• James Powell

Disguised Remuneration Schemes: delaying the inevitable

It’s often said that there are two certainties in life: death and taxes, and people have been searching for ways to avoid both since history began.

The most recent controversy around tax avoidance has centred around Disguised Remuneration Schemes, and HMRC’s rather blunt attempts to catch up on their effects. Disguised Remuneration Schemes are, in short, arrangements where an employee receives their salary in the form of a loan, rather than in wages. Because loans are not taxable as income, the employee’s tax bill would be substantially reduced.

In theory this wouldn’t be a problem. Loans are not taxable because you’re meant to pay them back, hence they’re not ‘income’ in the traditional sense. The catch here was that the schemes were specifically designed so that the loans would never be repaid, and in substance they were monthly lump sum payments for services received by the employer. Since this is just a fancy way of saying ‘wages,’ in 2016 HMRC took action on this and declared that the ‘loans’ should be treated as employment income, introducing the Loan Charge to recoup the tax they were owed.

Well, you might be thinking, so what? Tax avoidance is a problem, isn’t this exactly what HMRC should be doing?

Yes, but. Whilst the Loan Charge went largely unnoticed when first introduced, there were two qualities which meant it quickly become a highly contested issue.

Firstly, the majority of people affected were contractors who had entered into these schemes on the word of their accountants and financial advisers, who had assured them everything was scrupulously legal. The fact that HMRC had not been challenging other individuals using these arrangements was touted as proof of their integrity.

Secondly, there was the nature of the Loan Charge itself. Since HMRC had declared the loans should have been treated as income, this created a retrospective change which meant tax would be payable on the total value of all the loans which an individual had received.

Going back twenty years.

For perspective, imagine having to pay your last twenty years worth of tax deductions all in one go. Whilst this was achievable for a privileged few (some professional footballers were reported to be using these schemes), for most it was out of the question. HMRC were inundated with complaints and the issue became headline news across the country.

Luckily for those affected, the policy has since been revisited and is due to be purged of some of its more draconian elements, with draft legislation to this effect being put in place recently. The clawback period is likely to be shortened, and additional schemes will be put in place for those unable to immediately cough up the money (this, of course, has angered everyone who readily paid the charge when it was first introduced. It seems HMRC can’t get anything right at the moment).

An interesting question has arisen from this, though, as a response to those complaining about the charge: to what extent should those affected have realised what they were getting into?

Proponents of the Loan Charge have argued that these individuals benefited tremendously from what was clearly a tax avoidance arrangement and, whilst HMRC had not been opening investigations into individuals, a quick search on the web would confirm that they had been investigating employers. At the very least, if taxes are one of the two certainties in life, being told you could get a regular salary without paying into the public purse should have set alarm bells ringing.

Critics have responded that it is the role of financial advisers and accountants to give trustworthy advice, and that people should be able to rely on their services without having to second-guess everything, especially in the complicated world of UK tax law. Rather than penalising the trusting individuals, they argue, the blame should fall on those who actively promoted these avoidance schemes to people who weren’t in a position to know better.

The truth, I would say, lies somewhere in the middle. Trust in our professional services is important, and those of us who work in this area have a duty not to abuse that trust. Bad apples do exist however, and this saga demonstrates the importance of choosing an ethical and reliable adviser whose advice you can trust.

An independent review into the Loan Charge was completed in December 2019 and draft legislation put in place on 20th January 2020 to implement the advised changes. You can read the review and the government’s response here: