Disguised remuneration: asset transfer arrangements set up to avoid the loan charge (Spotlight 50)
HMRC is aware of a contractor arrangement which claims to avoid the 2019 loan charge by transferring ownership of shares in a Personal Service Company (PSC).
Overview
Spotlights 36, 39 and 49 warned of a number of schemes and arrangements that claim to avoid the disguised remuneration loan charge.
HMRC is also aware of contractor arrangements being marketed, involving a Personal Service Company (PSC) and a limited liability partnership (LLP) which claims to get around the April 2019 loan charge, by transferring ownership of the shares in the PSC.
HMRC’s strong view is that these arrangements or similar ones do not work and we will tackle the promoters and users of these arrangements.
How the arrangements claim to work
These arrangements involve a number of steps:
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The contractor provides their services to an end user (for example Business ABC) via a PSC in which they are major/sole shareholder. Both the contractor and the PSC become partners of an LLP based offshore.
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The PSC bills Business ABC for the services the contractor provides. Business ABC pays the money to the PSC who then pays the contractor a salary at or a little over the National Minimum Wage rate.
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The PSC then transfers the balance of the payment, to the LLP. The PSC tells the contractor how much money they can draw on their capital account with the LLP. Since the contractor has not contributed any capital to the LLP, the amount drawn from their capital account is classed as a loan, for the purposes of the loan charge.
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The majority of shares in the PSC are then sold to an overseas holding company linked to the scheme promoter, in an attempt to cancel the overdrawn capital accounts. The value of the shares is artificially fixed at an amount which will extinguish the balance of the loan.
Contractors entering into arrangements like these may find that they are tied into further avoidance arrangements for up to 3 years. These arrangements will not result in an effective repayment of outstanding loans and will not reduce or eliminate the amount liable to the loan charge.
Why you should not use these arrangements
These arrangements aim to disguise the use of loans by transferring assets rather than actually making a genuine repayment. They are deliberately designed to try to avoid the loan charge.
If you use these arrangements the loan charge will still apply and you may face a significant penalty in addition to the tax charge.
Deliberately misleading or concealing information from HMRC may also result in criminal prosecution.
What this means for promoters
HMRC will pursue those who promote or enable tax avoidance.
This includes using the penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
The enablers’ penalty may apply where any of these arrangements have been enabled and entered into on or after 16 November 2017.
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who persist with promoting tax avoidance schemes.
Members of accounting professional bodies are also expected to follow the standards of behaviours set out in the Professional Conduct in Relation to Taxation code.
What to do if you’re using these or similar arrangements
If you’re using one of these schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
If you do, you’ll:
- avoid the costs of investigation and litigation
- minimise interest and, where they apply, penalty charges on the tax you should have paid
Find out more about how to identify tax avoidance schemes.
You can report a scheme that has been set up to avoid tax.