Tackling disguised remuneration

Technical consultation document

Publication date: 10 August 2016

Closing date for comments: 5 October 2016

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Subject of this consultation:

The changes being introduced in Finance Bill 2017 to tackle disguised remuneration avoidance schemes.

Scope of this consultation:

This is a technical consultation to ensure that the final legislation is correctly targeted and effective.

Who should read this:

The government would like to hear views from anyone who is affected by or interested in these changes. This includes both users and promoters of disguised remuneration schemes, as well as the accountancy and tax professions.

Duration: This technical consultation will run from 10 August to 5 October 2016.

Lead official: Tim Smith, HMRC.

How to respond or enquire about this consultation:

Responses to the consultation can be emailed to: employmentincome.policy@hmrc.gsi.gov.uk. Alternatively written responses can be sent to: HM Revenue and Customs Employment Income Policy Team Room 1E/08, 100 Parliament Street London SW1A 2BQ

Additional ways to be involved:

As the issues are largely technical, it is expected that those wishing to respond will do so in writing or by email. HMRC will also consider requests for meetings as part of this consultation. Any such requests should be made to the email or postal address above.

After the consultation:

Responses to the consultation will be considered when finalising the legislation. A further draft of the legislation is expected to be consulted on as part of draft Finance Bill 2017.

Getting to this stage:

This technical consultation is in response to the tackling disguised remuneration announcement at Budget 2016.

Previous engagement:

This is the first consultation on these measures to tackle disguised remuneration.

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Contents

1

Foreword Introduction

4 5

2

Tackling the continued use of schemes

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3

Transfer of liability

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4

The loan charge

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5

Additional technical details

22

6

Similar avoidance schemes

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7

Summary of Consultation Questions

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8

The Consultation Process: How to Respond

35

Annex A

Draft legislation

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Foreword

The government remains committed to tackling tax avoidance in all its forms. Disguised remuneration was one of the first areas of tax avoidance tackled by the then coalition government. These schemes usually involve an individual’s income being funnelled through a third party, with the money often then being paid to the individual as a ‘loan’ that is never repaid. The vast majority of people pay the right amount of tax and National Insurance contributions. Ordinary working people simply are not paid in loans. So it is only right that those who use avoidance arrangements, such as disguised remuneration schemes, pay their fair share too. In 2011 the government successfully legislated to clamp down on disguised remuneration schemes. That legislation protected almost £3.9bn of tax, £100m more than originally expected. HMRC gave users of those schemes a chance to settle their liability and collected around £1.5bn from those who did the right thing and settled. However, disguised remuneration continues to be a significant risk to the Exchequer. There remain many who have yet to settle, and still more who have used new, more artificial and contrived schemes. The government will continue its action to tackle disguised remuneration schemes regardless of the form they take. At Budget earlier this year we announced a package of changes targeting both the ongoing and the historic use of these schemes to put it beyond doubt that they do not work. This technical consultation relates to part of that package and sets out the detail of these reforms, including draft legislation. The government wants to ensure that this legislation works as intended and does not penalise any innocent arrangements that are not motivated by tax avoidance. However, we are also determined to stop those who might seek to circumvent these changes, and will tighten the rules further should the need arise. The government would also like to take the opportunity to thank stakeholders in advance for their time and efforts responding to this technical consultation.

Jane Ellison MP Financial Secretary to the Treasury

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1. Introduction

1. At Budget earlier this year the government announced a package of changes to tackle disguised remuneration (DR) avoidance schemes to ensure users of these arrangements pay their fair share of income tax and National Insurance contributions (NICs).

2. An overview of changes and technical note (technical note) was published at the same time. This set out the background to these changes and what the government intends to achieve. Some of the changes announced were introduced immediately, with others to be legislated in Finance Bill 2017 after a consultation on the technical detail.

3. This technical consultation includes more detail on the changes the government will introduce in Finance Bill 2017. In order to provide as much detail as possible an early draft of the legislation has been included in Annex A.

4. The government wants to ensure that the final legislation is targeted and effective. These changes are specifically designed to tackle DR avoidance schemes and are not intended to catch other arrangements, such as certain employee share schemes and pensions, that are specifically carved out of the current rules.

5. Therefore, as part of this consultation, the government particularly wants to hear of any arrangements that are not DR avoidance schemes that could be affected by these changes.

6. This technical consultation and the draft legislation primarily provides detail of how the new rules will work for income tax purposes. However, it is the government’s intention that the changes will also apply for NICs purposes, including the changes to the transfer of liabilities rules (see chapter 3). Further details of the equivalent NICs changes will be provided in due course.

7. The government welcomes responses on all aspects of the technical detail and not just responses to the specific questions posed in this document.

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2. Tackling the continued use of schemes

1. As set out in chapter 4 of the technical note, the government is making changes to

the current DR rules in Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) to put beyond doubt that they apply to all forms of DR schemes, as they were always intended to.

2. All statutory references in this document are to ITEPA 2003 unless otherwise stated. The DR rules are referred to simply as ‘Part 7A’.

3. In addition, references to ‘employee’ include directors, and also include any individual ‘contractors’ who were working under a contract of employment, even where those individuals might normally think of themselves as self-employed.

Loan transfers

4. As set out in the technical note, most DR schemes normally involve a loan being made by a third party to an employee. However, some schemes instead involve someone else (such as the employer) making the initial loan, which is followed by a series of intervening steps, the result of which is the employee owing the loan balance to the third party.

5. Those who use these schemes claim that because the third party did not make the loan a Part 7A charge does not arise.

Example 2.1: An employer makes a loan of £10,000 to the employee ‘A’. The employer then enters into an arrangement with a trust, of which ‘A’ is a beneficiary, with the end result being that ‘A’ owes the trust £10,000. ‘A’s employer claims that Part 7A doesn’t apply because the trust didn’t make the loan, or any other payment, to ‘A’.

6. Part 7A will be amended to make clear that arrangements which result in the

employee being indebted to the third party are treated in the same way as if the third party made the loan directly.

7. The draft legislation currently includes one exception to this that prevents the loan transfer rules applying where:

The original loan was made by the employer; and

The third party who the employee ends up indebted to becomes the new employer.

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8. For example, this might occur where an employee transfers to a new employer and the new employer agrees to take on the employee’s season ticket loan.

9. The existing exemptions, including the exclusion for commercial loans at section 554F, will continue to apply. Question 2.1 - Are there any other transactions or arrangements which the government should consider excluding from the new loan transfer rules? Loan transfers are provided for by draft additions to section 554C, introduced by paragraph 5 of the draft Schedule in Annex A. The exclusions for the transfer of employment-related loans are provided for by the draft addition of the new section 554OA, introduced by paragraph 7 of the draft Schedule in Annex A.

Close companies’ gateway

10. Currently, in order for an arrangement to fall within Part 7A it must meet the conditions of the Part 7A ‘gateway’ in section 554A. More information on the existing gateway can be found in the employment income manual from EIM45000 onwards, but one of the key conditions of the current gateway is, broadly, that the arrangement is connected to the individual’s employment.

11. As set out in the technical note, some schemes try to avoid being caught by Part 7A by claiming that the disguised remuneration received by an employee or director of a close company is not in connection with their employment. The government considers that these schemes are ineffective. In order to put beyond doubt that these schemes do not work another gateway will be added to Part 7A specifically for close companies.

12. The intention is for the close companies’ gateway to operate in a broadly similar way to the existing gateway. As the gateways have a similar structure and contain some identical provisions this document only highlights the differences between the two.

13. The close companies’ gateway will apply where:

● there is a close company, as defined by section 439 of the Corporation Tax Act 2010;

● an individual has a qualifying connection with that close company; ● there is an arrangement to which the individual is party, or which relates to the

individual; ● the close company is also party to the same arrangement, or facilitates it in

some way; ● the outcome of the arrangement is that payments or benefits are provided to

the individual; and ● a relevant step is taken by the third party.

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14. A qualifying connection arises where the individual:

is a current, or former, employee, or director, of the close company; and

has at any time held a material interest in the close company.

15. The definition of director and material interest are replicated from the existing definitions in sections 67 and 68 of ITEPA 2003 respectively. The purpose of the qualifying connection is to restrict the close companies’ gateway to apply only to those individuals who are mostly likely to argue that the remuneration was not derived from their employment or directorship.

Example 2.2: A close company ‘B’ contributes £10,000 to a trust for a director ‘A’, and ‘A’ later receives a loan of £10,000 from the trust paid for out of the contribution. ‘B’ is wholly owned by ‘A’. All of the conditions of the close companies’ gateway are met. In particular, ‘B’ has facilitated the arrangement as they contributed the money to the trust from which the loan was made. Therefore the £10,000 loan is taxable under Part 7A.

16. If the employer is not a close company they only need to consider the existing

gateway. However, if either gateway applies then Part 7A will apply, including any applicable exclusions and reliefs. It will be possible for both gateways to apply to the same arrangement, and therefore close companies will have to consider both gateways in order to determine whether Part 7A applies.

Example 2.3: A close company ‘B’ contributes £10,000 to a trust for an employee ‘A’, and ‘A’ later receives a loan of £10,000 from the trust paid for out of the contribution. ‘A’ has never owned any shares in ‘B’. Because ‘A’ has no material interest in ‘B’ the conditions of the new close companies’ gateway are not met. However, the conditions of the existing gateway are met, and so the £10,000 loan is taxable under Part 7A.

Question 2.2 - Are there any other transactions or arrangements which the government should consider excluding from the close companies’ gateway? Question 2.3 - Are there any additional criteria or conditions the government should consider to ensure that the close companies’ gateway is targeted at DR schemes?

17. It is possible that loans made in such circumstances could be caught by both Part 7A and the loans to participators rules in Chapters 3, or 3A, of Part 10 CTA 2010.

