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Disguised remuneration: the current position

Finance Bill 2017 proposed significant extensions of the “disguised remuneration” tax regime, anti-avoidance legislation intended to ensure payments from third parties to employees are taxed as employment income. In light of the general election on 8 June, many of these proposals were withdrawn in order to allow time for further Parliamentary scrutiny. However, the following key changes have come into force as part of Finance Act 2017:

  • The release or write-off of a loan from a third party, or the acquisition of a right to repayment by a third party, will now be within the scope of DR.

The write-off of an employment-related loan is already a taxable event. It is difficult to see a rationale for this change other than, potentially, to bring the write-off of a loan to a former employee no longer associated with the company within the scope of PAYE, so that HMRC can seek to ensure liabilities are settled by corporate employers rather than needing to pursue beneficiaries directly. However, the exception for write-offs after the death of an employee will continue to apply.

There is a limited exception for loans not exceeding £10,000 which were originally made by an employer.

  • Confirmation that neither the repayment of a loan nor the payment of funds to HMRC under a settlement will be treated as a relevant step attracting a DR charge.
  • Legislation intended to prevent double taxation where an income tax charge has already arisen, and been paid, in respect of the same money or assets.

It is likely the other amendments proposed will however be reintroduced as part of Finance Bill 2018 (regardless of the outcome of the election). These will include measures to:

  • Introduce a new tax charge on loans from third parties outstanding as at April 2019.
  • Extend the application of “disguised remuneration” measures to the self-employed.
  • Significantly extend the application of the disguised remuneration tax regime in relation to close companies, adding further complexity to the existing close company tax regime.
  • Restrict the availability of corporation tax reliefs for contributions to “disguised remuneration schemes” – taking a definition likely to include all employee share trusts, including those used for warehousing arrangements without any avoidance aspects.

The proposals as originally introduced have been criticised as likely to catch legitimate commercial transactions. It is to be hoped that the delay will ensure they can be modified to capture only the avoidance they are intended to target.

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