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Proposed changes to Part 7A Disguised Remuneration legislation

Proposed changes to Part 7A Disguised Remuneration

A consultation has been released outlining the proposed expansion of the disguised remuneration legislation.


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This consultation picks up on the Chancellor's announcement at Budget 2016 and deals with four specific issues - Changes to tackle the continued use of disguised remuneration (DR) arrangements, changes to introduce a charge on loans made prior to the introduction of the DR rules, transferring the liability to employees in certain cases, and extending the DR legislation to self-employed persons. The consultation also reiterates the Government's intention to use retrospective action should promoters continue to develop arrangements in response to these changes. The proposal is that the changes will be introduced in Finance Bill 2017.

Continued use of schemes
The proposals cover the following:

  • HMRC believe that some taxpayers are claiming that loans originating from an employer and which are subsequently transferred to a third party are not caught by the DR provisions. HMRC are introducing a change which is intended to put the position beyond doubt;
  • HMRC believe that some taxpayers are claiming that amounts being paid to directors of close companies by third parties are not being paid in relation to their employment duties and so are not caught;
  • HMRC are proposing to introduce a new gateway which is specifically targeted at close companies and removes the requirement for the amount received to be linked to employment except that the recipient must be a current/former employee/director of the close company and have had a material interest in the company;
  • HMRC believe that some taxpayers are claiming that loans which are not taxed under the DR provisions are not employment related loans and so are not subject to tax when written off. HMRC are introducing a change which is intended to put the position beyond doubt; and
  • HMRC are intending to deny corporation tax relief for employers for any amounts contributed to a DR arrangement on or after 6 April 2017 unless it is subject to PAYE and NIC at the time the contribution is made, subject to certain exceptions.

Pre-DR loans
When the DR provisions were introduced in 2011, a decision was made by HMRC to grandfather loans made prior to 9 December 2010. HMRC are now proposing to introduce a new loan charge from April 2019 to tax such loans.

In summary, if such a loan is outstanding on 6 April 2019 and the loan was made after 5 April 1999, the full amount outstanding on 6 April 2019 will generally be taxed at that time. Relief is proposed for cases where the employer has settled PAYE and NIC on or about the time of contribution (e.g. under the Employee Benefit Trust (EBT) settlement opportunity) and as a consequence the loan amount will already have effectively been taxed.


Transfer of liability 

The consultation also deals with a proposed extension to HMRC's powers to pursue the employee rather than the employer when a DR arrangement is used. HMRC believe that the current rules need supplementing in cases including the following:

  • Existing legislation can require a UK company (e.g. the UK end client) to account for the tax in certain cases involving intermediaries and agents, but HMRC are proposing to change this so that it is the employee which can be pursued in cases where the individual had an avoidance motive or (as an alternative) knew that PAYE was not being deducted; and
  • HMRC are proposing to make the transfer of the liability to the employee automatic when the employer has been deliberately dissolved when the DR charge arises.

Extension to self-employed persons
HMRC also intend to extend the DR provisions to self-employed individuals and members of partnerships as they believe that some taxpayers are seeking to depress profits by diverting funds to third parties and then drawing on those funds by way of loan/benefit.

Responses to the consultation, including on areas where the proposals could impact non-avoidance arrangements, are requested by HMRC by 5 October 2016 and KPMG in the UK will be responding to the consultation in due course.

For further information please contact :

Richard Rolls

Seamus Murphy

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