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18. Therefore the changes above will ensure that no double taxation arises, but will also make clear that loans to those who have, or have had, a material interest in a close company must fall within either one set of rules or the other. A combination of existing and new provisions will make clear which rules take priority in any given situation. Question 2.4 - Are there any other instances of double taxation that the government should consider? The close companies’ gateway is provided for by the new sections 554AA, 554AB and 554AC as well as subsection 554Z2(1AA), introduced by paragraphs 2 and 10 respectively of the draft Schedule in Annex A.

Release of a DR loan

19. In addition to the changes outlined in the technical note, the draft legislation also includes a new provision relating to the write-off, or release, of loans made under DR schemes.

20. It is the government’s view that DR loans, which are not taxed as employment income, are employment-related loans within the meaning of section 174. This means that when they are written off, or released, there is an income tax charge under section 188. However, some users of DR schemes do not consider that their DR loans are employment related loans and so believe that a charge does not arise when their DR loan is released.

21. The government intends to put beyond doubt that the writing off, or release, of a DR loan results in a tax charge. The current rules will be amended so that the write-off, or release, of a DR loan, including loan transfers covered earlier in this chapter, will be a relevant step and so will give rise to a Part 7A charge.

22. Section 188 is contained in the ‘benefits code’ in ITEPA 2003. This means that double taxation will be prevented by the existing section 554Z2(2) which gives priority to Part 7A where any relevant step also gives rises to a charge under the benefits code.

23. However, the write off, or release, of a loan on, or after, the employee’s death will not be taxed under Part 7A, in the same way that there is no charge under section 188 in those circumstances. The release of a DR loan is provided for by subsection 554C(1)(ac), introduced by paragraph 5 of the draft Schedule in Annex A.

Deductions for employee remuneration

24. Payments made by an employer wholly and exclusively to reward employees are trading expenses which qualify as a deduction in calculating taxable profits. However, where the payment is made to a DR scheme from which employees may

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only benefit after some time has passed, this deduction is generally deferred until the employees receive a taxable benefit derived from the payment.

25. This treatment is often referred to as “fiscal symmetry”, and is provided for at sections 1288 – 1296 Corporation Tax Act 2009 and sections 36 – 44 ITTOIA 2005 for corporation and income tax purposes respectively. More detail on these rules can be found in HMRC’s guidance in the Business Income Manual at BIM44636.

26. Some employers do not claim an immediate deduction for the contribution when the DR scheme is entered into. However, where HMRC successfully challenges such schemes, resulting in an employment income charge, the scheme user may then be able to claim a deduction in respect of the contribution. This mitigates the impact of HMRC’s success in defeating DR schemes and can act as an incentive for those considering using a DR scheme.

27. Other DR schemes claim to avoid an employment income charge and receive tax relief for the amount contributed to the scheme, breaking the fiscal symmetry set out above. This is purportedly achieved by rewarding employees in a way that does not create an employment income charge whilst still claiming tax relief on the employee reward at the point the scheme is used. The government’s view is that these schemes do not achieve asymmetry and an employment income charge arises.

28. To discourage schemes being entered into in the future the government proposes that tax relief for employers’ contributions to DR schemes should be denied rather than merely deferred. It would not be possible for the employer to obtain a tax deduction for such a contribution unless employment taxes and NICs are paid at the time the contribution is made, even where the contribution is subsequently agreed to be remuneration. The government thinks this would create a clear deterrent to those considering entering into a DR scheme.

29. This would apply to contributions to DR schemes made on or after 6 April 2017.

30. The existing legislation includes exceptions for certain commercial arrangements and these exceptions, such as accident benefit schemes, would not be disturbed. Question 2.5 - The proposal is that employment taxes must be paid at the time the contribution is made. Will this affect arrangements, or transactions, that are not part of DR schemes which the government should consider excepting? Question 2.6 – Will the requirement for employment taxes to be paid at the time of the contribution cause any problems? Should there be a reasonable period of time before the employment taxes have to be paid, and if so how long should that be? Question 2.7 - Are there other approaches to deductions the government should consider in attempting to discourage the use of DR schemes? The draft legislation in Annex A does not include provisions for this proposal.

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3. Transfer of liability

1. Also set out in chapter 4 of the technical note is the government’s intention to broaden the powers that allow HMRC to transfer income tax and NICs liabilities from employers to employees where a DR scheme is used.

2. It is often the employee who benefits from a DR scheme because they will have received the money, or asset, without tax having been deducted. Therefore broadening these powers will help to ensure that users of DR schemes pay their fair share of tax and NICs.

3. However, the government recognises that it is important to ensure that there are sufficient safeguards so that the liability is not transferred in inappropriate circumstances. The government will not disturb the principle that HMRC will pursue PAYE liabilities from the employer in the first instance, and will only transfer a liability where it cannot reasonably be collected from the employer. The changes are also only targeted at arrangements that result in a Part 7A charge.

4. Below are a number of proposals for changes to the transfer of liability rules that the government is currently considering. These are initial proposals and there will be a further consultation on the details of the final proposals before they are introduced at a later date. The government welcomes broad responses as is still exploring how best to achieve its aims in this area.

5. These proposals are in addition to the existing transfer of liability powers contained in the Income Tax (PAYE) Regulations 2003. Some of these powers, in particular regulation 81(3), clearly already apply to charges arising under Part 7A.

Common DR scenarios

6. There are three common scenarios that the proposals are concerned with, which are:

● there is a non-UK employer set up solely for the purposes of the DR scheme and the employee provides services to a UK person;

● the employer exists at the time the Part 7A charge arises but is unable to meet the liability; and

● the employer no longer exists at the time the Part 7A charge arises.

Non-UK employer

7. The first scenario mentioned above is common in certain DR schemes where labour or services are provided through various intermediaries and agencies. At one end of the chain will be the individual employed by a non-UK employer and at the other end the individual provides their skills and expertise to UK based clients.

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8. Where the non-UK employer is not required to account for PAYE, section 689 can require a UK entity, for example the UK client, to account for the tax. In order to ensure those who have benefited from the scheme the most pay their fair share the government is considering requiring that the employee (rather than the UK entity) pay the tax in certain circumstances. The conditions to trigger this requirement could be:

● there is a charge arising under Part 7A due to a payment, or benefit, being provided to the individual;

● the individual has entered into the arrangement with the main purpose, or one of the main purposes, of avoiding tax and NICs; and

● a UK person other than the employer is required to account for tax as a result of section 689 but doesn’t do so.

9. These conditions target only cases where there is a DR arrangement involving a

non-UK employer and only cases where there is an avoidance motive on the part of the individual. This would prevent abuse by unscrupulous employers because the liability could only be transferred where there is a third party involved and the employee was actively attempting to avoid tax.

10. An alternative option to counteract non-UK employer DR schemes would be to create a similar power to the existing regulation 72 of the PAYE regulations. This new power would allow the transfer of the liability where the following conditions were met:

● there is charge arising under Part 7A due to a payment, or benefit, being provided to the individual;

● the individual knows tax has not been deducted from the payment or benefit; ● a UK person other than the employer is required to account for tax as a result

of section 689 but doesn’t do so.

11. This would have similar safeguards to the first option by targeting avoidance schemes where the individual knows the amounts they receive have not been taxed.

12. Both options would also require that obligation to account for the tax on the Part 7A charge be removed from the UK entity once it has fallen to the employee instead.

13. However, the main difference would be that the first approach would be triggered automatically where the conditions are met, whereas the second would only apply where HMRC issues a notice to the individual transferring the liability to them.

Employer unable to pay

14. The second scenario where an employer is unable to meet the tax liabilities can arise where all, or most, of the value in a business has been extracted, and it does not have sufficient assets to meet the Part 7A liability. It could also arise where a company is set up for the sole purpose of attracting substantial Part 7A liabilities without ever having the ability, or intention, to pay.

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15. Under the existing regulation 81 of the PAYE regulations, HMRC can transfer a Part 7A liability to an employee where:

HMRC has issued a determination to an employer in respect of the liability;

the determination has become final; and

the employer has not paid the liability within 30 days.

16. Where DR schemes have been used it can sometimes be apparent at the time HMRC raises determinations that the employer will not be able to meet the liability. It can also take a period of time for a determination to become final, in which time the financial position of the employer may have deteriorated, before HMRC can collect the liability under the existing powers.

17. In order to resolve such cases more swiftly the government is considering adding an additional condition to the existing conditions at regulation 81. The criteria could be:

● there is a charge arising under Part 7A due to a payment, or benefit, being provided to the individual; and

● at the time the determination is issued it is reasonable to assume that the employer would not be able to meet the liability if it became final.

18. Like regulation 81 this would be a discretionary power allowing an officer of HMRC to

apply their judgement. Similar safeguards to the non-UK employer options also apply but in addition HMRC must be able to issue a determination to the employer in the first instance.

19. As with the current regulation 81, the employee would have a right to appeal the transfer of liability if they believe that the amount is incorrect.

Dissolved

20. The third scenario arises where the employer is dissolved before the Part 7A charge arises and includes cases where that dissolution is deliberate and the business is carried on by another entity.

21. Where the employer does not exist at the time of an employment income charge the income tax liability automatically arises on the employee and should be included in their self-assessment return. Question 3.1 - Do the proposals include sufficient safeguards to ensure the liability is not transferred in inappropriate circumstances? Question 3.2 - Are there any other circumstances in which a Part 7A liability should be transferred from the employer to the employee? The draft legislation in Annex A does not include provisions for these proposals.

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4. The loan charge

1. As set out in chapter 5 of the technical note, the government is introducing a new charge on outstanding disguised remuneration loans (“the loan charge”) to tackle the use of schemes to date.

Application

2. The loan charge will apply where all the following conditions are met:

● a loan has been made to an employee or director; ● the gateway conditions are met on 5 April 2019; ● the loan was made on or after 6 April 1999; and ● the loan, or part of it, is outstanding immediately before the end of 5 April

2019.

3. There must have been a loan to an employee or director, or to a person that the employee or director has chosen to receive the loan. As mentioned in chapter 2, references to ‘employee’ also include ‘contractors’ who worked under a contract of employment as part of their scheme, even if they may not usually think themselves as employees.

