Dealing with the HMRC over trusts

The introduction of the Loan Charge should have been the end of HMRC’s long battle with Employee Benefit Trusts and Contractor Loan schemes, but it was not that simple.

Lisa Vanderheide is Tax Director at litigation firm Stewarts

The Loan Charge caused – and continues to cause – a huge furore, with accusations of retrospective legislation, HMRC failures and unfairness.

It applies to any company that remunerated its employees via a loan from an Employee Benefit Trust, and thereby avoiding PAYE and NIC liability on behalf of the employee. If the loan was still in existence at April 5, 2019, it is treated as earnings of the relevant employee.

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HMRC issued reams of guidance for employers and relevant employees in the spring of 2019. Broadly, if the employing company is based in the UK it should have calculated the Income

Tax and NIC due on the loans and paid it over to HMRC in April 2019. Some companies did, many did not.

Due to the ongoing general furore around the loan charge, the Morse review was commissioned by Boris Johnson in September 2019 and published in December.

The results of the Morse review meant that the total tax burden was eased for some, but many companies were still left with the spectre of significant tax liability and uncertainty. Many of these companies decided to register for the HMRC Settlement Opportunity with a cut-off date for settlement of September 30, 2020.

But for many companies and individuals alike, uncertainty remains. Companies that failed to register for the Settlement Opportunity in time – before April 5, 2019 – although nevertheless subsequently promised settlement by September 30 by HMRC, were in fact put to the back of the queue and I am aware many were not given the opportunity to settle with HMRC in time.

On the basis that many of these companies also did not pay the Income Tax and NIC liability back in April 2019, they are now wondering what to do.

Similarly, the company employees are also in a difficult position. Individuals with Employee Benefit Trust Loans outstanding at April 5, 2019, were required to ensure the loans were declared on their 2018/19 Income Tax Returns – and these had to be submitted by September 30, 2020.

The problem that has come to my notice is that if the employing company failed to pay the Income Tax and NIC due in April 2019, or reach settlement with HMRC by September 30, 2020, the employee cannot claim a PAYE credit on their Income Tax Return. This means that they risk a significant tax bill which is not strictly theirs.

HMRC are aware of the problem but have still been advising relevant employees to put the loans on their tax return. Anyone heeding HMRC’s advice and receiving a large tax bill accordingly, should take advice.

Companies that did not pay the Income Tax and NIC in April 2019, or settle with HMRC by September 30, have outstanding liability and should expect HMRC to make contact.

Where there is outstanding liability, it is better to approach HMRC before they approach you. It’s Counter Avoidance Directorate is usually open to approaches to settle Employee Benefit Trust issues.