Disguised Remuneration: Hope, Hurdles, and Harsh Realities

The legislation warmly referred to as ‘disguised remuneration’ is still causing problems. Some might think that the problems are caused by a few unscrupulous instigators, perpetrators and promoters of certain arrangements. Well the problems are caused by both and also by the fact that the cost of living has increased, the UK isn’t ‘great’ in the eyes of the public and politicians are still talking bollocks: its no wonder why someone who has used an arrangement is keen to believe it was and is perfectly normal and if its not, it is not their fault.

The case of Mr Currell Ltd v Revenue and Customs Commissioners [2024], provided an opportunity for the instigators of an arrangement to hail success for themselves: The ‘Upper Tribunal overturned the FTT, ruling that EBT loans are not earnings’. As with almost all promotional material the fact is true when read in isolation. If you read the detail, its not quite so good new for users of remuneration trust.

The Currell case concerned an employee benefit trust that received a payment and the trustees used those funds to lend to a shareholder director who in turn used those funds to purchase shares from his wife. The FTT found the loan was a reward for services. The Upper Tribunal concluded that a ‘genuine loan with a real repayment obligation does not constitute earning. And the statutory regime supports the interpretation.’

Interesting facts about the case:

• The employee benefit trust was established on 22 November 2010 (before the disguised remuneration legislation).
• On 22 November, the director wrote to the trustees applying for a loan and accepting the trustees would likely need security.
• The loan agreement was entered on 25 November 2010 and security charged over shares held.
• There was no adjustment to earnings or profit extraction as a result of the arrangements entered.
• On 26 November, a share purchase agreement was completed to acquire shares from their spouse.
• The shares had been subject to a valuation.
• There was evidence that the borrower understood the loan was repayment in accordance with the specific loan agreement terms, the loan was subsequently recalled although not repaid.
• The reason the loan was not repaid at that time was the fear of a charge to double taxation arising given HMRC had opened an enquiry and issued determinations.
• The FTT decision finding the loan was paid as a reward followed a brief discussion of ‘the Baxendale Walker cases’. It was stated that:

“As far as case law is concerned, we do not think that it is clear from either Rangers, or the Baxendale Walker cases, that a repayable loan cannot be a reward or benefit.”

“In Rangers the loans were repayable, and Lord Hodge found that they were a component of the redirected earnings. However, it is certainly not authority for the proposition that a repayable loan can never, as a matter of law, be a reward or benefit.”

“Nor do we think the same is true of the Baxendale Walker cases. In those cases, the judges, in our view, elided the analysis of whether a loan could be, as a matter of principle, a reward or benefit, with their analysis of whether in those particular circumstances, it provided a reward or benefit for services supplied by the relevant director. If the ratio of those cases was that as a matter of legal principle a genuinely repayable loan could not be able to benefit, we disagree with it for the reasons set out above. In our view such a money loan can as a matter of law be a reward or benefit.”

The case doesn’t quite solve the problem for most users of disguised remuneration arrangements. However, there may be some hope given the ‘Further Independent Review’ of the loan charge. The reason for the second review is the hardship caused to many who entered arrangements and believed they were obtaining a tax saving by receiving loans. Many users spent the tax saving, thereby having no means with which to repay the loan nor pay HMRC. There is a slight irony here because if the recipient of the loan cannot pay HMRC the tax, it is likely they never would have been able to repay the loan, therefore considering the principles of case law, the loans that cannot be repaid are more likely to be considered a reward for services i.e. taxable.

HM Treasury’s letter to Ray McCann – ‘The Loan Charge Review Commission’ sets out the terms of reference which stipulate:

“We want this review to bring the Loan Charge to a close for those people who still owe substantial amounts of money but can see no way to resolve their debts. It must, however, do so in the context of the very challenging fiscal situation we face.”

“As we have discussed, the review must therefore focus on bringing closure for the unsettled and unpaid Loan Charge populations, with targeted solutions that have the minimum possible impact on the public finances.”

“Solutions should not undermine the fundamental principles of the tax system that individuals are responsible for their own tax affairs and that tax owed should be paid. Given our approach to closing the tax gap and the fiscal position, we will not be able to accept recommendations that do not meet these criteria.”

Following the announcement of the second loan charge review in the 2024 Autumn Statement, news circulated intermating the end of the loan charge and the potential elimination of liabilities. People’s hopes are raised that they will not have the tax charge and many are pleased that the pressure is off them at least until after summer 2025, when the outcome is anticipated.

However, from reading the parameters of the request for review, it seems unlikely that the tax liabilities will be erased. A problem erasing a liability for a taxpayer who can ill afford it, is the unfairness of the tax system to those in similar or identical circumstances that can afford it. What the request appears to be pointing at is a consideration of how the tax may be collected fairly without causing hardship.

Its good to be positive. It is also good to be realistic. Often those that went into arrangements have muttered the timeless words ‘I thought it sounded to good to be true’ yet proceeded.

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About Disguised remuneration

Disguised remuneration refers to tax avoidance schemes where earnings are routed through loans or other mechanisms to avoid income tax and National Insurance contributions. Many business owners have been caught up in disguised remuneration arrangements, often believing them to be legitimate tax planning strategies. However, HMRC has taken a firm stance against disguised remuneration, implementing legislation and legal challenges to recover unpaid taxes. As a result, those who have used such schemes may face significant tax liabilities, making it crucial to seek professional advice and understand the potential consequences