4. The loan charge requires the gateway conditions to be met. This could be either the existing gateway or the close companies’ gateway, as set out in chapter 2 of this document.

5. As mentioned in the technical note, the government has considered whether to exclude extremely old loans from the scope of the loan charge, and as a result the loan charge will only apply to loans made on, or after, 6 April 1999.

Example 4.1: An employee ‘A’ received a £10,000 loan from a DR scheme on 1 January 1999. The loan is still outstanding on 5 April 2019 and has not been taxed as income or replaced. Because the loan was made before 6 April 1999 the loan charge will not apply to it.

6. Where a loan has been replaced with a new loan only the replacement loan is

considered. This means that any loans originally made prior to 6 April 1999 but subsequently replaced will be within the scope of the loan charge.

Example 4.2: An employee ‘A’ received a £10,000 loan from a DR scheme on 1 January 1999. In 2003 the loan was replaced with a new loan also of £10,000.

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The loan is still outstanding on 5 April 2019 and has not been taxed as income or replaced. Because the replacement loan was made after 6 April 1999 the loan charge will apply to it and it will be taxable under Part 7A on 5 April 2019.

7. The loan charge will only apply to the outstanding balance of the loan on 5 April

2019. This gives those that have received a DR loan the opportunity to repay the loan in order to prevent the loan charge from arising. In order to calculate the outstanding loan balance any ‘repayment amounts’ are deducted from the ‘relevant principal’ (see below).

8. Where all the loan charge conditions are met an amount equal to the outstanding balance of the loan will be taxed under Part 7A.

9. It should also be noted that there will be no Part 7A liability if the loan charge arises after the death of the employee. Question 4.1 - Are there any additional criteria or conditions the government should consider to ensure the close companies’ gateway is targeted only at DR schemes? The application of the loan charge is provided for by paragraphs 13 and 14 of Part 2 of the draft schedule in Annex A.

Exclusions

10. The existing exclusions from section 554E to section 554Y will also apply to the loan charge. This means if the exclusion applied to the loan when it was made, or would have if Part 7A had been in force at that time, then it will also apply to the loan charge in 2019.

Example 4.3: An employee ‘A’ receives a loan of £10,000 in 2012 from a third party. When the loan was made it met the conditions of section 554F: commercial transactions and a Part 7A charge did not arise. The exemption will continue to apply in 2019, and the loan charge will not arise.

The exclusions for the loan charge have not been provided for in the draft legislation accompanying this consultation.

Anti-avoidance

11. The government has made clear that it will not accept attempts to circumvent the changes set out in this consultation, including the loan charge.

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12. To prevent attempts to artificially ‘repay’ the loan without actually paying back the

balance, the legislation defines the outstanding balance as being the ‘principal amount’ minus any ‘repayment amounts’.

13. The relevant principal is broadly the sum initially lent under the loan agreement plus any further amounts that have been added to the loan balance. This could include interest that has been added to the principal rather than being paid to the third party.

Example 4.4: An employee ‘A’ receives a loan of £10,000 in 2018 as a part of a DR scheme. That loan attracts 5% interest, payable annually. However, at the end of each year when the interest becomes due, the lender agrees to add the interest due to the amount owed. For the purposes of the loan charge in 2019 the ‘relevant principal’ would be £10,500 – i.e. the original £10,000 plus the £500 interest charged at 5% which was added to the loan balance.

14. What constitutes a ‘repayment amount’ will depend on when the repayment was

made. For repayments made prior to the Budget announcement on 16 March 2016 there is no specific definition of what constitutes a ‘repayment amount’. However, from the date of the Budget announcement onwards, only repayments of money by the borrower will be permitted to be counted as ‘repayment amounts’.

Example 4.5: An employee ‘A’ received a £10,000 loan from a trust as part of a DR scheme in 2009. ‘A’ makes a payment of £8,000 in money to the trust in repayment of the loan in 2017. By 5 April 2019 there are no further repayments of the loan and it not been taxed as income. The ‘relevant principal’ is the original £10,000 loan. Because the £8,000 was a money repayment of the loan it is a ‘repayment amount’ for the purposes of the loan charge, and so the outstanding balance on 5 April 2019 is £2,000 (the relevant principal minus the repayment amount). Therefore the loan charge will apply to the £2,000 and it will be taxable under Part 7A on 5 April 2019.

15. In addition, if the loan has been written off or released it will only be allowable as a

repayment amount if it has been subject to income tax. This could be under the release of an employment related loan at section 188 or under the new provision set out in chapter 2 of this document. Where the loan which is written off has been taxed, the loan charge will not apply due to the new provisions preventing double taxation set out in chapter 5 of this document.

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Example 4.6: An employee ‘A’ received a loan of £10,000 from a trust as part of a DR scheme in 2012. In 2015 the loan was written off by the trustees. Neither ‘A’, nor ‘A’s employer, paid income tax on the write off of the loan. For the purposes of the loan charge in 2019 there is no ‘repayment amount’ and so the full amount of the loan is treated as outstanding for the purposes of the charge.

16. The draft legislation also includes a TAAR that disallows money repayments where

there is a connection between the repayment and a further avoidance arrangement. This includes cases where a new arrangement is entered into in order for the money repayment to be returned to the individual without an employment income charge.

Example 4.7: An employee ‘A’ received a loan of £10,000 from a trust as part of a DR scheme in 2012. Following the government’s announcement of the new loan charge at Budget 2016, ‘A’ enters into a new arrangement where they repay the loan, but the money ends up back in ‘A’s hands without ‘A’ having paid income tax on that amount. In 2019 the TAAR will apply to disregard the new arrangement, meaning that ‘A’s loan will still be treated as outstanding for the purposes of the loan charge, and will be taxable in full.

17. The government intends to ensure that users of DR avoidance schemes will not be

able to avoid paying their fair share of tax and NICs by entering into another avoidance scheme that seeks to show a money repayment without the equivalent economic consequences. Question 4.2 - Are there any arrangements that could be caught by these anti-avoidance provisions that the government should consider excluding? Question 4.3 - Are there any additional criteria or conditions the government should consider to ensure the anti-avoidance provisions prevent attempts to circumvent the loan charge? The anti-avoidance provisions for the calculation of the outstanding loan balance is provided for by paragraph 15 of Part 2 of the draft schedule in Annex A.

Quasi-loans

18. The loan charge will apply to loans made directly by the third party to the relevant person, as set out above. It will also apply to loan transfers, as set out in chapter 2 of

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this document, which for the purposes of the loan charge are referred to as “quasi-loans”.

19. The intention is for the loan charge to apply in the same way to both loans and quasi-loans. The draft legislation sets out a definition of quasi-loans and how the outstanding balance of a quasi-loan is to be calculated.

Example 4.8: An employer makes a loan of £10,000 to the employee ‘A’. The employer then enters into an arrangement with a trust, of which ‘A’ is a beneficiary, with the end result being that ‘A’ owes the trust £10,000. For the purposes of the loan charge, the right to repayment of £10,000 is a quasi-loan. If the debt from ‘A’ to the trust is not paid on, or before, 5 April 2019 then the amount that ‘A’ is indebted to the trust, £10,000, will be subject to the loan charge and taxable under Part 7A.

Quasi-loans are provided for by paragraphs 14 and 16 of Part 2 of the draft schedule in Annex A.

Postponement for approved fixed term loans

20. The loan charge will not apply to loans, or quasi-loans, that on 5 April 2019 are “approved fixed term loans”.

21. This is because the government considers that it would be unfair to require fixed term loans of reasonable duration to be repaid early in order to prevent the loan charge applying, provided that there is a realistic expectation that the loan will actually be repaid by its due date.

22. However, any borrowers who then fail to repay the loan will not be permitted to avoid the loan charge altogether. Instead, where the conditions outlined below are met, the loan charge will be postponed until the due date of the loan, at which point the loan charge will apply to any loan balance still outstanding.

23. The postponement will apply where the following conditions are met:

● the loan is a qualifying loan; ● either:

○ the qualifying payments condition is met; or ○ the commercial terms condition is met; and

● the application for postponement is approved by HMRC.

24. A qualifying loan is, broadly, defined as a loan made prior to the introduction of Part 7A with a repayment period of less than 10 years. It cannot have been replaced or had the terms amended at any time since it was made.

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25. The qualifying payments condition requires a repayment of the principal to have been made at least once every 53 weeks from the date the loan was made to the date of the application for postponement. This is just longer than one year to allow for cases where the repayments are made annually but the period between repayments is slightly longer than a year, for example because the payment anniversary falls on a bank holiday.

26. The commercial terms condition considers loans that are close to, but do not quite meet the conditions for exclusion from a Part 7A charge at section 554F. That section, broadly, requires the lender to be in the business of making loans and the loan to have been made on terms that are available to the general public.

27. The commercial terms condition is met if the loan was:

● made in the ordinary course of the lender’s business but not on terms available to the general public; or

● not made in the ordinary course of the lender’s business but is broadly comparable to loans made available to the general public.

28. This would exclude, for example, unsecured loans granted for 10 years with no

interest payable where the lender does not make loans in the ordinary course of its business. However, it would allow loans made on favourable terms not available to the public where the lender does make loans to the public in the ordinary course of its business.

29. HMRC will take into consideration all relevant factors when determining if the terms of the loan would be available to the public. Examples of the factors that will be taken into account will be set out in guidance and will include:

● whether capital repayments have been made (but at an interval of less than every 53 weeks);

● whether the loan is secured against an asset; ● whether interest payments have been made; ● the regularity of repayments, either interest or capital; and ● the interest rate applied to the loan.

30. It will not be sufficient for the terms of the loan to indicate that it is commercial, the

terms of the loan will also need to have been met. This is to ensure that loans that only appear ‘commercial’ on paper, but are not in practice do not qualify as approved fixed term loans.

31. The form and content of the application will also be set out in detail at a later date in HMRC guidance. The application will need to be made by the person liable to the loan charge between 1 April 2018 and 1 October 2018 and is only effective if, and when, confirmation from HMRC is received. If the application is denied there will be no right of appeal.

