David Richardson, director of HMRC’s Counter-Avoidance Directorate, explains why those using tax avoidance schemes should withdraw and settle their affairs as soon as possible. 

In July this year, the Supreme Court released their unanimous decision about the disguised remuneration tax avoidance schemes used by Rangers Football Club.

I want to outline HMRC’s view of the decision, and to set out what this means for the tiny minority of people caught up in similar disguised remuneration (DR) schemes.

DR schemes aim to hide an individual’s income, often by paying the person through a loan from a third party that is unlikely ever to be repaid. The objective of these schemes is to avoid having to pay income tax and national insurance contributions (NICs).

The Supreme Court decision

In their decision, the Supreme Court agreed with HMRC that the avoidance scheme used by Rangers Football Club – which tried to pay staff through an employee benefit trust (EBT) – doesn’t work. The court said that Rangers should have deducted income tax and NICs from payments they made to the scheme.

Importantly, paragraph 39 of the Supreme Court’s decision sets out the principle that employment income paid from an employer to a third party is still taxable as employment income.

What this means for other DR schemes

Our view is that the principle set out by the Supreme Court applies to a wide range of DR avoidance schemes, no matter what type of third party is used. These could include:

• EBTs – including variants within these schemes where no loans are made from the EBT but instead the funds remain in the trust, or are invested by the trust.
• DR routed through employer-funded retirement benefit trusts.
• A range of contractor loans schemes – these schemes are often sold to contractors as a way to save tax: the contractor is paid in the form of a loan from a third party, not directly from the company for which they are working.

Our next steps for people in DR schemes

HMRC intends to use the Supreme Court decision to take action against many DR schemes using the full range of our available powers. We will consider whether to issue follower notices and accelerated payment notices, which require those under investigation for avoidance to pay the disputed tax upfront.

If a user whose scheme doesn’t work refuses to settle, our approach will be to accelerate litigation to get a court decision. We have a strong record in avoidance litigation, winning around 8 out of 10 avoidance cases that go to the tribunals or court.

We strongly advise the tiny minority of people caught up in DR avoidance to withdraw from the scheme and settle their tax affairs as soon as possible. The quicker they act, the more likely they will be to minimise interest and penalty charges on the tax they should have paid. They will also avoid the cost of legal action, which can be substantial. In November, HMRC published the settlement terms for those caught up in DR avoidance. These terms set out how people can get their tax affairs in order and pay HMRC what they owe.

It’s important not to delay coming forward. Changes announced in the budget of 2016 mean that a new ‘loan charge’ will soon be payable on DR loans. The loan charge will apply to all outstanding DR loans made after April 1999 that have not been repaid or settled as earnings with HMRC before 5 April 2019. All loans will be aggregated into one charge in 2019 and could end up being charged at higher rates of tax and NICs than if recipients settle in advance with HMRC.

Coming forward is always the best option, even if you have concerns about paying all the tax, penalties and interest in one go. HMRC has an excellent record in supporting those in genuine difficulty, including offering more time to pay or payment plans, if appropriate.

If you, your company or a client are caught up in disguised remuneration

If you’re already speaking to someone in HMRC about the use of a DR scheme, or have a customer relationship manager, you should contact them in the first instance. If you don’t have a contact and think you or a client is using one of these schemes, you can contact us to settle by emailing ca.admin@hmrc.gsi.gov.uk.