Disguised Remuneration and the 2019 Loan Charge: Have you extra tax to pay?

Ruth Duncan, Maxwell Davies Director

This is another HM Revenue and Customs (“HMRC”) change to legislation and is a topic that has been hitting the headlines for a little while now. It is already having an impact both financially and emotionally on the lives of small business owners and the self-employed who have recently been presented with large tax bills to settle.

So, what is it all about?

Disguised Remuneration

Is how HMRC describe an income tax loophole used by over 50,000 people since 1999. This scheme enabled indirect payment through the use of non-repayable loan schemes or another non-taxable credit from third-parties (usually a trust) at a lower tax rate.

In answering questions Treasury Minister, Mel Stride, set out how these schemes work.  “ An employer can engage an employee and pay them in the normal way, by way of earnings, in which case national insurance for the employer and the employee is due. Income tax must also be paid by the employee. Alternatively, they can use a loan scheme, which generally works like this: instead of the employer paying the employee in the way I have described, money is sent out to a low or no-tax tax haven and placed in a trust. That money then comes from the trust back to the United Kingdom, where it is treated as a loan, even though there is no intention of ever settling that loan or paying it off. Because that money it is treated as a loan, it is claimed that it does not incur any national insurance or income tax because it is not earnings.”

However, despite their popularity, the use of non-repayable loans has never been approved by HMRC.

When do Loan Charges take effect

An employer, who offered disguised remuneration loans that were still existing on 5 April 2019, is responsible for paying the loan charge via the PAYE scheme, and that any trust that provided the loan had to disclose any outstanding loan balances by 15 August 2019.

The Treasury Minister further clarified the misconceptions about these schemes and the loan charge being retrospective by confirming the “there was never a time in the history of our country where the model for payment that I have just outlined [as set out above] has ever been correct within the tax rules of any previous year”.

Loan Charges still apply in insolvency

The application of the Loan Charge will also affect many insolvencies when it comes to realisations from director’s loan accounts. Although as HMRC agrees, it may be difficult for an insolvency practitioner to know if the employer used a disguised remuneration scheme or if the loan is still outstanding.

So, if any loans are treated as disguised remuneration it will be claimed by HMRC against the employer. If the company cannot repay it, HMRC will claim it directly from the director.

Insolvency Practitioners will be required to fully investigate any overdrawn directors loan accounts. HMRC will then review the results to establish whether the director’s loan accounts were indeed disguised remuneration schemes and whether HMRC might have a tax claim as an unsecured creditor.  This additional, previously unknown, claim by HMRC will have the effect of reducing any dividend payments to other unsecured creditors.


There has been a Loan Charge All Party Parliamentary Group (“LCAPPG”) who have, amongst other issues been looking at the impact on individuals being issued with notices by HMRC for these back dated taxes and the individual’s ability to pay these sums and the mental health issues that these debts have caused especially with vulnerable customers.  The LCAPPG were advised of the death of at least one HMRC customer and were told that “when HMRC is engaging with vulnerable people, it will do everything it can to ensure that they have all the support they need. This support includes a helpline that is dedicated solely to looking after loan charge customers, with a team fully trained to identify those who may be vulnerable and to provide appropriate support. Where necessary, HMRC will always refer individuals to the right external sources of support”. “HMRC also has a vulnerable customers team available to provide specialist, one-to-one support for vulnerable customers in need of it” and it “will be expanding its specialist service for customers with additional needs so that it will include anyone who finds their tax affairs under scrutiny. As we roll out that additional support, we will start with those affected by the loan charge as our first priority”.

There has been a debate in the House of Commons on this matter and Treasury minister Mel Stride advised parliament that “HMRC has publicly stated that nobody will lose their primary residence as a consequence of settling their loan charge liability”.  He also went on to say “that it is never the intention of HMRC to bankrupt anyone who comes forward in good faith to agree a manageable tailored repayment plan”. 

It is unclear how this statement fits in with the mantra that HMRC provides Insolvency Practitioners when having issued a bankruptcy petition HMRC reject an Individual Voluntary Arrangements citing “non-compliance of the debtor’s tax affairs”.   

Could you be affected by the loan charge?

One of the side effects of this loan charge and the “retrospective” nature of the claw back of tax due for a number of past years is the financial impact that this charge is having on the employees of these loan companies; which has been extensively discussed in Parliament. As noted above if the original company is no longer a live company either because it has become insolvent, dissolved or just disappeared, then HMRC are requesting the funds directly from the individual who benefitted from the loan.  Some of these requests for payment can date back to 1999 and it is quite clear that this is a very a badly implemented policy that is having a devasting impact on some people’s lives.

If you or your business are impacted by the loan charge, the sooner you address any issues, the easier it will be to formulate a rescue plan.

Remember, you only need to ask

Whatever your debt problem, whether a failing business or individual debts, advice and help is always available and it is vital that it is sought as early as possible.

If you or your business is facing financial problems, then please do not put it off. We offer a free initial consultation, please contact us on 0800 118 2948 to arrange. You don’t know what we can do until you ask!

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