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Question 4.4 - Are there further types of loan which the government should consider allowing to qualify for postponement? Question 4.5 - Are there are any practical issues with the application process for postponement approval described above? The postponement for approved fixed term loans are provided for by paragraphs 17 to 20 of Part 2 of the draft schedule in Annex A.

Postponement for Accelerated Payments

32. Individuals who have received a DR loan may have been required to pay an Accelerated Payment (AP), under Part 4 of Finance Act 2014. It is possible that the individual will want to repay the loan balance to prevent the loan charge applying but will be unable to fully repay the loan because they have had to use some of the money to meet the AP liability.

33. Provisions have been included in the draft legislation to allow individuals in this position to make a claim for the loan charge to be postponed. However, this will only apply where the person liable for the loan charge is the same as the person who received the loan.

34. Additionally, postponement will only be allowed where the remaining loan balance is equal to or less than the AP amount. This means the user must have repaid all of the loan balance apart from the amount that has been used to meet the AP liability.

35. If the AP is later repaid to the employee they will have 30 days to repay the outstanding loan balance, after which the loan charge will apply. If the AP is not repaid there will be nothing further to pay.

36. An application process for this postponement, similar to that described above for the

fixed term loan postponement, will also be put in place.

Example 4.9: An employee, ‘A’, receives a £10,000 loan through a DR scheme. HMRC consider that income tax of £4,000 is due on the loan amount and begins litigation proceedings. ‘A’ makes an AP of £4,000 after being issued an Accelerated Payment Notice. Before the loan charge arises ‘A’ decides to repay the loan but only has £6,000 available after paying the AP. ‘A’ can apply for postponement of the loan charge on the £4,000 AP amount if the £6,000 remaining loan balance is repaid.

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If ‘A’ wins the litigation, and income tax is not due on the loan, the AP of £4,000 will be repaid to ‘A’. ‘A’ now has 30 days in order to repay the £4,000 loan balance. If it is not repaid the loan charge will apply to the £4,000 outstanding balance. If the litigation is decided in HMRC’s favour the AP will not be repaid. There is nothing further to pay under the loan charge as the earlier overlapping liability has been paid in full (see also chapter 5 of this document).

The postponement for Accelerated Payments is provided for by paragraph 21 of Part 2 of the draft schedule in Annex A.

Operational implementation

37. HMRC will consider if there should be any notification, or reporting, requirements to ensure the loan charge is applied as intended.

Interaction with settlements

38. As also set out in chapter 5 of the technical note, the loan charge will not apply where income tax has been paid on a DR loan, or on the money from which the DR loan was made. This is provided for by the new double taxation provisions that are outlined in chapter 5 of this document. This includes cases where DR loans have been included in a settlement reached with HMRC.

39. Generally, where a DR loan hasn’t been included in a settlement, and tax hasn’t

been paid on it, the loan charge will apply.

40. However, there are some cases where this does not apply due to the details of the terms on which those settlements were reached. For example, this is the case for those who settled on the terms offered as part of HMRC’s “Contractor Loans Settlement Opportunity”.

41. This means that where one of those individuals has had an offer of settlement

accepted by HMRC on one or more loans from a DR scheme on such terms, the loan charge will not apply to those loans, or to any earlier DR loans implicitly covered by that settlement as a result of those terms.

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5. Additional technical details

Double taxation

1. As mentioned in chapter 6 of the technical note, there will be many cases where a Part 7A charge, such as the new loan charge, will apply to money or assets which have already been subject to an earlier income tax charge.

2. The current legislation in Part 7A, along with the associated transitional rules in

Schedule 2 to Finance Act 2011, offers some protection against double taxation in certain cases. However, in other cases the current legislation is silent about how double taxation should be addressed.

3. The draft legislation being consulted on creates two new provisions to further protect

against double taxation in situations not catered for in the current rules.

Relief where the earlier charge has been paid

4. The first of these provisions will apply in cases when a Part 7A charge arises on an amount that has already been subject to an income tax charge. Where this happens the amount subject to the Part 7A charge will be reduced by the amount that was subject to the earlier charge.

Example 5.1: £10,000 is contributed to a trust for an employee ‘A’, and income tax is reported and paid through PAYE on the basis that it was earnings of ‘A’. After the tax has been paid, ‘A’ then receives a loan of £8,000 from the trust, paid for out of the contribution. Normally the £8,000 loan would be taxable under Part 7A as it is a relevant step. However, because ‘A’s employer has already paid income tax on the whole of the £8,000, the value of the relevant step is reduced to nil, and no Part 7A liability is payable.

5. However, this will not apply in cases where, at the time the Part 7A charge arises,

tax is due on the earlier charge but hasn’t been paid.

Example 5.2: £10,000 is contributed to a trust for an employee ‘A’. However, before the relevant PAYE deadline for ‘A’s employer to pay tax on that amount, ‘A’ receives a loan of £8,000 from the trust, paid for out of the contribution. Because the tax on the £10,000 was not due at the time the loan was made the new provision still applies and there is no Part 7A charge to pay on the loan.

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However, if, later, tax wasn’t paid on the £10,000 contribution then HMRC would pursue that tax through normal compliance procedures.

Example 5.3: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. The tax is still unpaid at a later date when ‘A’ receives a loan of £8,000 from the trust, paid for out of the contribution. As tax was due, but has not been paid at the time of the loan the new provision does not apply and a Part 7A charge arises.

6. As mentioned in chapter 2 of this document, this provision will also apply in relation

to the loan charge where a loan has previously been written off and taxed in full under section 188 of ITEPA 2003.

Example 5.4: Employee ‘A’ had a loan from a DR scheme in 2009. In 2015 the loan was written off and tax was paid on the whole of the loan amount under section 188 ITEPA 2003. On 5 April 2019 the new loan charge comes into force. As the loan charge is a Part 7A charge, and income tax has already been paid on ‘A’s loan, the amount of the loan subject to the new loan charge will be reduced to nil, and so there will be no tax to pay on the loan in 2019.

7. If, before the Part 7A charge arises, the customer has reached an agreement with

HMRC to pay the earlier liability (for example, a time to pay agreement) then they will be treated for the purposes of the provision in the same way as if the tax had actually been paid.

Example 5.5: £10,000 is contributed to a trust for employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. HMRC carries out a compliance check on ‘A’s employer, who agrees that tax was due on the contribution amount. However, ‘A’s employer cannot pay the tax due immediately, and so reaches an agreement with HMRC to pay the tax in instalments over the next 12 months. 3 months after the arrangement begins, ‘A’ receives a loan of £8,000 from the trust, paid for out of the contribution. Because an agreement has been reached with HMRC for tax to be paid on the contribution, the new provision will apply and there is no Part 7A charge to pay on the loan.

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The relief where the earlier charge has been paid is provided for by the new section 554Z5, introduced by paragraph 11 of the draft schedule in Annex A.

Relief where the earlier charge has not been paid

8. The second new double taxation provision will only be considered where the first provision, described above, doesn’t already remove the double taxation. The second provision will apply where:

● a Part 7A charge applies to an amount which has been subject to an earlier income tax liability;

● before the Part 7A charge arises the earlier liability was due, but had not been paid; and

● the customer then pays either the tax due from the Part 7A charge or the earlier income tax liability.

9. The provision works by treating a payment of one of the two liabilities as also being a

payment on account of the other liability. In other words, broadly, both charges remain in place, but a payment towards one charge is treated as a payment towards both.

Example 5.6: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. ‘A’s marginal tax rate at the time the contribution was made was 40%, and so £4,000 of income tax is due on the contribution. The income tax is still unpaid at a later date when ‘A’ receives a loan of £10,000 from the trust, paid for out of the contribution, and so a tax charge on the loan arises under Part 7A. ‘A’s marginal tax rate at the time the loan was made was also 40%, and so £4,000 is due on the loan. ‘A’s employer pays the £4,000 income tax due on the loan. The new provision then treats this as also being a payment on account of £4,000 against the income tax on the contribution, and so there is no further income tax to pay.

10. Where the two liabilities only partially overlap with each other the double taxation

provision only applies to the overlapping part of each liability.

Example 5.7: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. ‘A’s marginal tax rate at the time the contribution was made was 40%, and so £4,000 of income tax is due on the contribution. The income tax is still unpaid at a later date when ‘A’ receives a loan of £8,000 from the trust, paid for out of the contribution, and so a tax charge on the loan

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arises under Part 7A. ‘A’s marginal tax rate at the time the loan was made was 50%, and so £4,000 is also due on the loan. ‘A’s employer pays the £4,000 income tax due on the loan. The new provision then treats this as also being a payment on account of up to £4,000 against the income tax on the part of the contribution that overlaps with the loan. However, since the loan was only from £8,000 of the contribution, the payment on account can only be set against the £3,200 (£8,000 x 40%) tax due on that part of the contribution. This means that ‘A’s employer still owes £800 in tax on the original contribution.

11. Where paying one of the liabilities gives rise to a payment on account which is larger

than the other liability any excess will be set against any associated late payment interest. If there is still an excess after all late payment interest has been paid then the remainder of the payment on account goes unused – it may not be repaid to the scheme user or used to meet a different income tax liability.

Example 5.8: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. ‘A’s marginal tax rate at the time the contribution was made was 40%, and so £4,000 of income tax is due on the contribution. £400 of late payment interest has also accrued on the unpaid tax. The income tax is still unpaid at a later date when ‘A’ receives a loan of £10,000 from the trust, paid for out of the contribution, and so a tax charge on the loan arises under Part 7A. ‘A’s marginal tax rate at the time the loan was made was 45%, and so £4,500 is due on the loan. ‘A’s employer pays the £4,500 income tax due on the loan. The new provision then treats this as also being a payment on account of up to £4,500 against the income tax on the contribution, and so there is no further income tax to pay. However, because the tax due on the contribution was only £4,000 there is £500 left of the payment on account. This may then be used to pay the late payment interest of £400, meaning that there is also no further late payment interest to pay. The remaining £100 of the payment on account cannot be used.

