UK tax office warns on two tax avoidance schemes

By Cherry Raynard

Added 17th February 2017

HM Revenue & Customs has warned of a new disguised remuneration tax avoidance scheme that uses payment via annuities as a means to avoid income tax and national insurance contributions (NICs).

UK tax office warns on two tax avoidance schemes

The tax office said the scheme doesn’t work and it would investigate everyone who used it.

The scheme is aimed at contractors and uses private annuities.  The person being paid gets their income in two parts: the first part is a small salary that keeps them under the main income tax and NIC thresholds; the second part of their income is claimed to be a capital payment for a deferred annuity which is non-taxable.

HMRC described the scheme as ‘highly contrived’. It added: “Schemes involving annuities are within the scope of the proposed new loan charge, which will apply to all outstanding disguised remuneration loans on 5 April 2019.”

It said it would challenge all the users of this type of scheme and investigate their tax affairs, and that any users of the scheme who had not yet filed their tax returns, should do so on the basis that the payment for the deferred annuity is taxable income.

For transactions taking place after 16 July 2013, HMRC will also consider whether the general anti-abuse rule (GAAR) will apply. After 14 September 2016, transactions where the GAAR applies will be subject to a 60% GAAR penalty.

HMRC also warned on a second scheme, designed to circumvent the new rules for tackling disguised remuneration avoidance schemes. It said these schemes tend to include loans from third parties on such terms that mean they are unlikely to be repaid.

HMRC says some promoters claim to have come up with schemes that enable users to get out of the loan arrangements and avoid the loan charge, in return for a fee.

Unless the capital sum is paid back in full by 5 April 2019, or the user settles with HMRC, the new loan charge will apply to the outstanding sum. 

It added: “These schemes don’t work. The only way you can avoid the new loan charge is by making a repayment of the loan balance or settling the tax liability with HM Revenue and Customs in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.”

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