Ahead of the introduction of the disguised remuneration loan charge on 5th April, HMRC has issued guidance warning contractors against schemes contrived to avoid it.
In its note, Spotlight 49, HMRC asserts that it is aware of arrangements claiming to circumvent the 2019 loan charge and will tackle promoters and users.
Warning against asset transfer arrangements
In its latest publication, Spotlight 50, the Revenue homes in on one particular type of scheme – a contractor arrangement which claims to avoid the loan charge by transferring ownership of shares in a Personal Service Company (PSC).
How these arrangements claim to work
The scheme under scrutiny typically involves a number of steps:
- The contractor provides their services to an end user (eg. Business ABC) via a PSC in which they are majority / sole shareholder. Both the contractor and the PSC become partners of an LLP based offshore.
- The PSC bills Business ABC for the services the contractor provides. Business ABC pays the money to the PSC who then pays the contractor a salary at or a little over the National Minimum Wage rate.
- The PSC then transfers the balance of the payment to the LLP. The PSC tells the contractor how much they can draw on their capital account with the LLP. Since the contractor has not contributed any capital to the LLP, the amount drawn from their capital account is classed as a loan, for the purposes of the loan charge.
- The majority of shares in the PSC are then sold to an overseas holding company linked to the scheme promoter, in an attempt to cancel the overdrawn capital accounts. The value of the shares is artificially fixed at an amount which will extinguish the balance.
If you think this all sounds dodgy in the extreme, you would be right!
HMRC warns contractors entering into arrangements like these may find that they are tied into further avoidance arrangements for up to three years.
The Revenue is also resolute that these arrangements will not result in an effective repayment of outstanding loans and will not reduce or eliminate the amount liable to the loan charge.
If you use an asset transfer arrangement, or any type of scheme deliberately designed to avoid the loan charge, not only will the loan charge still apply but you may face additional penalties.
HMRC’s advice, if you are involved in such an arrangement, is to withdraw from it and settle your tax affairs.
Having previously come under fire for coming after users rather than promoters, HMRC has pledged to use its penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements.
It will invoke the enablers’ penalty for arrangements entered into after 16th November 2017 and will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who persist with promoting tax avoidance schemes.
Help and advice
If you are worried about the legitimacy of any tax arrangement you have been involved in, we may be able to help or to point you in the direction of a specialist if needed – but as a rule of thumb, if it looks too good to be true, it generally is.
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