12. If, on the other hand, the payment on account is less than the amount of the other

charge then any excess, along with any late payment interest due, will still be payable.

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Example 5.9: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. ‘A’s marginal tax rate at the time the contribution was made was 40%, and so £4,000 of income tax is due on the contribution. The income tax is still unpaid at a later date when ‘A’ receives a loan of £10,000 from the trust, paid for out of the contribution, and so a tax charge on the loan arises under Part 7A. ‘A’s marginal tax rate at the time the loan was made was also 45%, and so £4,500 is due on the loan. ‘A’s employer decides to settle their original liability with HMRC and pays the £4,000 income tax due on the original contribution. The new provision then treats this as also being a payment on account of £4,000 against the income tax on the loan. However, because the tax due on the loan was £4,500 ‘A’s employer still owes a further £500 of income tax on the loan, plus any late payment interest that has accrued on that amount.

13. This second provision is designed to prevent double taxation while at the same time

stopping those who have used tax avoidance arrangements from being better off just because they have incurred a later Part 7A charge. As a result it takes a different approach from many other double taxation provisions. Therefore views from interested stakeholders would be particularly welcome about whether they think this draft provision works as intended.

14. Additional provisions will be added in the final version of the legislation to address cases where more than one earlier income tax liability overlaps with the same later Part 7A charge. Question 5.1 - Are there any circumstances in which the second double taxation provision described above would give rise to anomalous or unfair results? Question 5.2 - Are there any cases where there might be double taxation involving Part 7A which are not prevented either by the two new provisions described above, or by existing double taxation provisions? Question 5.3 – Does the draft legislation for the second new double taxation provision described above work as intended? The relief where the earlier charge has not been paid is provided for by the new sections 554Z12A, 554Z12B and 554Z12C, introduced by paragraphs 12 of the draft schedule in Annex A.

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Interaction with beneficial loans

15. In many cases the loans made as part of a DR scheme are interest free or attract a very low rate of interest. In some such cases a charge on the benefit in kind (BiK) of the loan having a low rate of interest will have been paid. Such loans are often referred to as ‘beneficial loans’ and more information can be found in the employment income manual from EIM26100 onwards.

16. This BiK charge is not a charge on the amount of the loan itself - it is a charge on the

benefit of the loan being a beneficial loan - i.e. that there is little or no interest to pay on it. Therefore if such a loan is later taxed under Part 7A there is no double taxation, since the Part 7A charge relates to the loan amount itself, whereas the BiK charge relates to the fact that the loan is a beneficial loan.

17. As there is no double taxation, no relief is given where a loan is taxed under Part 7A

for any BiK charge that has been paid in relation to that loan. This is the position under the current rules, will continue to be the case.

18. However, the current rules already provide that where the making of a loan gives rise

to a Part 7A charge it is no longer treated as a beneficial loan, and so no further BiK charge will arise on the loan after that point. This will also be extended to cases where the loan charge arises on a loan, so after that point it will no longer be treated as a beneficial loan.

Example 5.10: An employee ‘A’ received an interest free loan of £10,000 from a DR scheme and pays tax on it as a beneficial loan each year. By 5 April 2019 ‘A’ has paid £1,000 in tax on the loan as a BiK. The loan is still outstanding on 5 April 2019 and has not been taxed as income. Therefore the loan charge applies to the full £10,000 of the loan, and no relief is given for the tax on the BiK already paid. However, even if the loan continues to be outstanding after 5 April 2019 ‘A’ will not have to pay any further tax on the loan as a BiK.

NICs and double taxation

19. The first of the two double taxation provisions outlined above essentially prevent a Part 7A charge from arising on an amount where income tax has already been paid on it.

20. Where a Part 7A charge does arise there is also a corresponding NICs charge. The

NICs charge depends on the Part 7A charge arising - i.e. where there is no tax charge under Part 7A there is no equivalent NICs charge. This also applies to the new loan charge.

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21. Therefore where only an income tax liability (and no NICs liability) arises and has been paid on an amount which is later subject to Part 7A it will still be the case that neither a Part 7A liability nor a corresponding NICs liability will arise on that amount.

22. For example, some settlements for individuals who have used certain DR schemes

have been reached with HMRC on the grounds that income tax was due under the ‘transfer of assets abroad’ rules in chapter 2, Part 13 of the Income Tax Act 2007. In those cases the settlements usually only required income tax to be paid, not NICs.

23. However, since an income tax charge on those loans has been paid under the new

double taxation provision no future Part 7A charge will arise on the amounts included in those settlements, which also means that no corresponding NICs charge will arise on those amounts. This will also be the case where the Part 7A charge is the new loan charge.

Interaction with Accelerated Payments

24. The second double taxation provision outlined above is only triggered when one of the two outstanding liabilities is paid and final. However, in some cases where the earlier liability is disputed an AP may have been paid.

25. It is not the government’s intention to require those who have paid an AP liability to

then have to pay a later Part 7A charge in full if it relates to the same underlying money or asset. To prevent this, HMRC will allow those who have paid an AP which overlaps with a later Part 7A charge to use the AP to meet the Part 7A charge instead.

26. However, where an AP liability has been used to meet a later Part 7A liability in this

way it will no longer be available to be repaid should the dispute be decided in favour of the scheme user.

Example 5.11: £10,000 is contributed to a trust for an employee ‘A’. The PAYE deadline for paying tax on the contribution passes, but the income tax is not paid. ‘A’s marginal tax rate at the time the contribution was made was 40%, and so £4,000 of income tax is due on the contribution. However, ‘A’s employer disputes the liability and appeals against HMRC’s determinations. HMRC issues ‘A’s employer with an APN, requiring them to pay the £4,000, which they do. The appeal has still not been decided at a later date when ‘A’ receives a loan of £10,000 from the trust, paid for out of the contribution, and so a tax charge on the loan arises under Part 7A. ‘A’s marginal tax rate at the time the loan was made was also 40%, and so £4,000 is due on the loan. ‘A’s employer opts to use the £4,000 that they paid in response to their APN to pay the £4,000 income tax due on the loan.

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If the appeal is later decided in HMRC’s favour, then the new provision will treat the payment of the income tax due on the loan as also being a payment on account of £4,000 against the income tax on the contribution, and so ‘A’s employer will have nothing further to pay. If, however, the appeal is later decided in favour of ‘A’s employer then the new provision doesn’t apply (since there was no earlier liability to cause double taxation). However, ‘A’s employer will not be repaid the AP as it has been used to meet the Part 7A income tax liability on the loan.

27. The process set out above would require the person who paid the AP to actively opt

for it to be used be used to meet the Part 7A charge instead. Question 5.4 - Should affected scheme users be given the choice of whether to set their AP against an overlapping Part 7A charge? Or should the amount automatically be used in payment of the later charge? This interaction has not been provided for in the draft legislation accompanying this consultation. However, HMRC is continuing to work on this and expects to publish any legislation required for this change as part of the draft Finance Bill.

Other interactions

28. HMRC is aware that there are also potential charges and interactions between the changes provided for in the draft legislation being consulted on and other areas of the tax code, for example:

● the tax charge on employers paying the income tax in respect of Part 7A liabilities under section 222 ITEPA 2003; and

● interactions with inheritance tax. Question 5.5 - Are there any other interactions between the changes set out in this document and other areas of the tax system that are of particular concern?

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6. Similar avoidance schemes

1. As set out in chapter 7 of the technical note, there are other DR schemes that do not currently fall within Part 7A but have the same objective. The government will introduce changes to put beyond doubt that any attempts to insert arrangements to disguise remuneration or rewards for services do not work.

Outline of DR schemes involving self-employed earnings

2. These arrangements can take a number of forms. Some involve individuals who are already self-employed or who are entering self-employment as part of the arrangements that are put in place. Additionally, there are arrangements where individuals provide their services via a partnership (including a Limited Liability Partnership) of which they are, or become, a member.

3. In the normal course of events, self-employed individuals engage with a customer to provide services, by way of a contract for services, for an agreed fee over an agreed period or by reference to a specific piece of work. The full amount of the income earned from this provision of services is chargeable to income tax and NICs based on the provisions, primarily, of Part 2 of ITTOIA 2005.

4. The majority of DR arrangements that seek to avoid a charge to tax and NICs focus on depressing the income of the trade by some method of diversion of the monies earned from the provision of the individual’s services, so that the amount taxable on the individual is claimed to be less than it would otherwise be.

5. The monies diverted are then received by the individual through a variety of methods so that they purportedly lose the character of income from the business and are received as loans or some other form of non-taxable amount. The provision of these loans and other amounts has many similarities with the arrangements addressed by Part 7A.

6. In addition, there are also arrangements where deductions are claimed from the profits of the business for expenses purportedly incurred wholly and exclusively for the purposes of the trade. No actual expense of the trade is defrayed by the expenditure, and as with the arrangements above, the amounts that are claimed as deductions are often returned and received by the individual in the form of a loan or in some other way. There are variations of this type of arrangement involving repetitions of the steps in order to justify a larger expense.

7. In summary, all of the arrangements described above aim to reduce the income that should be charged to tax on the self-employed individual, depriving the Exchequer of the income tax and NICs that ordinarily flow from the profits earned.

8. The government’s view is that these schemes do not work and HMRC will challenge them rigorously. Nonetheless, the government will put beyond doubt that these schemes do not work and ensure users pay their fair share of tax and NICs.

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9. Therefore, legislation will be introduced in Finance Bill 2017 to ensure the full amount of income that derives from the services provided is brought into charge for income tax and NICs.

Tackling the continued use

10. As described above, the arrangements seek to reduce the chargeable income of the individual that is derived from the services they provide to the end customer. The government proposes legislation that will therefore look through the various contrived arrangements to consider the substance of the transactions.

