From the late 1990s, planning arrangements designed to reward employees in a tax efficient way became increasingly popular, reaching their height in the late 2000s. Typically these arrangements involved an employer making a contribution to an offshore trust (often an employee benefit trust “EBT” or Employer funded retirement benefit scheme “EFRBS”) which would then in turn allocate funds to specific employees, often in the form of loans. From the mid-2000s onwards, HMRC began to robustly challenge employers who had used this type of planning.

In 2009, HMRC published its view that where funds were allocated to specific individuals, they should be treated as employment income and subject to PAYE and NIC. In Finance Act 2011, new anti-avoidance legislation known as the ‘disguised remuneration’ rules was introduced to dispel any doubt that these arrangements would work. In order to give those affected by the new legislation a chance to close HMRC’s enquiries into their planning, the ‘EBT Settlement Opportunity’ was launched. It ran until 31 July 2015 and was an opportunity to reach an agreement with HMRC over historic liabilities and the tax consequences of collapsing the EBT. This was incredibly popular and resulted in HMRC collecting £1.5 billion of unpaid tax.

Despite the changes in the law, the introduction of the accelerated payment regime, and the generous settlement terms made available by HMRC, thousands of users of these schemes still have not reached a settlement agreement with HMRC. New planning arrangements were designed to protect old arrangements from the new anti-avoidance legislation or to circumvent the disguised remuneration rules altogether. At the same time HMRC has struggled to use the judicial process to close down this planning; in part due to the sheer volume of individual cases that they need to deal with. To tackle this, as part of Budget 2016, the Government announced a series of new measures designed to remove the benefit of continuing to defend historic arrangements, and to ensure that the economic risks of entering into similar planning in future outweigh any potential benefits

The new rules are widely drawn and are designed to capture all arrangements that deliver value from employers to employees using intermediaries. The most common types of planning caught will be those involving EBTs, EFURBS and contractor loan arrangements. The main measures are as follows:

• A new employment tax charge will apply on 5 April 2019 on historic outstanding loans made through these arrangements. This will apply where there was a loan that was made before the disguised remuneration legislation was introduced in 2011 (or where a loan was made after 2011 which was not affected by that legislation) which has not been taxed or repaid by 5 April 2019. Where it applies, a PAYE/NIC charge will arise on the employer.
• Investment returns made by the EBT will be taxable as employment income when distributed unless a settlement is reached with HMRC by 31 March 2017.
• PAYE regulations will be amended so any PAYE due can be recovered from employees if the employer cannot pay.
• Anti-avoidance legislation will be introduced to tackle the continued use of arrangements designed to be unaffected by the current disguised remuneration rules.
• The General anti-abuse rule (GAAR): a new penalty will apply where a general anti-abuse rule counteraction notice is issued. The penalty will be up to 60% of the tax advantage sought

HMRC issued a consultation on 10 August 2016 which sets out in more detail how it proposes to introduce these changes – it is vital that anyone who has this type of planning in place and who has not reached a settlement agreement with HMRC makes sure that they understand how these proposals might affect them and what their options are in terms of gaining certainty over their past and potential future tax liabilities.

‘Tackling Disguised Remuneration’ Consultation

The proposed new rules are complex and it is not possible in this article to describe how they will apply to every different variant of this type of planning. However, there are some key points that anyone who has either implemented, or benefited from, this planning should consider.

The legislation is designed to ensure that there is protection from the same amount of income being taxed twice. However, the proposals for how this will work make sure that those who have reached a settlement agreement with HMRC before the 5 April 2019 employment tax charge applies are in a better position than those who continue to defend the planning and who wait for the 5 April 2019 charge to arise. The proposed new rules ensure that if there are found to be two taxing points (i.e. when the planning was first implemented and on 5 April 2019) then one is treated as a payment on account of the other but any excess of one over the other will not be repayable.

If HMRC cannot collect the 5 April 2019 charge from the employer for any reason, it will be able to collect the tax from the beneficiary of the loan. The current restrictions that apply to HMRC transferring liability from an employer to an employee will be significantly reduced.

If the loan is repaid or if a settlement agreement with HMRC is reached before 5 April 2019 then the employment tax charge on the loan will not apply.

The rules are widely drawn. In addition to capturing arrangements that involve a loan from an EBT or EFRBS directly to an employee, they capture planning involving ‘quasi-loans’. HMRC use this term to apply to arrangements where additional steps are inserted into the planning so that the loan received by the employee falls outside the scope of Part 7A ITEPA 2003. This ensures arrangements that were widely implemented from 2011 onwards will be caught by the new provisions.

Wider Considerations

In addition to the specific targeted measures announced in Budget 2016 and detailed in the recent consultation, there are a number of other issues that need to be considered. Many of the promoters of these arrangements have ceased to trade and/or withdrawn some or all of their support for the defence of the planning at the Tax Tribunals which means individual affected taxpayers will have to meet the significant costs of litigation themselves.

The accelerated payment notice (“APN”) regime creates significant cash flow uncertainties where planning was registered under HMRC’s Disclosure of Tax Avoidance regime and taxpayers who have entered into judicial reviews to challenge the legality of their APNs have been largely disappointed by the lack of sympathy shown by the Courts for their position.

Over recent years, as new anti-avoidance provisions have been introduced, promotors of tax avoidance schemes have developed new products designed to circumvent the new rules. Aside from any ethical considerations, in view of the strict new rules governing the promotors of tax avoidance schemes and the associated penalty regime, and a penalty of up to 60% of the tax charged by a GAAR counteraction notice, implementing more planning designed to avoid these changes is an extremely high-risk strategy.

Options for taxpayers

The broad scope of the changes described above should send a clear message about the Government’s focus on tackling planning arrangements of this type. People who have used planning of this type can take action to prevent themselves being caught by the punitive elements of the new rules. HMRC’s strategy over the last couple of years has been to make it easy for those people who want to withdraw from planning of this type to do so. The settlement opportunities that have been made available all offered beneficial settlement terms and the new rules specifically state that if an agreement is reached prior to the new charges arising, they will not apply.

Conclusion

These new rules are only at the consultation stage and there might be some changes to the proposals before the legislation is introduced in Finance Act 2017. However, they represent one of the widest set of anti-avoidance measures targeting a specific type of planning that we have seen. It is clear that the Government is prepared to arm HMRC with all of the legislative tools it needs in order to curtail the benefits of this type of tax planning and remove the economic advantage of continuing to defend existing arrangements at the Tax Tribunal.

Anyone with tax planning arrangements of the kind targeted by the measures above will need to make sure that they understand how all of the changes that we have seen over the last few years, and that are coming over the next few years, will impact on their particular circumstances. This will allow them to consider all of the options available to them and make an informed decision about how to proceed.

Anyone who currently has loans outstanding will potentially need to take action to ensure that they are not caught by these changes.

Ben Roseff is a Director in PwC specialising in Tax Disputes and Tax Reporting and Strategy.

Email: ben.roseff@uk.pwc.com