What is Disguised Remuneration?
HMRC define disguised remuneration (DR) as:
…tax avoidance schemes claim to avoid the need to pay Income Tax and National Insurance contributions. They normally involve a loan or other payment from a third-party which is unlikely to ever be repaid.
These schemes can be used by employers and individuals alike. With the IR35 reforms in the public sector, many contractors, faced with a reduced income were sold the dream and convinced of the legitimacy of these contractor loan schemes, that meant their take home pay was in excess of 85%.
These schemes primarily work by paying a small salary and loan the balance of the income to the contractor on the proviso that when the person leaves, the loan is written off. However what most contractor’s are unaware of is that as soon as the loan is written off, it becomes taxable in full. If the loan is not written off, the scheme provider can recall the loan at any time, and if this loan is not declared on the contractor’s tax return as income there is the risk of being hit for the double whammy of a tax bill and fine on top of the loan repayment.
Removing the Disguise
HMRC are combatting these schemes by making it mandatory that all outstanding DR loan amounts are reported as part of the month 12/week 52 FPS for 2018/19 and in any Earlier year updates that are sent for all employees and ex-employees.
“We’d have gotten away with it if it hadn’t have been for you pesky kids!”
It appears that with this change the noose is tightening for these types of contractor loan schemes that have been prevalent in the Umbrella market place and were allowed to thrive due to the previously slow response time from HMRC. This is great news for compliant umbrella companies and for the sector as a whole; which attracts a lot of bad press all drawn from companies running tax avoidance schemes.
Lets hope those pesky kids at HMRC keep up the good work and continue to unmask the villains!