Changes to the disguised remuneration legislation | KPMG | UK
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Changes to the disguised remuneration legislation

Changes to the disguised remuneration legislation

HMRC have announced certain changes to their proposals to extend the disguised remuneration rules.


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HMRC have announced certain changes to their proposals to extend the disguised remuneration rules. The changes include some additional (and welcome) exclusions and other responses to concerns with the breadth of some of the earlier proposals. However, most of the earlier proposals are to be proceeded with in Finance Bill 2017.

Who should read this?

Any employer which operates an employee benefit trust (EBT) with loans outstanding to beneficiaries or any other arrangement that is potentially caught by the disguised remuneration (DR) legislation.

Directors and shareholders of close companies and self-employed individuals who could be caught by the extension of the DR rules to close companies and self-employment circumstances.

Summary of proposal

HMRC issued a consultation on proposed changes to the DR rules on 10 August 2016. On 5 December 2016, HMRC issued a technical note and summary of responses which included further draft legislation and HMRC's responses to comments received on the consultation document.

HMRC have confirmed that the main part of the proposed changes will be introduced in Finance Bill 2017, although the transfer of liability proposals will not be proceeded with until a further consultation has been undertaken. HMRC have responded to some of the concerns raised in response to the consultation and the key changes to their previous proposals are summarised below.

The 5 December document also notes that HMRC will discuss potential settlement of what they term DR schemes with all users of those schemes who are interested.

Changes impacting employers

The main changes that will impact employers concern the loan charge and the corporation tax deductibility of contributions to DR schemes.

  • The loan charge

The broad proposal is that all loans from EBTs and other third parties made to employees or directors on or after 6 April 1999 and which remain outstanding at 5 April 2019 will attract a PAYE and NIC charge following that date. The amount subject to PAYE and NIC will be the outstanding loan amount on that date. Loan amounts repaid before that date will not be subject to the loan charge, subject to certain anti-avoidance provisions which are designed to ensure that a genuine repayment has been made. There are a number of, mostly narrowly drawn, exclusions from the loan charge which mirror the loan exclusions currently found in the DR rules (e.g. on commercial loans and loans used to fund the exercise price of share options).

The main response to the consultation is a new exclusion for loans made in connection with unlisted company share plans. The exclusion will apply to loans that meet the following conditions:

  1. A loan was made by an EBT or other relevant third party before 9 December 2010;
  2. The loan was used to purchase shares in the employer (or another group company)
  3. The purchase was made within one year of the loan being granted; and
  4. The shares are not listed on a recognised stock exchange.

There is a fall back charge so that if the loan is not repaid within one year of the shares being sold, the loan charge will apply to the outstanding balance.

  • Employer deductions

The original proposal was that employment taxes must be paid at the same time as contributions were made for the employer to obtain a deduction for a contribution to a DR scheme. Concerns expressed included the difficulty of defining a DR scheme and the consequent potential for the new rules to apply to commercial arrangements (e.g. cases where a DR charge was inadvertently triggered because an arrangement involving an EBT did not meet all the requirements of an exclusion from the DR rules such as the ones that apply to share plans and deferred cash plans).

HMRC now propose that the legislation will require that employment income tax and NIC must be paid within 12 months of the end of the period in which the employer seeks a deduction for the contribution to an employee benefit scheme. No motive or purpose test is proposed and, as anticipated, HMRC have not sought to define a DR scheme. The amendment is therefore to be made to the existing rules in section 1290 of the Corporation Tax Act 2009 and so will apply to all employee benefit contributions rather than just being restricted to DR schemes which might be said to have a tax avoidance motive.

At the same time, section 1290 is to be amended to introduce a new, overarching rule that a deduction will not be allowed for an employee benefit contribution in any period that starts more than 5 years from the end of the period in which the contribution was made.

  • Transfer of liability

HMRC are to consult further on the proposals to transfer PAYE and NIC liabilities from the employer to the employee in certain cases involving DR schemes. The scenarios that HMRC appear to be concerned with include where a non-UK employer is set up solely for the purposes of a DR scheme, the employee provides services to a UK person and where the employer no longer exists or is otherwise unable to meet the DR liability when it arises.

HMRC have acknowledged that there are potential concerns with the targeting of these proposals and have said that they will publish more detailed proposals, including on NIC, in early 2017 and seek further feedback. The government intends to make the changes through secondary legislation rather than Finance Bill 2017 and for the changes to be effective in early 2017 after consultation.

Changes affecting close companies and self-employed persons

  • New close companies gateway

HMRC have confirmed that they intend to introduce a new close companies gateway to the DR legislation to deal with cases where it is asserted that remuneration is not paid in connection with an employment (and so is not caught by the current DR rules). HMRC say that they have listened to concerns that the original proposals were too broad and could apply to commercial arrangements (e.g. consideration for the sale of shares in a close company or distributions made by the company).

Under the revised proposals, instead of the company merely facilitating the arrangement, the company must directly finance it through a relevant transaction. Certain commercial transactions are to be excluded but a targeted anti-avoidance rule is to be incorporated to ensure that this only applies to arrangements not connected with tax avoidance. The specific exclusions referred to are for dividends and distributions to the relevant third party; the company undertaking a transaction in the ordinary course of its business on arm's length terms; and for the sale of shares on arm's length terms.

  • Self-employed DR schemes

HMRC say that they are keen to put beyond doubt that schemes under which taxable receipts by self-employed persons are converted into non-taxable amounts, or which seek to match a taxable receipt with a deduction for purported business expenses which are in reality a diversion of earnings, do not work. Objections were raised that the proposals were too broad or that HMRC should seek to invoke the general anti-abuse rule rather than introducing more legislation in this area. However, HMRC have announced that they intend to proceed with these proposals although "the published legislation is designed to ensure that that genuine commercial arrangements will not be affected".

HMRC are also to proceed with a self-employed loan charge similar to the one proposed for employee loans. This will apply to loans previously made to self-employed individuals before the proposed legislation on self-employed DR schemes comes into effect, i.e. where the loan would have been taxable under the new rules and is wholly or partially outstanding immediately prior to 6 April 2019.


Most these changes will be introduced by Finance Bill 2017 and will take effect from 6 April 2017, with those relating to the deductibility of employee benefit contributions for corporation tax purposes applying to contributions made on or after 1 April 2017. The loan charges will apply to loans that remain outstanding immediately before the end of 5 April 2019. The transfer of liability proposals are intended to come into effect in early 2017, from a date which will be confirmed.

Our view

Employers with EBTs (and the trustees of EBTs) with outstanding loans to beneficiaries that have not already entered into a settlement with HMRC to pay PAYE and NIC at the time contributions were made to the EBT (or allocated to sub-trusts) will want to consider how to respond to the loan charge. Responses might include approaching HMRC to reach a settlement and/or discussing the proposed loan charge with beneficiaries to consider whether they wish to make repayment (or conversely ask for the loan amount to be written off earlier and so trigger a DR charge under the current rules).  It will also be important to check whether any of the exclusions may apply, e.g. where a loan was made by an EBT to purchase shares in an unlisted company.

We are analysing the draft legislation on these proposals - in particular those on employer deductions and the close company and self-employment proposals - to consider whether they could still apply to commercial arrangements and will likely be making further representations to HMRC on the revised proposals.

If you would like further information on anything discussed above, then please do not hesitate to get in touch with your normal contact or e-mail

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