Parliament intended.

7.A tax information and impact note and draft legislation with explanatory note providing more detail on these changes was published on 16 March 2016.

Finance Bill 2017

8.Further legislation will follow in Finance Bill 2017 to put beyond any 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.

Example 1

A disguised remuneration scheme is entered into by employer ‘B’ with the aim of rewarding an employee ‘A’, which involves setting up a trust ‘P’.

A series of contrived steps result in A receiving £350,000 from B. However, A could be asked to repay this money to P at some point in the future.

The Finance Bill 2017 changes will put beyond any doubt that the debt to P is caught by Part 7A.

9.Some schemes claim that they are not disguising remuneration because the individual who benefits from the scheme is not solely an employee. It is also possible that both Part 7A and the loans to participator rules in Chapter 3 or Chapter 3A of Part 10 CTA 2010 could apply to the same remuneration.

10.Therefore another part of the package will put beyond any doubt how Part 7A applies to disguised remuneration of directors/shareholders (participators) of close companies.

11.Rules will be added to ensure that there can be no double charge but also to make clear that there can be no possible gap between the 2 sets of rules.

Example 2

The facts are the same as in Example 1 but A is a shareholder and director of B, which is a close company.

When the result of the scheme is that A receives a loan from P, funded by B, the loans to participators rules may apply as well as Part 7A.

The Finance Bill 2017 changes will ensure that either of those rules will apply.

PAYE regulations

12.Some schemes involve creating an entity, sometimes offshore, as the ‘employer’, solely for the purposes of the avoidance scheme. The government will broaden HMRC’s transfer of liability powers, contained with the PAYE regulations, so that in specific circumstances the liability can be transferred from the employer to the individual if it cannot reasonably be collected from the employer.

13.It is important to maintain sufficient safeguards so that the liability is not transferred to the individual in inappropriate circumstances. The detail of the changes to the transfer of liability rules will be included in the consultation over the summer.

Chapter 5 - tackling the use of schemes to date

1. The package includes 2 changes to tackle the use of disguised remuneration schemes to date, which are set out below. Additional technical details, which are common to both changes are set out in Chapter 6.

Withdrawal of transitional relief on investment returns

2.One of the changes is the withdrawal of a transitional relief on investment returns contained in paragraph 59(1)(f)(ii) of Schedule 2 to the Finance Act (FA) 2011. The rest of the relief at paragraph 59 will not be affected.

3.Paragraph 59 was introduced alongside Part 7A to encourage those who had used disguised remuneration schemes prior to the introduction of Part 7A to settle with HMRC.

4.The relief is given when tax has been accounted for on the amount of disguised remuneration on the basis it is earnings.

5.The effect of the relief is that the amount treated as earnings, and any investment returns accruing on that amount, will not be taxed under Part 7A when distributed to the employee by the third party.

6.The government intends to withdraw the transitional relief on the investment return if the original earnings charge on the disguised remuneration has not been paid on or before 31 March 2017. Part 7A will then apply to the investment returns, whenever they were accrued, when they are distributed to the employee, even if the original earnings charge on the disguised remuneration has been paid since 31 March 2017.

7.In other words, the full relief will only continue to apply if the earnings charge on the original disguised remuneration has been settled prior to that date.

8.A tax information and impact note and draft legislation with explanatory note providing more detail on these changes was published on 16 March 2016.

Example 3

An employer ‘B’ placed £100,000 into an EBT ‘P’ in 2008 with the intention that it will eventually be for the benefit of an employee ‘A’. P is located overseas, and invests the £100,000 in offshore investments, which attract investment returns.

By April 2016 the £100,000 has attracted a further £30,000 of investment returns, resulting in £130,000 being held in P.

Before 31 March 2017 B settles with HMRC on the basis the £100,000 was earnings of A in 2008.

A is entitled to relief under paragraph 59(1)(f)(ii), Schedule 2, FA 2011 and Part 7A does not apply to the £30,000 when it is distributed to A.

Tax may be due on the £30,000 under other parts of the Taxes Acts.

Example 4

The same facts apply as in Example 3 above, but settlement is not reached and tax has not been paid on the £100,000. HMRC pursues the liability through the courts.

In December 2016 HMRC wins the litigation and B pays the outstanding tax on the original £100,000.

Then in January 2017 P makes a distribution of £130,000 to A. There is no tax to pay on £100,000 of the distribution since this has already been taxed as earnings, but the £30,000 is taxable under Part 7A as paragraph 59(1)(f)(ii), Schedule 2, FA 2011 will no longer apply.

New charge on outstanding disguised remuneration loans

9.Another change to tackle the use of disguised remuneration schemes to date is the introduction of a new tax charge on all outstanding disguised remuneration loans.

10.The charge will apply where:

a.The loan was made at any time prior to the amendments to Part 7A, outlined in Chapter 4, coming into force (including where the loan was made before Part 7A was first introduced);

b.If the same loan was made after those amendments came into force it would be taxable under Part 7A (including if it would already have been taxable under Part 7A if made before it was amended); and

c.The loan, or part of the loan, is outstanding on 5 April 2019.

11.The new charge will not apply where:

a.The loan has been repaid in full before 5 April 2019;

b.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;

c.The loan has been taxed in full under Part 7A before 5 April 2019.

12.A loan is within the scope of the new charge if, had the same loan been made on the date that the new legislation comes into force, it would be taxable under Part 7A. This includes the amendments to Part 7A that are set out in Chapter 4 above.