11. The intention is to ensure that whatever steps or actions are taken between the actual provision of the services and the eventual receipt of the payment, these steps or actions are ignored for tax purposes. To reduce any risk that promoters will continue to market the schemes, the government proposes to introduce a broad rule, without any “main purpose” tax avoidance test.

12. One way of achieving this could be as follows:

There are arrangements in place under which an individual M performs services as a sole trader, or member of a partnership;

it is reasonable to assume that directly, or indirectly, in consequence of, or otherwise in connection with, those arrangements payments, or other sums, (“the relevant payment”) arise, or accrue, to a person other than M; and

M or a connected person receives a payment, or other benefit, (including a payment by way of loan or the meeting of any obligation) which it is reasonable to assume derives (wholly or in part, and directly or indirectly) from the relevant payment.

13. This proposal will provide that the relevant payment is (if not otherwise charged to

tax as income) to be treated as profits of a trade carried on by M that arise to M at the time that M, or the connected person, receives the payment or other benefit.

14. The government recognises that a broad set of conditions set out in this way may bring some genuine commercial arrangements into scope. The government would therefore like to hear what concerns might arise, with examples if possible, and any proposals to mitigate any potential unforeseen impacts. Question 6.1 - Are there any arrangements that could be caught by this proposal that the government should consider excluding? Question 6.2 - Are there any additional criteria, or conditions, the government should consider to ensure that the proposal is targeted at schemes involving self-employed earnings? Question 6.3 – Is there another approach the government should consider in attempting to tackle schemes involving self-employed earnings?

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The draft legislation in Annex A does not include provisions for these proposals.

Tackling the historic use

15. The change detailed above will only tackle the continued use of these arrangements. In order to tackle the historic use of these schemes the government proposes to introduce legislation that broadly mirrors the loan charge for DR schemes that fall within Part 7A described in chapter 4 of this document.

16. This will create a charge under Part 2 of ITTOIA 2005 where:

a loan has been made to a self-employed individual before the changes in Finance Bill 2017 come into force;

the same loan would have been taxable under the new rules had it been made after the proposed amendments in Finance Bill 2017; and

all, or part of, the loan remains outstanding on 5 April 2019.

17. As with the prospective change, the government is concerned to ensure that loans or other outstanding debts that should not be within the scope of this rule are excluded, and that there is no double taxation.

18. It is also proposed that the charge may be postponed where an AP has been paid in certain cases, as set out in Chapter 4 of this document. Question 6.4 - Are there any circumstances where this measure could lead to double taxation on the same profits of a trade? Question 6.5 - Are there any loans or other similar amounts that should not be affected by this proposal? The draft legislation in Annex A does not include provisions for these proposals.

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7. Summary of Consultation Questions Question 2.1 - Are there any other transactions or arrangements which the government should consider excluding from the new loan transfer rules? Question 2.2 - Are there any other transactions or arrangements which the government should consider excluding from the close companies’ gateway? Question 2.3 - Are there any additional criteria or conditions the government should consider to ensure that the close companies’ gateway is targeted at DR schemes? Question 2.4 - Are there any other instances of double taxation that the government should consider? Question 2.5 - The proposal is that employment taxes must be paid at the time the contribution is made. Will this affect arrangements, or transactions, that are not part of DR schemes which the government should consider excepting? Question 2.6 - Will the requirement for employment taxes to be paid at the time of the contribution cause any problems? Should there be a reasonable period of time before the employment taxes have to be paid, and if so how long should that be? Question 2.7 - Are there other approaches to deductions the government should consider in attempting to discourage the use of DR schemes? Question 3.1 - Do the proposals include sufficient safeguards to ensure the liability is not transferred in inappropriate circumstances? Question 3.2 - Are there any other circumstances in which a Part 7A liability should be transferred from the employer to the employee? Question 4.1 - Are there any additional criteria or conditions the government should consider to ensure the close companies’ gateway is targeted only at DR schemes? Question 4.2 - Are there any arrangements that could be caught by these anti-avoidance provisions that the government should consider excluding? Question 4.3 - Are there any additional criteria or conditions the government should consider to ensure the anti-avoidance provisions prevent attempts to circumvent the loan charge? Question 4.4 - Are there further types of loan which the government should consider allowing to qualify for postponement?

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Question 4.5 - Are there are any practical issues with the application process for postponement approval described above? Question 5.1 - Are there any circumstances in which the second double taxation provision described above would give rise to anomalous or unfair results? Question 5.2 - Are there any cases where there might be double taxation involving Part 7A which are not prevented either by the two new provisions described above, or by existing double taxation provisions? Question 5.3 - Does the draft legislation for the second new double taxation provision described above work as intended? Question 5.4 - Should affected scheme users be given the choice of whether to set their AP against an overlapping Part 7A charge? Or should the amount automatically be used in payment of the later charge? Question 5.5 - Are there any other interactions between the changes set out in this document and other areas of the tax system that are of particular concern? Question 6.1 - Are there any arrangements that could be caught by this proposal that the government should consider excluding? Question 6.2 - Are there any additional criteria, or conditions, the government should consider to ensure that the proposal is targeted at schemes involving self-employed earnings? Question 6.3 - Is there another approach the government should consider in attempting to tackle schemes involving self-employed earnings? Question 6.4 - Are there any circumstances where this measure could lead to double taxation on the same profits of a trade? Question 6.5 - Are there any loans or other similar amounts that should not be affected by this proposal?

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8. The Consultation Process This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for

implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

This consultation is taking place during stage 3 of the process. The purpose of the consultation is to seek views on draft legislation in order to confirm, as far as possible, that it will achieve the intended policy effect with no unintended effects.

How to respond A summary of the questions in this consultation is included at chapter 7. Responses should be sent by 5 October 2016, by e-mail to employmentincome.policy@hmrc.gsi.gov.uk or by post to: HM Revenue and Customs Employment Income Policy Team Room 1E/08, 100 Parliament Street London SW1A 2BQ If you have any queries on the consultation, please contact Tim Smith on tel: 03000 514 178; or e-mail: employmentincome.policy@hmrc.gsi.gov.uk. The consultation will run for 8 weeks from 10 August 2016. Please do not send consultation responses to the Consultation Coordinator. Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from HMRC’s GOV.UK pages. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations. When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

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Confidentiality Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004. If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentially can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs (HMRC). HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

Consultation Principles This consultation is being run in accordance with the Government’s Consultation Principles. The Consultation Principles are available on the Cabinet Office website: http://www.cabinetoffice.gov.uk/resource-library/consultation-principles-guidance If you have any comments or complaints about the consultation process please contact: John Pay, Consultation Coordinator, Budget Team, HM Revenue & Customs, 100 Parliament Street, London, SW1A 2BQ. Email: hmrc-consultation.co-ordinator@hmrc.gsi.gov.ukmailto:hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk mailto:hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk Please do not send responses to the consultation to this address.

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Annex A: Draft legislation

SCHEDULE 1

EMPLOYMENT INCOME PROVIDED THROUGH THIRD PARTIES

PART 1

AMENDMENTS TO ITEPA 2003

Introductory

1 Part 7A of ITEPA 2003 (employment income provided through third parties) is amended as follows.

Close companies

2 After section 554A (application of Chapter 2) insert—

“554AA Application of Chapter 2: close companies

(1) Chapter 2 applies if—

(a) an individual (“A”) has a qualifying connection with a close company (“B”),

(b) there is an arrangement (“the relevant arrangement”)—

(i) to which A is a party or which otherwise (wholly or partly) covers or relates to A, and

(ii) which is facilitated by B, or to which B is a party,

(c) it is reasonable to suppose that, in essence—

(i) the relevant arrangement, or

(ii) the relevant arrangement so far as it covers or relates to A, is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, A-linked payments or benefits or loans,

(d) a relevant step is taken by a relevant third person, and

(e) it is reasonable to suppose that, in essence—

(i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or

(ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.

(2) A has a “qualifying connection” with B if—

(a) A is—

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(i) a director, or a former director, of B, or

(ii) an employee, or a former employee, of B, and

(b) A has, or at any time has had, a material interest in B.

(3) Subject to subsection (6), section 68 (meaning of “material interest” in a company) applies for the purposes of this section as it applies for the purposes of the benefits code.

(4) For the purposes of subsection (1)(c), a payment or benefit or loan is “A-linked” if—

(a) it is being provided to A, or

(b) it is being provided to a person linked with A and it is reasonable to suppose that the main reason, or one of the main reasons, for it being provided is that the person is linked with A.

(5) In this section “close company” includes a company that would be a close company but for section 442(a) of CTA 2010 (exclusion of companies not resident in the United Kingdom).

(6) In section 68 as it applies for the purposes of this section, “participator”—

(a) in relation to a close company, means a person who is a participator in relation to the company for the purposes of section 455 of CTA 2010 (see sections 454 and 455(5) of that Act), and

(b) in relation to a company which would be a close company if it were a UK resident company, means a person who would be such a participator if the company were a close company.

(7) “Relevant step” has the meaning given by section 554A(2).

554AB Section 554AA: supplementary

(1) Section 554AA(1) is subject to subsection (2) and sections 554E to

554Y.

(2) Chapter 2 does not apply by reason of a relevant step taken on or after A’s death if—

(a) the relevant step is within section 554B, or

(b) the relevant step is within section 554C by virtue of subsection (1)(aa) to (ac) of that section.

(3) In section 554AA(1)(b) and (c) references to A include references to a person linked with A.

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(4) For the purposes of section 554AA(1)(c) it does not matter if the relevant arrangement does not include details of the steps which will or may be taken in connection with providing, in essence, payments or benefits or loans as mentioned (for example, details of any sums of money or assets which will or may be involved or details of how or when or by whom or in whose favour any step will or may be taken).

(5) In section 554AA(1)(d) “relevant third person” means—

(a) A acting as a trustee,

(b) B acting as a trustee, or

(c) any person other than A or B.

(6) If B is a member of a group of companies at the time the relevant step is taken, in subsection (5) references to B are to be read as including references to any other company which is a member of that group at that time.

