Disguised remuneration | Blog Item | PKF Francis Clark
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Disguised remuneration

It was announced in the 2016 Budget that the Government would seek to strengthen the disguised remuneration (DR) legislation with a number of measures, including imposing a charge on loans which remain outstanding on 5 April 2019.

The 2019 loan charge provisions were included in Finance Bill 2017, but dropped to allow the Bill to be passed before the general election. They have now been included in Finance Bill (No. 2) 2017.

New close companies gateway

The original proposals applied where, among other conditions, the recipient of the loan or benefit held a material interest in the close company at any time. The new draft legislation limits the charge to recipients who hold, or at any time in the previous 12 months held, a material interest. The amended rule will apply to relevant steps taken after 6 April 2018.

New main purpose test

The rules will only apply if a main purpose of the arrangement is the avoidance of income tax, national insurance contributions, corporation tax or a ‘loan to participator’ charge.

In addition, the new rules will only apply where the transaction between the close company and the third party relates to the same money or asset as the transaction between the third party and the employee.

Overlap with charge on loans to participators

It is possible for the same transaction to be caught by both the DR rules and the rules governing loans to participators. This might happen where there is an indirect loan, such as where the close company lends money to a third party who lends it on to a participator. The original draft included a provision giving the loans to participators rules precedence. The updated draft makes clear that where there is an overlap, the loans to participators charge will take precedence over the DR charge, provided the company does one of the following:

  • Follows the rules for close company loans by making the appropriate entries in its corporation tax return and accounting for tax by the due date
  • Obtains HMRC’s agreement that DR charges should not apply to the transaction (this condition only applies if the company has reported the charge in its corporation tax return but has failed to make the payment)

If the company does not fall within one of these two exceptions, the arrangement will be taxed under the DR rules.

New information provisions for 2019 loan charge

A new charge will apply DR rules to certain loans outstanding on 5 April 2019. This legislation is included in Finance Bill (No. 2) 2017.

The recipient of a loan which falls within the 2019 loan charge (or their personal representatives, if the borrower has died) must report the loan to HMRC before 1 October 2019. The report must include specified information regarding the company, the borrower and the loan balance, including any scheme reference number allocated to the arrangement under the disclosure of tax avoidance schemes rules and any other reference number allocated to the taxpayer or arrangement by HMRC.

Failure to provide the information will result in a £300 fixed penalty and a further daily penalty of up to £60 for each day (up to 90 days) for which the information remains outstanding. If inaccurate information is provided carelessly or deliberately, a penalty of up to £3,000 may be imposed.

HMRC is developing an online tool for borrowers to report the information.

The information required under this provision and the information required to be provided to the employer by the employee and third party will be harmonised. The requirement for third party and the employee to contact HMRC directly if they do not provide information to the employer will be removed.

Legislation to ensure that PAYE and NIC arising under the DR rules can be recovered from employees will be published later this year.


Most of the amendments made to the close companies gateway rules will be welcomed by companies as they clearly limit the scope of the gateway. HMRC has released a technical note which explains how the rules are intended to operate and will also add detailed guidance to the Employment Income Manual.

The overlap rules may prove to be problematic for smaller companies, many of which will not recognise that the loans to participators rules apply until it is too late to comply with them. In practice, loans via third parties are likely to be rare and the DR rules may not apply in many cases, because there will often not be a main purpose of tax avoidance. If the arrangement does come within the close companies gateway, the DR liability will be due through PAYE (and NIC will also be payable). If this is discovered more than 90 days after the end of the relevant tax year, an additional tax charge will be due on the amount of tax not made good by the employee.

FEATURING: Lisa Macpherson
Lisa is the Head of Tax Technical at PKF Francis Clark, supporting the firm’s teams on tax policy and technical issues across its offices and… read more
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