13.Where this is the case, the charge will fall on any amount of the loan that has not been repaid before 5 April 2019. This means that there will be a period of grace in which the loan can be repaid in full, or the user can settle with HMRC, to avoid the new charge being triggered.

14.In the case of extremely old loans it is possible 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 5 April 2019. Consideration will be given to any such situations when legislation for these proposals is drafted.

15.Since the new charge will be part of Part 7A the charge will fall on the relevant employer in the first instance.

Example 5

An employer ‘B’ directly placed £200,000 into an EBT ‘P’ prior to December 2010 in order to remunerate an employee ‘A’. Shortly afterwards P made a loan of £195,000 to A.

If that loan is outstanding on 5 April 2019 the new measure will charge the loan amount of £195,000 to income tax and NICs. The £5,000 not borrowed by A is not subject to the charge but may be caught by Part 7A at a later date.

If A repays the debt to the P before 5 April 2019 there is no charge under the new measure as there is no debt outstanding. However, the £200,000 now held by P may be caught by Part 7A at a later date, for example if it were distributed to A.

There could be an earnings charge on the contribution to P prior to December 2010. More detail is provided in Chapter 6.

Example 6

The facts are the same as in Example 5 above.

However, before 5 April 2019 a settlement is reached between B and HMRC on the basis that the £200,000 was earnings of A.

On the 5 April 2019 B does not have to pay the new charge as the same amount has already been taxed as earnings.

Example 7

An employer ‘B’ contributes £200,000 into a scheme involving a third party ‘P’ in January 2013 in order to remunerate an employee ‘A’. Shortly afterwards, after a series of intervening steps, the end result of the scheme is achieved, which is a debt of £190,000 owed by A to P.

If that debt is outstanding at 5 April 2019 the loan amount of £190,000 will be charged to income tax and NICs, since the arrangement, were it made at that time, would be caught by Part 7A.

The £10,000 not borrowed by A is not subject to the charge but may still be caught by Part 7A at a later date.

If A repays the debt to P before 5 April 2019 there is no charge under the new measure as there is no debt outstanding. However, the £200,000 now held by P may be caught by Part 7A at a later date, for example if it were distributed to A.

However, it should be noted that there could be a Part 7A charge as a result of the contrived steps taken in January 2013 and HMRC may pursue this charge.

Chapter 6 - additional technical details

1. There are some additional technical details which are common to many of the proposals set out in Chapters 4 and 5 above.

Collecting tax on disguised remuneration payments

2.Many of the changes result in a charge being levied under Part 7A. In the majority of cases this means that the charge is collected through PAYE from the employer who was party to the avoidance scheme. NICs would also normally be collected from the employer.

3.However, the government will amend the PAYE regulations to allow, where appropriate, for the tax and NICs to be collected from the employee where it cannot reasonably be collected from the employer. A consultation on these amendments will form part of the wider consultation over the summer.

Preventing double taxation

4.In many cases, where the charge on outstanding disguised remuneration loans applies, there may also be an earlier income tax charge on the same amount. The most common example is an earnings charge. Provisions will be included in the legislation for these changes to ensure that the same amount is not taxed as income twice.

5.However, in some cases the amount due under the new charge will be less than the total amount due to be paid in respect of the earlier liability, for example where the liability has not been paid and a large amount of interest has accrued on it.

6.In such cases the user will still have to pay the difference between the new charge and the amount due in respect of the earlier liability.

7.Provisions will also be included in the legislation to address the interaction of Part 7A and the Accelerated Payment (AP) rules. A payment of an AP issued in respect of an earlier charge can also be used to set off against the payment of any subsequent Part 7A charge, including the new charge on outstanding loans, in respect of the same income.

Interaction with other taxes

8.Provisions will be included in the legislation to address the interaction between the new charges and other relevant tax rules, eg the interaction with the rules for corporation tax deductions.

Chapter 7 - similar avoidance schemes

1. The government is aware of other avoidance schemes that have the same objective of avoiding tax and NICs on earned income, or disguising remuneration, that do not currently fall within Part 7A.

2. 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.

3. Others do not use employment arrangements and seek to avoid tax and NICs liabilities on self-employed earnings.

4. Scheme users, their advisers and avoidance scheme promoters, should be aware that HMRC firmly considers these schemes and arrangements to be ineffective, and will act swiftly and rigorously to challenge such cases.

5. However, to remove any possible incentive for promoters to market and individuals or employers to use the schemes, the government intends to put beyond any doubt that any attempts to insert arrangements to disguise remuneration or rewards for services do not work. The government will take action to tackle these schemes in Finance Bill 2017 and in future Finance Bills if necessary.

Chapter 8 - next steps

1. A technical consultation will be published in the summer inviting views from interested parties and stakeholders on the detail of the proposals, including draft legislation.

2. If you think you are affected by these changes you should contact HMRC. We have dedicated teams who can help you extract yourself from tax avoidance schemes and to settle what you owe.

3. If you are already speaking to someone at HMRC about your involvement in a disguised remuneration scheme you should contact them in the first instance.

4. If you don’t have a contact, and you think you might have used an avoidance scheme as an individual or contractor, you should email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk. If you’re an employer, you should email ca.admin@hmrc.gov.uk.

5. If you have sold or introduced clients to the types of products affected by these changes and would like to discuss how to support multiple clients with meeting their tax obligations before the new loan charge applies to them, you should contact ca.promoterchannelexternal@hmrc.gov.uk.

6. If the contact details above are not appropriate for you, or you have a general question about these changes, please contact employmentincome.policy@hmrc.gov.uk.