What does the 2019 Loan Charge mean to us and our clients?
Firstly a little background on Employee Benefit Trusts (EBT) as they are at the heart of the story.
An EBT is set up by a company to hold cash or other assets ostensibly for the benefit of employees. They are a separate legal entity from the company that created them even though they can be guided by them and the trustees can take advice on what to do with any assets or property the trust receives from that company or others. The trust will continue even if the company that set it up is eventually sold or wound up and liquidated.
The 1990s was a wild time. The Spice Girls were everywhere, Eric Cantona was booting rowdy fans and simply everybody was reading The Beach while wearing French Connection tee shirts and cargo trousers. This was also the dawn of the EBT.
Some bright sparks had the idea that they would transfer money into an EBT instead of paying it to their staff. The EBT would then give them the money (less administration fees of course) in the form of an interest-free loan with a repayment date of never. This is what has irked the HMRC – if it is not expected to be repaid then it’s not a loan is it?
The HMRC considered these as tax avoidance schemes as the EBT and the loanee didn’t pay either Pay As You Earn (PAYE) income tax or National Insurance Contributions (NICs). So, the Loan Charge was created to tackle these schemes on the basis that they are not loans at all but disguised remuneration or pay.
Many people who are receiving demands proclaim innocence/ignorance and that they were assured by their company, accountants and EBTs that the schemes were 100% legal at the time. While this may be an accurate summary of the advice received, HMRC’s view is implacable – they were wrong.
Officially known as the Sch.11 of the Finance (No 2) Act 2017, the Loan Charge applies to all loans made since April 6 1999 IF they are still outstanding by Friday April 5.
The new rules mean that any distributions from an EBT or similar will be taxed as income from employment which means they are liable for both income tax and national insurance contributions.
The loan charge will not be applied if:
- The loan has been repaid in full (or the individual has agreed settlement terms with HMRC)
- The loan has been taxed in full
- Any exclusions apply
- The loan is from an amount on which income tax has already been paid.
Impact for Insolvency Practitioners
We have a lot of legal duties to diligently perform for our clients and the Loan Charge adds more.
We now have to notify the HMRC of any EBT schemes we know about or become aware of. After we do this then the employer who set it up or has an interest is legally obliged to contact the HMRC with all the info.
The HMRC have previously said they wouldn’t enter into direct agreements with individuals when we were handling a company’s insolvency proceedings without telling us and including us in those negotiations.
However, if individuals approach the HMRC directly themselves to discuss settlement or set up an arrangement then they WILL deal with them directly. So it’s important to tell us if you have contacted the HMRC and have any settlement terms already agreed with them.
Additionally anybody who benefited from any EBT payments have to provide certain information to their employer or former employer by Monday April 15 to allow PAYE and NIC liabilities to be calculated. If the company is insolvent then this info should be passed to us.
If you think you might have received pay through an EBT after April 6 1999 then you should contact the HMRC.
The moral of the EBT saga and other clever tax avoidance schemes is a simple and timely one – If something seems too good to be true, then it probably is.