Disguised Remuneration Loans

4 April, 2019

Disguised remuneration loans – if it looks too good to be true, it probably is!

Freelance contractors across the UK are currently engaged in a tax avoidance debate with HMRC regarding disguised remuneration loans (DR Loans). A DR Loan is a financial arrangement in which an employee receives income through a loan or credit scheme,  typically using an offshore trust vehicle. Rather than receive a salary that is taxed for National Insurance Contributions (NIC) and Pay As You Earn, the terms of the trust mean that the money is ‘loaned’ in a way that is unlikely ever to be repaid.

Changes to the law – 5 April 2019

As announced in the 2016 Budget and introduced in the Finance (No 2) Act 2017, from 5 April 2019 a ‘loan charge’ will be introduced. It will apply to all DR Loans made since 6 April 1999 that remain outstanding on 5 April 2019.

The loan charge will affect:

  • Individuals who used DR Loans and have not repaid the loan or provided HMRC with settlement information by 5 April 2019 and subsequently settled the fee; and
  • Employers who provided remuneration through DR Loans and have not provided settlement information to HMRC by 5 April 2019 and subsequently settled the fee.

Calculating the loan charge

HMRC will calculate the sum of the charge owed by taking the total balance of all outstanding sums under the DR Loans on 5 April 2019 and taxing that amount for income tax and NIC as if it was income received by that person in the tax year 2018/2019.

Next steps

For some people, the loan charge will attract a 6 figure tax bill and many argue it is unfair in its retrospective nature. It is yet to be seen how HMRC will enforce the payment of the loan charge and it has been a stark reminder to everyone that tax avoidance will be met with harsh penalties.