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A disguised remuneration scheme (DRS) is a tax avoidance scheme, many of which involve  artificial remuneration arrangements between an employer and employee. The schemes commonly provide for an employee to be partially remunerated through the company payroll system but with the majority of their remuneration taking the form of a loan. The loan is often funded via a third party (typically an off-shore trust) but, where the loans are never intended to be repaid, HMRC treat the monies advanced as taxable income.

The most famous ruling on this type of scheme was given by the Supreme Court in a decision concerning an employee benefit trust used by Rangers Football Club. In that case, the court held that employee remuneration paid via a third party is not excluded from a tax charge.

Accordingly, HMRC has been encouraging users of any DRS to come forward and settle their tax liability, since any loan or credit received by an employee on or after 6 April 1999 which remains outstanding on 5 April 2019 is subject to an immediate tax charge (unless income tax and NIC has already been provided for). This tax charge (known as the ‘loan charge’) deems the total balance of the loan outstanding on 5 April as income received on that date or profits arising in the 2018/19 tax year, attracting income tax and NIC charges.

For those who entered into a DRS in good faith (many on the basis of professional advice received at the time) believing the schemes were legitimate tax planning arrangements, the loan charge will be a very unwelcome development. HMRC estimate that of the 50,000 suspected users of DRS’s, only around 25,000 have come forward to agree a repayment schedule.

Where the DRS was set up by the employer, HMRC are likely to look initially to the employer to settle the loan charges. For many SME and owner-managed businesses, this is likely to place a heavy burden on cashflow, resulting in directors approaching their financiers, cap in hand, for additional funding. Where the employer is unable to pay, has ceased trading or has entered into an insolvency process, HMRC will seek to recover the tax charge from the employee.

HMRC’s  briefing on the loan charge (see sets out details of how the charge can be settled. They point out that, in most cases, they will discuss and agree payments over a period and that there are no time limits on how long payments can be spread out.

Further, HMRC confirm they will not force anyone to sell their main home and insolvency is only ever considered as a last resort. Comforting?