Understanding Disguised Remuneration Schemes and implications for directors

Julie Palmer

Regional Managing Partner

4 Minutes to read

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Understanding Disguised Remuneration Schemes and implications for directors

Updated: 24th March 2020

What Are Disguised Remuneration Schemes

Disguised remuneration schemes are characterised by low payment or non-payment of tax and National Insurance, and are set up in a similar way to discretionary trusts. Payment is made in the form of loans channelled through a third party, typically an offshore trust.

These types of loans are used to replace the salaried income that would naturally attract tax and National Insurance through the PAYE system, but in reality their terms mean they’re unlikely ever to be repaid.

Tax avoidance schemes have been a focus of HMRC’s attention for some time and in 2011 legislation was introduced to clamp down on the practice of deliberately disguising income as a loan.

Due to the potentially severe financial impact of this clampdown, it’s important for directors to understand disguised remuneration schemes, how they work, and the implications of being a participant.

Legislation to prevent tax avoidance via disguised remuneration schemes

Within the two Finance Acts introduced in 2017, the government imposed a loan charge on loans made from 6th April 1999 within a disguised remuneration scheme, where tax affairs remain unsettled.

This loan charge could potentially be as much as 50% of the outstanding loan amount, and with a payment deadline of the end of January 2020, it represents a significant financial threat to those involved.

If you’re a limited company director and have participated in a disguised remuneration scheme, your tax liability and settlement requirements depend on whether you’ve already complied with HMRC’s demand for information.

If so, you may be eligible to use the November 2017 settlement terms offered by HMRC to limit your liability and pay in instalments.

What are the November 2017 settlement terms?

If you provided HMRC with all the required information on your outstanding loan(s) by the 5th April 2019 deadline, you can still settle your tax affairs under the November 2017 settlement terms.

These terms could include the ability to pay tax or NICs by way of an instalment plan taken over several years. This is clearly a more favourable option than paying a loan charge, which as we mentioned earlier could amount to half of the outstanding loan amount.

If you didn’t provide the necessary information by 5th April 2019, you have until October 2019 to provide particulars of the outstanding loan amounts to HMRC, otherwise penalties may be imposed in addition to the loan charge.

"Clearly the implications for you as a director are severe if you’ve participated in a disguised remuneration scheme, with the potential for a huge tax liability and serious financial issues on a personal level."

Implications for directors with regard to disguised remuneration schemes

Clearly the implications for you as a director are severe if you’ve participated in a disguised remuneration scheme, with the potential for a huge tax liability and serious financial issues on a personal level.

The government expects to raise over £3 million for the public purse over the next five years by pursuing payment of outstanding tax in relation to disguised remuneration schemes, and they’re likely to be unrelenting in their pursuit of this money.

So what type of loan scheme might you have been involved in? Although not all Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBSs) are disguised remuneration schemes, HMRC do target this type of scheme.

Employee Benefit Trusts (EBTs)

Employee Benefit Trusts are administered by independent trustees, and in many cases are located offshore. Typically a member would receive a relatively low salary, but then larger payments would be received depending on when it was tax-efficient – perhaps in retirement or if they moved abroad.

Employer Financed Retirement Benefit Schemes (EFRBSs)

An EFRBS is a type of unregulated pension scheme set up as a discretionary trust. With no limit or restrictions on the amount that can be invested, these schemes were intended to allow pension savings to be increased when a member’s pension limit had been reached.

Help for directors participant in disguised remuneration schemes

If you have participated in a disguised remuneration scheme and HMRC are demanding payment of the associated tax and National Insurance, we can advise you on your best options.

The deadline for payment of a loan charge is the end of January 2020, adding to the negative impact of this unexpected tax liability. For specialist professional advice on how to deal with the situation, please call one of our partner-led team at Real Business Rescue.

We’re a major part of Begbies Traynor Group, the UK’s largest professional services consultancy, and have extensive experience of dealing with HMRC on behalf of clients. Our advice is impartial and reliable, and we offer free same-day consultations to quickly establish your overall tax position.