Given the forthcoming “outstanding loan charge” to income tax under the Disguised Remuneration rules, trustees of all forms of employee trusts should, by now, have taken steps to identify any and all loans, quasi-loans, and other forms of credit extended to employees, or to any person nominated by an employee (past or present) or any person linked with an employee (“a relevant person”) outstanding made at any time after 5 April 1999 and outstanding at any time on or after 17 March 2016.
The one-off, and penal, charge to income tax and NICs on “outstanding loans” will have effect on 5 April 2019 (or possibly later in the case of certain fixed-term loans). The scope of the charge is broader than many have assumed. In some cases, for example, it could apply notwithstanding that the indebtedness has been repaid, or the loan written-off, before 5 April 2019 but since 17 March 2016.
Penalties for failure to provide information to HMRC
If a loan or quasi-loan has been made to a relevant person on or after 6 April 1999 and any amount is, or is deemed to be, outstanding at any time between 17 March 2016 and 5 April 2019, the employee and the lender or creditor are each obliged to provide to the employer, within 10 days after the loan charge date, all the information necessary for the employer to comply with its PAYE obligations. If, having taken reasonable steps, the employee and lender have failed to contact the employer to provide the information, each is responsible for notifying HMRC of that fact in the form specified by HMRC (para 36, Sched 11). There are penalties for a failure on the part of trustees to comply with this obligation.
Avoiding the ‘outstanding loan charge’ by settlement
Of course, the outstanding loan charge will not arise if settlement of all previous tax liabilities (including inheritance tax charges, if applicable) have been agreed with HMRC, and the tax has been paid in full pursuant to HMRC’s settlement arrangements ( as to which, see https://www.gov.uk/government/publications/hmrc-issue-briefing-disguised-remuneration-charge-on-loans/hmrc-issue-briefing-disguised-remuneration-charge-on-loans ), but it is apparent that not all employers who made use of ‘disguised remuneration’ arrangements, or the employees concerned, have yet registered their interest in settlement with HMRC. There is a deadline, of 30th September 2018, for providing all information to HMRC if settlement is to be reached before the penal charge arises on 5 April 2019.
HMRC are willing to agree 5-year payment terms for those employees with expected annual taxable income of less than £50,000, and flexible payment arrangements for those who are in genuine financial difficulty.
As part of the settlement, consideration needs to be given to how an outstanding loan is to be released or written-off and the employee put in the economic position he expects to be in once all taxes have been paid on what he or she will then regard as ‘their money’. Trustees need to consider both their obligations as trustees needing to comply with the terms of the trust deed (etc.), and the interests of the beneficiaries in winding-up the arrangements in a cost-effective manner.
There will also need to be a focus upon the terms of the trust deed (etc.) insofar as they might provide for the cost of NICs to be borne out of the trust fund, as this can reduce the costs of a settlement.
Exemptions from the ‘outstanding loan charge’
There are limited exclusions from the outstanding loan charge although none of these applies if there is a connection with tax avoidance. They relate to:
(a) certain loans made on ordinary commercial terms if similar loans were made available to members of the public at large;
(b) if an employer has made an employment-related loan below the £10,000 threshold (in s 180 ITEPA), the employee’s employment has been transferred and the employer would otherwise be treated as having made a quasi-loan by acquiring a right to repayment of the outstanding loan;
(c) subject to conditions, loans by a bank (or similar) to its employees as part of a package of benefit generally available to its employees;
(d) subject to conditions, a loan by an authorised lender made to an employee under an employee car purchase scheme;
(e) certain loans made before 9 December 2010 to enable the acquisition, within a year, of unlisted shares in the employer company or another company in the same 75% group, although an outstanding loan charge may still arise if the loan remains outstanding 12 months after the shares cease to be held by the employee.