Tax due and payable to HMRC on income tax is a long established process supporting the UK economy.
Income Tax and National Insurance Contributions together comprise 44% of the tax receipts by HMRC during the financial year 2017-18 (source: Institute for Fiscal Studies, Briefing Note BN198) with the next larges receipt being VAT (18%).
- without taxes received on income, and National Insurance Contributions, almost half of the financial support for the UK government would be lost.
- from the early 1990s to 2017, the share of income tax payable by the top 1% earners in our society has almost doubled.
- accordingly, ensuring the continued payment of income tax is perhaps one of the most important priorities of government.
During the same period of growth of the income (and therefore income tax) arising on the top 1% of our society, tax schemes have similarly arisen in popularity leading to legislative requirements to ensure that such schemes are not used to defraud or evade tax properly due to HMRC.
We set out below some of the most important legal changes governing this area. However, this list is by no means exhaustive and we would always recommend you seek legal advice bespoke to you or your company’s circumstances
Inland Revenue Press Release No. 35 (“IR35”)
IR35 was initially issued in early 1999 to counter the then perceived tax avoidance measures adopted by individuals, who worked and drew their income via a company (with lower tax rates) but who was otherwise engaged as an employee.
IR35 can mean there are a lot of tax losses which could put small service companies into insolvency and potentially meant the director(s) are liable for such losses. .
Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”)
ITEPA was one of the first legislative steps taken to ensure clarity of what employment income, general earnings and other income chargeable to income tax was.
It dealt with topical issues surrounding (as was prevalent at the time and since) issues of domicile, IR35 and the use of companies, taxable benefits and a myriad of issues surrounding the tax treatment of income. ITEPA has been amended on many occasions since, including in respect of loan charges.
Finance Act 2011
The Finance Act 2011 was brought in to enact amendments introduced by the previous budget which included, following concerns as to the use of third party vehicles such as Employee Benefit Trusts for the purpose of avoiding taxation on income, anti-avoidance provisions.
The Finance Act 2011 amended ITEPA to introduce rules as regards arrangements entered into in respect of loans and monies received from third parties, where the relevant steps had been taken after 9 December 2010 and it has had wide implications for the use of Employee Benefit Trusts.
The Finance Act 2017 and the Finance Act (No.2) 2017 (“the Finance Acts 2017”)
The Finance Acts 2017 have been enacted to make further changes to ITEPA and the associated tax regulations to further deal with disguised remuneration and impose loan charges on companies and individuals participating in prohibited tax schemes.
- these changes also impose rules and clarification as regards events where double taxation may arise under previous changes to ITEPA and dealing with small owner-managed companies, often referred to as the close companies gateway;
- most importantly, the Finance Acts 2017 also introduce the loan charge, which is chargeable on disguised remuneration loans made after 5 April 1999 and which remain outstanding as at 5 April 2019.
Loan charges
The Finance Act (No.2) 2017 implemented provisions as regards disguised remuneration loans that remained outstanding as at 5 April 2019. These changes affect both the payors (employers), payees (employers) and those facilitating such arrangements.
- for any loan made after 15 April 1999 that was not repaid by 5 April 2019, the loan charge imposed and payable to HMRC could be 50% of the outstanding loan sum;
- HMRC have provided a disclosure facility whereby loans that may be vulnerable to such charges can be declared and the loan charge potentially avoided, but people only had until only December 2018 to make such a declaration or suffer the consequences.
At Francis Wilks & Jones we have considerable experience of negotiating such issues with HMRC and dealt with claims arising out of insolvency or claims for breach of a director’s fiduciary duties. Please call any member of our tax disputes team for help.