(7) Subsection (6) does not apply if there is a connection (direct or indirect) between the relevant step and a tax avoidance arrangement.

(8) For the purposes of section 554AA(1)(e)—

(a) the relevant step is connected with the relevant arrangement if (for example) the relevant step is taken (wholly or partly) in pursuance of an arrangement at one end of a series of arrangements with the relevant arrangement being at the other end, and

(b) it does not matter if the person taking the relevant step is unaware of the relevant arrangement.

(9) For the purposes of section 554AA(1)(c) and (e) in particular, all relevant circumstances are to be taken into account in order to get to the essence of the matter.

554AC Section 554AA: meaning of “director”

(1) For the purposes of section 554AA(2) “director” means—

(a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body,

(b) in relation to a company whose affairs are managed by a single director or similar person, that director or person, and

(c) in relation to a company whose affairs are managed by the members themselves, a member of the company, and includes any person in accordance with whose directions or instructions the directors of the company (as defined in this subsection) are accustomed to act.

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(2) For the purposes of subsection (1) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity.

(3) For the purposes of section 5 as it applies to this Part, a person who is a director within the meaning of subsection (1) is to be treated (where it would not otherwise be the case) as holding an office.”

3 In the heading of section 554A, at the end insert “: main case”.

4 In section 554Z(2) (interpretation: “A” and “B”) at the end insert “or, as the case may be, section 554AA(1)(a)”.

Loans: transferring, releasing or writing off

5 (1) Section 554C (relevant steps: payment of sum, transfer of asset etc.) is amended as follows.

(2) In subsection (1), after paragraph (a) insert—

“(aa) acquires a right to payment of an amount equal to the whole or part of a payment made, by way of a loan or otherwise, to a relevant person,

(ab) acquires a right to payment by way of a transfer of assets, where the market value of the assets at the time the right is acquired (or the value of the right at that time if the assets are non-fungible and not in existence at that time) is equal to the whole or part of a payment made, by way of a loan or otherwise, to a relevant person,

(ac) releases or writes off the whole or a part of—

(i) a loan made to a relevant person, or

(ii) an acquired debt of the kind mentioned in paragraph (aa) or (ab),”.

(3) After subsection (3) insert—

“(3A) For the purposes of subsection (1) “loan” includes—

(a) any form of credit, and

(b) a payment that is purported to be made by way of a loan.”

6 In section 554A(4) (application of Chapter 2 where relevant step taken on or after A’s death)—

(a) omit “within section 554B”, and

(b) at the end insert “if—

(a) the relevant step is within section 554B, or

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(b) the relevant step is within section 554C by virtue of subsection (1)(aa) to (ac) of that section.”

7 After section 554O insert—

“554OA Exclusions: transfer of employment-related loans

(1) Chapter 2 does not apply by reason of a relevant step taken by a person (“P”) if—

(a) the step is acquiring a right to payment of an amount equal to the whole or part of a payment made by way of a loan to a relevant person (the “borrower”),

(b) the loan, at the time it was made, was an employment-related loan, and

(c) at the time the relevant step is taken, the borrower is an employee, or a prospective employee, of P.

(2) In subsection (1) “employment-related loan” has the same meaning as it has for the purposes of Chapter 7 of Part 3.”

8 In section 554Z(10)(b) (interpretation: relevant step which involves a sum of money), after “section 554C(1)(a)” insert “to (ac)”.

9 In section 554Z12(1) (relevant step taken after A’s death etc.), after “554C” insert “, by virtue of subsection (1)(a) or (b) to (e) of that section,”.

Double taxation

10 In section 554Z2 (value of relevant step to count as employment income), after subsection (1) insert—

“(1AA) But subsection (1) does not apply where—

(a) this Chapter applies only by reason of section 554AA (close companies),

(b) the relevant step is a step within section 554B, 554C or 554D, and

(c) the relevant step gives rise to a charge to tax under either—

(i) section 455 of CTA 2010 by virtue of section 459 of that Act (loans treated as made to participator), or

(ii) section 415 of ITTOIA 2005 (release of loan to participator in a close company).”

11 For section 554Z5 (overlap with earlier relevant step) substitute—

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“554Z5 Overlap with money or asset subject to earlier tax liability

(1) This section applies if there is overlap between—

(a) the sum of money or asset (“sum or asset P”) which is the subject of the relevant step, and

(b) a sum of money or asset (“sum or asset Q”) by reference to which, on an occasion that occurred before the relevant step is taken, A became subject to a liability for income tax (“the earlier tax liability”).

(2) But this section does not apply where—

(a) the earlier tax liability arose by reason of a relevant step within section 554B taken in a tax year before 6 April 2011, and

(b) the value of the relevant step is (or if large enough would be) reduced under paragraph 59 of Schedule 2 to FA 2011.

(3) Where either the payment condition or the liability condition is met, the value of the relevant step is reduced (but not below nil) by an amount equal to so much of the sum of money, or (as the case may be) the value of so much of the asset, as is within the overlap.

(4) The payment condition is that, at the time the relevant step is taken—

(a) the earlier tax liability has become due and payable, and

(b) either—

(i) it has been paid in full, or

(ii) the person liable for the earlier tax liability has agreed terms with an officer of Revenue and Customs for the discharge of that liability.

(5) The liability condition is that, at the time the relevant step is taken, the earlier tax liability is not yet due and payable.

(6) For the purposes of this section there is overlap between sum or asset P and sum or asset Q so far as it is just and reasonable to conclude that—

(a) they are the same sum of money or asset, or

(b) sum or asset P directly, or indirectly, represents sum or asset Q.

(7) Subsection (8) applies where the earlier tax liability arose by virtue of the application of this Chapter by reason of an earlier relevant step (the “earlier relevant step”).

(8) If any reductions were made under this section to the value of the earlier relevant step, sum or asset P is treated as overlapping with any other sum of money or asset so far as the other sum of money or asset

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was treated as overlapping with sum or asset Q for the purposes of this section.

(9) In subsection (1)(b)—

(a) the reference to A includes a reference to any person linked with A, and

(b) the reference to a liability for income tax does not include a reference to a liability for income tax arising by reason of section 175 (benefit of taxable cheap loan treated as earnings).

(10) In subsection (3) the reference to the value of the relevant step is a reference to that value—

(a) after any reductions made to it under section 554Z4, this section or 554Z7, but

(b) before any reductions made to it under section 554Z6 or 554Z8.

(11) For the purposes of subsection (4)(b)(i) a person is not to be regarded as having paid any tax by reason only of making—

(a) a payment on account of income tax,

(b) a payment that is treated as a payment on account under section 223(3) of FA 2014 (accelerated payments), or

(c) a payment pending determination of an appeal made in accordance with section 55 of TMA 1970.”

12 After section 554Z12 insert—

“554Z12A Earlier income tax liability: application of section 554Z12B

(1) Section 554Z12B applies if the conditions in subsection (2) and (3) are met.

(2) The first condition is that there is overlap between—

(a) the sum of money or asset (“sum or asset P”) which is the subject of the relevant step, and

(b) a sum of money or asset (“sum or asset Q”) by reference to which, on an occasion that occurred before the relevant step is taken, A became subject to a liability for income tax (“the earlier tax liability”).

(3) The second condition is that at the time the relevant step is taken—

(a) an amount is payable by a person (the “liable person”) in respect of the earlier tax liability, but the whole or part of that amount is unpaid and not otherwise accounted for, and

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(b) the liable person has not agreed any terms with an officer of Revenue and Customs for the discharge of the earlier tax liability.

(4) For the purposes of this section there is overlap between sum or asset P and sum or asset Q so far as it is just and reasonable to conclude that—

(a) they are the same sum of money or asset, or

(b) sum or asset P directly, or indirectly, represents sum or asset

(5) In subsection (2)(b)—

(a) the reference to A includes a reference to any person linked with A, and

(b) the reference to a liability for income tax does not include a reference to a liability for income tax arising by reason of section 175 (benefit of taxable cheap loan treated as earnings).

554Z12B Earlier income tax liability: treatment of payments

(1) In this section—

(a) “the earlier charge”, in relation to an overlap between sum or asset P and sum or asset Q, means so much of the earlier tax liability as relates to the overlap, and

(b) “the Chapter 2 charge”, in relation to an overlap between sum or asset P and sum or asset Q, means so much of the Chapter 2 tax liability as relates to the overlap.

(2) The amount of a tax liability that relates to the overlap between sum or asset P and sum or asset Q is to be determined on a just and reasonable basis.

(3) Subsection (4) applies where, after the relevant step is taken, an amount (the “earlier charge paid amount”) is paid in respect of all or part of the earlier charge in relation to an overlap.

(4) An amount equal to the earlier charge paid amount is treated as a payment on account of—

(a) the Chapter 2 charge in relation to the overlap, or

(b) if that charge has been paid in full, any late payment interest payable in respect of the charge.

(5) Subsection (6) applies where after the relevant step is taken, an amount (the “Chapter 2 paid amount”) is paid in respect of all or part of the Chapter 2 charge in relation to an overlap.

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(6) An amount equal to the Chapter 2 paid amount is treated as a payment on account of—

(a) the earlier charge in relation to the overlap, or

(b) if the earlier charge has been paid in full, any late payment interest payable in respect of the charge.

(7) In this section—

“late payment interest” means interest payable under—

(a) section 86 of TMA 1970,

(b) section 101 of FA 2009, or

(c) regulation 82 of the Income Tax (Pay As You Earn) Regulations 2003 (S.I. 2003/2682);

“Chapter 2 tax liability” means the liability for income tax arising by virtue of the application of Chapter 2 by reason of the relevant step.

554Z12C Earlier income tax liability: meaning of “paid”

(1) Subsection (2) applies for the purposes of—

(a) section 554Z12A(3)(a), and

(b) section 554Z12B(3), (4)(b), (5) and (6)(b).

