The PART 7A loan charge – a recent hokey cokey
What is a typical disguised remuneration (“DR”) avoidance scheme?
Using an Employee Benefit Trust as an illustration, consider that the flow of payments from the company to a Trust and onward to family Sub-trusts for funds (described as “loans”) then to be deposited in the participator’s personal bank account is regarded as a disguised remuneration (“DR”) scenario.
The loans are rarely/never repaid and remain outstanding. Sometimes a commercial rate of interest is charged or otherwise the beneficial (“cheap”) loans are treated as a P11D Benefit in Kind and income tax is paid annually.
NB. The above refers to Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
FB 2017 No. 2 and the hokey cokey
The Financial Bill 2017 (No. 2) axed many of the proposed clauses in the Resolution and our friends at the CIOT provided an excellent summary of what was “In” and “Out” (and shake it all about).
Take for example clause 48, broadly Schedule 16 triggers a new tax charge introduced on DR loans that are “written off”. However Schedule 17 intended to trigger a new tax charge on DR loans outstanding on 5 April 2019 (‘the loan charge’). On 25th April 2017 the Schedule 17 resolution for Finance Bill 2017 was chopped. Before celebratory champagne corks are popped while dancing the hokey cokey, I would suggest that the (“DR loans outstanding”) matter will/must be revisited later when the new Parliament sits following the 8th June 2017 General Election.
Employer PAYE & NICs
The tax charge includes not only PAYE employment income taxes, but Schedule 16 of Finance Bill 2017 (No. 2) regarding the Part 7A charge will also include Class 1 NICs in the appropriate circumstances. Where these changes result in a charge under section 554Z2 ITEPA 2003, as amended, a NICs charge will arise due to Regulation 22B of the Social Security (Contributions) Regulations 2001 (‘Regulation 22B’). This regulation treats the amount of the PAYE employment income under section 554Z2 as earnings for, both primary and secondary, Class 1 NICs purposes.
The reasonably informed reader will realise that the tax charge operated under the PAYE and NICs regulations are operated by the Employer Entity.
Financial distress
The UK is in financial distress and therefore HMRC is the enforcement authority tasked to recover taxes. This is easier said than done when considering the litigation of tax avoidance schemes is both costly and time consuming. Enter a new tax charge – Accelerated Payment Notices (“APNs”).
Broadly, DOTAS notifiable tax avoidance schemes attracted APNs and in the illustration above the Employer Entity has been ruthlessly pursued by HMRC. In some cases this has resulted in insolvency proceedings.
But hang on, where can the Insolvency Practitioner go to where there are no funds left in the company to pay the creditors, including HMRC which since September 2003 has been a non-preferential creditor but armed with a raft of recovery powers? After all, Schedule 17 was axed (but even if it had not, the PART 7A charge was to be attracted at 5th April 2019 anyway) and despite both the 2015 and 2016 Budget promises there is still no statutory instrument to transfer PART 7A PAYE/NICs to the director.
In summary
The informed reader will realise that DR is pointed at PAYE/NICs and logically dismisses the loans theory and therefore no indebtedness attributed to a director loan account ("DLA"). Using this "logic", it follows that unless the directors were wilful, the existing insolvency powers and HMRC Regulatory 72/81 and NICs equivalents may be ineffective and no claw-back from the director.
I suspect that Parliament has a mountain of tax legislation to consider, but meanwhile the liquidators and directors appear to be in a limbo situation with HMRC pressing hard to recover taxes from a nonsensical situation as sticky as sticky the stick insect got stuck to a sticky bun.
Please contact me if you need assistance in unravelling complex tax-technical matters or an HMRC tax investigation that has gone wrong.
