The draft Finance (No 2) Bill 2017 published on 20 March 2017 contains some changes to the earlier legislative proposals on disguised remuneration published on 5 December 2016.
Who should read this?
Any employer that 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.
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.
On 20 March 2017, the Government published revised draft legislation on the DR changes as well as a technical update and explanatory notes to the draft legislation. The technical update (which can be found here) helpfully summaries the main changes from the 5 December 2016 version of the draft legislation.
The main point of note to employers is that the loan charge is to be proceeded with, largely as planned, but with some helpful clarifications and amendments. The loan charge is a new charge that will be introduced on loans made by EBTs and other relevant third parties after 5 April 1999 and that remain outstanding on 5 April 2019. The draft legislation provides for certain exclusions and deals with the requirements for making loan repayments before 5 April 2019 if the loan charge is not to arise.
The Government has acknowledged that its original proposals to introduce a new close companies’ gateway into the DR legislation “could catch commercial arrangements that aren’t DR schemes” and has therefore decided to consult further on these proposals with a view to introducing legislation in Finance Bill 2018. However, the revised draft 2017 legislation includes provisions aimed at tackling the use of DR schemes by the self-employed, with some changes made to these provisions with the intention of carving out commercial arrangements that are taxed in accordance with normal tax rules.
Key changes from the draft legislation
The revised draft legislation and technical update include the following key changes in relation to the loan charge:
Other than the decision to postpone the close companies’ gateway, the other changes are less noteworthy insofar as they would concern most employers. However, employers may wish to note that the earlier proposal to deny corporation tax relief for any employee benefit contributions such as contributions to EBTs in any accounting period that begins more than five years after the end of the period in which the contribution was made (for contributions made on or after 1 April 2017) is proceeded with in the revised draft legislation. The only change is to extend this provision to employers who are not carrying on a trade or property business.
Employers with EBTs (and the trustees of EBTs) with outstanding loans to beneficiaries that have not already entered into EBT settlements with HMRC will want to consider how to respond to the loan charge now that further details are available. Employers with concerns about whether they will have the right to recover PAYE and employee’s NIC from beneficiaries when the loan charge occurs (or if loans are released or written off by EBTs they have previously sponsored prior to 5 April 2019) should consult with the EBT trustees and monitor developments on the transfer of liabilities.
Colin Ben-Nathan - Partner
+44 (0)20 7311 3363
Richard Rolls - Senior Manager
+44 (0)20 7694 1091