Disguised Remuneration: changes to go ahead which some commentators have characterised as retrospective tax charges on non-existent income

Wed 23 Nov 2016

The Autumn Statement has confirmed that the proposed changes to the so called Disguised Remuneration (DR) rules which according to some commentators tax non-existent income retrospectively will go ahead along the lines proposed in the August Consultative Document.

The Government introduced in 2011 the Disguised Remuneration (DR) rules which categorised loans made by Employee Benefit Trusts to employees as income of the employee to be subject to PAYE and NIC in the same way as a payment of salary and with no repayment of the PAYE and NIC if and when the loan was repaid. This was notwithstanding the fact that the UK tax code already contained provisions for taxing the benefit of loans if they were made available at less than market rates of interest together with provisions for taxing any write off of the loan as income.

HMRC equally argued the same treatment should apply to loans made pre 2011 and therefore pre the DR rules with many taxpayers settling tax liabilities on this basis under the EBT Settlement Opportunity.

In addition the government introduced proposals in Budget 2016 to widen the DR provisions and in particular to charge to PAYE and NIC any loans which have previously not been taxable as income but are still outstanding at 5 April 2019.

So in combination these legislative developments mean, in the opinion of some commentators, that a transaction that occurred within what was genuinely believed to be the framework of the tax code and which categorised it as one thing (a loan), can subsequently be re-categorised as something else (earnings) and that can happen in effect retrospectively (your loan will be treated as income from 5 April 2019 even if it was treated as a loan until then).

Nobody will argue that everyone should pay their fair share of tax. The tax code should define coherently what that fair share is and everyone should operate within its rules. The Courts should then rule on matters which are capable of differing interpretations. Most people, including many in HMRC, will begin to feel uncomfortable when those rules are changed effectively retrospectively re-characterising for tax purposes transactions which have already occurred.

Be that as it may, the changes look like going ahead and any taxpayer who is caught by them needs urgently to look at how their own arrangements might best be dealt with to minimise their liabilities within the framework of these new provisions.

For more information please contact Lindsay Pentelow (Lindsay.Pentelow@mazars.co.uk), Melanie Orriss (Melanie.Orriss@mazars.co.uk) or Graham Odlin (Graham.Odlin@mazars.co.uk)