These rules have been in place for a couple of years and we are beginning to see examples of where these rules are presenting large potential tax liabilities for employers.
The potential tax and national insurance contributions (NIC) charges involved are horrendous. Put simply, if these rules are broken then tax and NIC can be charged on amounts caught at up to a rate of an effective 98.7%. Can that possibly be right? Yes it is!
How can that be?
The legislation is designed to catch artificial tax planning arrangements using
- Employee benefit trusts
- Unregistered pension schemes and
- Similar third party arrangements
These have been used, often in conjunction with employee loans, to leave the employee much better off in tax terms than if he had been paid in the normal way by salary or bonus. This constitutes the ‘disguised remuneration’ that the rules designed to catch. Think Football Clubs and Large Banks.
The planning concept behind these arrangements is simple. Where employees do not actually need to be paid, there is a large time value of money advantage in holding money gross on his behalf until later payment. Similarly, if the employee can be loaned the money efficiently, it is as if he had also been lent the tax that he has yet to pay.
Because these basic concepts have such wide application, the legislation is similarly wide. HMRC are notoriously aggressive in this area and the length of the arrangements involved amounts to a greater uncertainty for the provider.
Feasibly, the DR rules can apply in any situation where there is a third party, even sometimes another group company, and there is an arrangement designed to benefit the employee without the employee incurring employment tax. This can even apply to provisions ( earmarked ) funds for an employee, and the rules obviously apply to loans and other beneficial arrangements.
There are wide exemptions for ‘approved’ arrangements, such as Registered pension schemes, HMRC Approved share plans and the like, but even here care has to be taken not to break the rules.
The simple moral is that in any situation where any third party is involved between the employer and the employee it’s worth checking beforehand that you are not inadvertently creating a tax nightmare