The Finance (No 2) Act 2017 introduced tax legislation, referred to as the “2019 Loan Charge”.
If you think you may be affected by the 2019 Loan Charge or are contacted by HM Revenue & Customs with a demand for payment, then you should seek professional advice immediately.
What is the 2019 Loan Charge?
Many contractors will remember IR35 with a deadline of 5 April 2017. That tackled “disguised employment” and now HM Revenue & Customs are looking to close another tax loophole known as “disguised remuneration”. Anyone who has an outstanding loan from an arrangement like an “EBT” or “EFRBS” on 5 April 2019 will have it treated as taxable income. Unless you repay the loan or settle with HM Revenue & Customs then you will have to pay the charge.
The exact charge will depend on your specific circumstances but may be made up of Income Tax as a percentage of the loan and National Insurance Contributions. The charge will apply to any disguised remuneration scheme that was entered into after 6 April 1999.
What’s an EBT or EFRBS and how do I know if I have an outstanding loan?
An Employee Benefits Trust (EBT) or Employee Funded Retirement Benefit Scheme (EFRBS) works by receiving money from your company and then “loaning” it back to you, for a fee. You have probably been told that the “loan” will never be collected. It is these sorts of schemes that HM Revenue & Customs are looking to address.
Not every scheme is described as an EBT or EFRBS. Some have been given a brand name by the tax professionals who devised the scheme.
ABC Limited has two director / shareholders.
In 2005 ABC Limited had a successful year and made £600,000 profit before tax. The directors in previous years were used to paying the tax and declaring dividends to themselves from the profits left over. They were, however, approached by a tax professional who explained that they had a more tax efficient product to take the profits from the business.
ABC Limited implemented an EBT and paid the £600,000 into it. The EBT loans the shareholder / employees the £600,000, less a fee. It is explained to them that the loans are “notional” and won’t be called in. Ever.
No tax at all is paid on the £600,000 and the fee is a percentage of the tax “saved”.
On 5 April 2019 the 2019 Loan Charge will apply to the £600,000 and the director / shareholder / employees will be liable to pay Income Tax and National Insurance Contributions on the whole amount.
What will happen to me if I have an outstanding loan?
At some point on or after 6 April 2019 HM Revenue & Customs will issue a demand for payment to you.
HM Revenue & Customs did offer a settlement opportunity, however the deadline for expressing an interest in settling passed on 30 September 2018.
Can I just stay quiet and hope I don’t receive a demand?
There is an obligation for everyone involved in a tax avoidance scheme to report the fact to either their employer or HM Revenue & Customs. That includes employers, Trustees and employees. There are financial penalties for those that fail to do so.
What should I do?
Everyone’s financial circumstances are different. It is important that you take advice immediately so that you can prepare for 5 April 2019.
The EBT or EFRBS will not automatically come to an end and you may still be liable for ongoing fees.
Some people may face very large bills from HM Revenue & Customs but will still be able to pay the charge. Others may have lower amounts demanded, but they have already spent the money.
Working with your tax and legal advisers we can help you plan a way forward.
Click for our Guide to the 2019 Loan Charge to print and keep.