The April 2019 Loan Charge – Employee Benefit Trusts and Insolvency
The Government Continues to Toughen its Stance with the April 2019 Loan Charge. This significant change could see the tax liability of an EBT jump from the Company to Individual Directors
In January of this year (2018) we commented on how HMRC was winning the battle over Employee Benefits Trusts and was aggressively collecting tax on Companies with Employee Benefit Trusts, usually through Advanced Payment Notices. It is estimated that c.80,000 APNs have been sent out, often received out of the blue and unexpectedly, giving companies 90 days to pay. As a result, our insolvency practitioners were anticipating a spike in insolvencies.
This article looks at a further significant development in this arena – the April 2019 Loan Charge – detailing what it is and what it might mean to companies who entered into EBTs AND the beneficiaries, often Directors, in terms of their tax liability.
What is the April 2019 Loan Charge? Why is it Such a Significant Change?
Historically, an EBT allowed a company to reward employees, often directors, with a loan made via a 3rd party – the EBT – in lieu of salary.
The attraction of Employee Benefit Trusts was that significant savings could be made by – legitimately at the time – not having to pay PAYE and NI. With an EBT, it was the Company who did not deduct and pay the PAYE and NI, and therefore, the liability was considered to be with the Company as HMRC tightened up its position. An EBT was not deductible for Corporation Tax purposes, but if the amount had been paid as salary instead, it would have been.
A quick example demonstrates why Employee Benefit Trusts were so attractive
- Assume £200,000 was paid into an EBT
- The Saving via this route compared to payment as salary is calculated as follows:
- PAYE at 45% would cost £90,000
- Employee NI @ 2% would cost £4,000
- Employer NI @ 13.8% would cost £27,600
- Total PAYE and NI saved = £121,600
- Less Corporation tax @ 20% of £40,000
- Overall net saving by using an EBT is, therefore, £81,600
The introduction of the April 2019 loan charge will affect anyone who might have entered into a loan agreement since 1999 and is caught by the Disguised Remuneration rules. This loan charge will mean that all loans that were made from disguised remuneration schemes, and that includes Employee Benefit Trusts, will now be subject to PAYE and NIC.
The Tax Liability Might Jump from the Company to the Individual
The really big change, however, is that the Government are attempting to retrospectively make the recipients of the loan – that is the EBT beneficiary – liable for the PAYE/NI that the Company ‘failed’ to pay when the EBT was set up. This means that if the Company is now insolvent the liability may not be removed, but will jump from the Company to the beneficiary, which was often the individual director(s).
This new charge will apply to all loans made under such arrangements since 6 April 1999 regardless of whether HMRC have registered an enquiry with the Company, director or other person receiving the benefit of the loans. As all such loans will be included in one charge, the tax due is likely to be higher than if each year were to be settled individually. The charge essentially treats the taxing of outstanding loans as if they were income/salary.
Under these circumstances, it seems clear that the APN liability may make some companies Insolvent. However if this is the case and the company fails to meet its obligations, then the beneficiary is likely to face the liability and the tax payment.
What Options Does the Taxpayer Have?
The options are limited
- Challenge HMRC via litigation. Action on an individual basis will be very expensive, there are a number of “class” type actions in process, however the Tribunal and the Courts appear to be finding in favour of HM Revenue & Customs in the majority of cases.
- Alternatively, the taxpayer can negotiate a settlement with HMRC to resolve any historical tax liabilities, possibly entering into a time to pay agreement. This will provide closure much more quickly that any attempt at litigation. In addition, settling before 5th April 2019 will negate the 2019 charge. However, those that wish to pursue this route must register their intentions with HMRC by 31st May 2018. Time is tight.
How Can Our Insolvency Practitioners Help?
Our team of insolvency practitioners and support staff, based in London, Brentford, Salisbury and The Cotswolds are experienced in negotiating with HMRC. If you or your company are facing a large tax bill because of an EBT and the introduction of the April 2019 loan charge, we can provide all the help and expertise you need in negotiating a settlement with HMRC.