The GAAR Panel has given its opinions on 2 recent cases involving employee rewards using loans.
One involved a contractor, and the other a company and its employee.
The arrangements in the cases they considered involved loans and transfer of creditor rights into an Employer Financed Retirement Benefits Scheme (EFRBS).
The panel said that entering into and carrying out these arrangements was not a reasonable course of action.
For the case involving the contractor, the panel stated:
“… a taxpayer bought into a marketed scheme aimed at a potential shortcoming in wide-ranging ‘keep off the grass’ anti-avoidance legislation. By adopting a series of predetermined and contrived steps the taxpayer and the promoter sought to gain an unintended tax ‘win’.”
For the case involving the company and employee, the panel stated:
“… a tax scheme promoter identified a potential hole in the rules charging employee remuneration to Income Tax. By adopting a series of contrived steps the employer and employee taxpayers sought, in an abusive way, to reduce the normal incidence of tax on his continuing reward for services.”
How these types of arrangements work
In both cases an individual became employed by a trust which paid them a small wage along with much larger loans. The loans were claimed not to be taxable as income.
In the contractor case, the trust provided the employee’s services to an unconnected third party.
In the company and employee case, the trust provided the employee’s services back to the company they had been employed by at the start of these arrangements. The employee’s company claimed 100% of the invoiced amounts as an expense for Corporation Tax purposes.
Under both of these arrangements, the individuals received about 82% of the amounts invoiced by the trust to the unconnected third party or previous employer.
In each case the trust transferred its right to receive repayment of the loans to an EFRBS. Both individuals were beneficiaries of the EFRBS.
This was one feature that made it unlikely that they would ever be asked to repay the loans.
The GAAR Panel’s opinion
The panel thought that there was no reason for the arrangements to be structured in this artificial and complex way, other than to seek a tax advantage.
The panel agreed with HMRC’s view that the steps comprising the tax arrangements in both cases were contrived and abnormal. HMRC’s view is that these schemes do not work and we will challenge them.
HMRC has referred other cases involving disguised remuneration to the panel for an opinion. In each case the panel has agreed with HMRC that the arrangements were not a reasonable course of action in relation to employment Income Tax rules.
What the GAAR Panel opinions mean
A designated HMRC officer will take the panel’s opinions into account when deciding if and how to counteract the tax arrangements under the GAAR.
A court or tribunal considering a case where HMRC has issued a notice of final decision must take the panel’s opinions into account when deciding any issue connected with the GAAR.
What this means if you have used these arrangements
If you have used very similar arrangements to the ones considered by the panel, a designated HMRC officer may issue you with a counteraction notice without going back to the panel for a new opinion.
You may also receive an accelerated payment notice if a GAAR counteraction notice is issued to you. This means you will have to pay the disputed tax upfront while HMRC continues its investigations.
Transactions entered into after 14 September 2016 may also be subject to a 60% GAAR penalty, where the GAAR applies.
What this means for tax avoidance promoters
HMRC will consider taking action against promoters where the GAAR Panel decides these arrangements are unreasonable, and relentlessly pursues anyone who promotes or enables tax avoidance.
This includes using the recently introduced penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
The penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.
What to do if you’re using these arrangements
If you’re using these or similar arrangements and you were rewarded using loans - or have used one in the past - HMRC strongly advises you to withdraw from them and settle your tax affairs.
If you do, you’ll:
- avoid the costs of investigation and litigation
- reduce any interest payable on the tax you should have paid
A charge on outstanding disguised remuneration loans (the 2019 loan charge) was introduced to deal with the use of these avoidance schemes. It will apply to anyone who has used them and who has not either repaid their loan or agreed a settlement with HMRC by 5 April 2019.
HMRC settlement terms were published in November 2017 to encourage users of these schemes to settle their tax affairs before the charge comes in.