(2) A person is not to be regarded as having paid, or otherwise accounted for, any tax by reason only of making—

(a) a payment on account of income tax,

(b) a payment that is treated as a payment on account under section 223(3) of FA 2014 (accelerated payments), or

(c) a payment pending determination of an appeal made in accordance with section 55 of TMA 1970.

(3) The reference in subsection (2)(a) to a payment on account of income tax does not include a reference to a payment treated under section 554Z12B as a payment on account of a tax liability.”

PART 2

LOANS AND QUASI-LOANS OUTSTANDING ON 5 APRIL 2019

Relevant step

13 (1) A person (“P”) is treated as taking a relevant step for the purposes of Part 7A of ITEPA 2003 if—

(a) P has made a loan, or a quasi-loan, to a relevant person,

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(b) the loan or quasi-loan was made on or after 6 April 1999, and

(c) an amount of the loan or quasi-loan is outstanding immediately before the end of 5 April 2019.

(2) P is treated as taking the step immediately before—

(a) the end of the approved repayment date, if the loan is an approved fixed term loan on 5 April 2019, or

(b) the end of 5 April 2019, in any other case.

(3) Where P is treated as taking a relevant step within this paragraph by reason of making a loan or a quasi-loan, references to “the relevant step” in sections 554A(1)(e)(i) and (ii) and 554AA(1)(e)(i) and (ii) of ITEPA 2003 have effect as if they were references to the step of making the loan or, as the case may be, quasi-loan.

(4) For the purposes of section 554Z3(1) of ITEPA 2003 (value of relevant step), the step is to be treated as involving a sum of money equal to the amount of the loan or quasi-loan that is outstanding at the time P is treated as taking the step.

(5) Subsections (2) and (3) of section 554C of ITEPA 2003 (“relevant person”) apply for the purposes of this Part of this Schedule as they apply for the purposes of that section.

(6) Sub-paragraph (1) is subject to paragraph 21 (accelerated payments) and paragraph 22 (double taxation).

Meaning of “loan”, “quasi-loan” and “approved repayment date”

14 (1) In this Part of this Schedule “loan” includes—

(a) any form of credit;

(b) a payment that is purported to be made by way of a loan.

(2) For the purposes of paragraph 13, P makes a “quasi-loan” to a relevant person if (and when) P acquires—

(a) a right to payment of an amount (the “acquired debt amount”) equal to the whole or part of a payment made, by way of a loan or otherwise, to the person, or

(b) a right to payment by way of a transfer of assets, where the market value of the assets at the time the right is acquired (or the value of the right at that time if the assets are non-fungible and not in existence at that time) (the “asset value”) is equal to the whole or part of a payment made, by way of a loan or otherwise, to the person.

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(3) Where a loan or a quasi-loan made by P to a relevant person is replaced, directly or indirectly, by another loan (the “replacement loan”), references in paragraph 13 to the loan are references to the replacement loan.

(4) Where a loan or a quasi-loan made by P to a relevant person is replaced, directly or indirectly, by another quasi-loan (the “replacement quasi-loan”), references in paragraph 13 to the quasi-loan are references to the replacement quasi-loan.

(5) In this Part of this Schedule, “approved repayment date”, in relation to an approved fixed term loan, means the date by which, under the terms of the loan at the time of making the application for approval under paragraph 18, the whole of the loan must be repaid.

Meaning of “outstanding”: loans

15 (1) An amount of a loan is “outstanding” for the purposes of paragraph 13 if the relevant principal amount exceeds the repayment amount.

(2) In sub-paragraph (1) “relevant principal amount”, in relation to a loan, means the total of—

(a) the initial principal amount lent, and

(b) any sums that have become principal under the loan.

(3) In sub-paragraph (1) “repayment amount”, in relation to a loan, means the total of—

(a) the amount of principal under the loan that has been repaid before 17 March 2016, and

(b) payments in money made by the relevant person on or after 17 March 2016 by way of repayment of principal under the loan.

(4) A payment is to be disregarded for the purposes of sub-paragraph (3)(b) if there is any connection (direct or indirect) between the payment and a tax avoidance arrangement (other than the arrangement under which the loan was made).

(5) In this paragraph and in paragraph 16, “tax avoidance arrangement” has the same meaning as it has for the purposes of Part 7A of ITEPA 2003 (see section 554Z(13) to (16) of that Act).

Meaning of “outstanding”: quasi-loans

16 (1) An amount of a quasi-loan is outstanding for the purposes of paragraph 13 if the initial debt amount exceeds the repayment amount.

(2) In sub-paragraph (1) “initial debt amount”—

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(a) in relation to a quasi-loan within paragraph 14(2)(a), means the total of—

(i) the acquired debt amount, and

(ii) where P subsequently acquires a right to a further payment of an amount (the “additional acquired debt amount”) in connection with the payment made, by way of a loan or otherwise, to the relevant person, an amount equal to the additional acquired debt amount;

(b) in relation to a quasi-loan within paragraph 14(2)(b), means the total of—

(i) an amount equal to the asset value, and

(ii) where P subsequently acquires a right to a further payment by way of a transfer of assets (“additional assets”) in connection with the payment made, by way of a loan or otherwise, to the relevant person, an amount equal to the market value of the additional assets at the time the right is acquired (or the value of the right at that time if the additional assets are non-fungible and not in existence at that time).

(3) In sub-paragraph (1) “repayment amount”, in relation to a quasi-loan, means the total of—

(a) the amount (if any) by which the initial debt amount has been reduced (by way of repayment) before 17 March 2016,

(b) payments in money (if any) made by the relevant person on or after 17 March 2016 by way of repayment of the initial debt amount, and

(c) if the quasi-loan is within paragraph 14(2)(b) and a payment has been made by way of a transfer of assets, an amount equal to the market value of the assets at the time of the transfer.

(4) A payment or transfer is to be disregarded for the purposes of subparagraph (3)(b) or (c) if there is any connection (direct or indirect) between the payment or transfer and a tax avoidance arrangement (other than the arrangement under which the quasi-loan was made).

Meaning of “approved fixed term loan”

17 (1) A loan is an “approved fixed term loan” on 5 April 2019 if, at any time on that day, it is a qualifying loan which has been approved by an officer of Revenue and Customs in accordance with paragraph 18.

(2) A loan is a “qualifying loan” if—

(a) the loan was made before 9 December 2010,

(b) the term of the loan cannot exceed 10 years, and

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(c) it is not an excluded loan under sub-paragraph (3).

(3) A loan is an excluded loan if, at any time after the loan was made—

(a) the loan has been replaced, directly or indirectly, by another loan, or

(b) the terms of the loan have been altered so as—

(i) to meet the condition in sub-paragraph (2)(b), or

(ii) to postpone the date by which, under the terms of the loan, the whole of the loan must be repaid.

Approval: application to HMRC

18 (1) The liable person in relation to a qualifying loan may make an application to Her Majesty’s Revenue and Customs for approval of the loan.

(2) An officer of Revenue and Customs may grant such an application if satisfied that, in relation to the loan—

(a) the qualifying payments condition is met (see paragraph 19), or

(b) the commercial terms condition is met (see paragraph 20).

(3) An application may be made—

(a) on or after 1 April 2018, and

(b) before 1 October 2018.

(4) An application for an approval must be made in such form and manner, and contain such information, as may be specified by, or on behalf of, the Commissioners for Her Majesty’s Revenue and Customs.

(5) An officer of Revenue and Customs must notify the applicant of the decision on an application.

(6) In this paragraph “liable person”, in relation to a loan, means the person who is liable for any tax on the value of the relevant step in relation to the loan under paragraph 13.

Approval: qualifying payments condition

19 (1) The qualifying payments condition is met in relation to a qualifying loan if, during the relevant period—

(a) payments have been made to P in respect of the repayment of the principal of the loan, and

(b) the payments have been made at intervals not exceeding 53 weeks.

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(2) The “relevant period” in relation to a loan is the period beginning with the making of the loan and ending with the making of the application.

Approval: commercial terms condition

20 (1) The commercial terms condition is met in relation to a qualifying loan if—

(a) either—

(i) it is reasonable to assume that, had the qualifying loan been made in the ordinary course of a lending business, loans on terms comparable to those of the qualifying loan would have been available to members of the public, or

(ii) the qualifying loan was made in the ordinary course of a lending business; and

(b) the borrower has, in all material respects, complied with the terms of the loan.

(2) For the purposes of sub-paragraph (1), a loan is made in the ordinary course of a lending business if it is made by a person in the ordinary course of a business carried on by the person which includes—

(a) the lending of money, or

(b) the supplying of goods or services on credit.

Accelerated payments

21 (1) Sub-paragraph (3) applies where—

(a) P would (ignoring sub-paragraph (3)) be treated as taking a relevant step within paragraph 13(1) by reason of making a loan, or a quasi-loan, to a relevant person,

(b) an accelerated payment notice, or a partner payment notice, relating to a charge to tax in respect of the loan or quasi-loan (the “accelerated payment notice”) has been given under Chapter 3 of Part 4 of FA 2014,

(c) the relevant person makes a payment (the “accelerated payment”) in respect of the understated or disputed tax to which the notice relates,

(d) the accelerated payment is made on or before the relevant date, and

(e) the amount of the loan or quasi-loan that, at the end of the relevant date, is outstanding for the purposes of paragraph 13 (see paragraphs 15 and 16) is equal to or less than the amount of the accelerated payment.

(2) In sub-paragraph (1) “the relevant date” means—

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(a) the approved repayment date, if the loan is an approved fixed term loan on 5 April 2019, or

(b) 5 April 2019, in any other case.

(3) If P makes a claim to be so treated, P is to be treated—

(a) as taking the relevant step only if the condition in sub-paragraph (4) is met, and

(b) as doing so not at the time given by paragraph 13(2) but immediately before the end of the 30 days beginning with the date on which the condition in sub-paragraph (4) becomes met.

(4) The condition is that, on the withdrawal of the accelerated payment notice or on the determination of an appeal, any part of the accelerated payment is repaid.

Double taxation

22 (1) This paragraph applies where—

(a) a person (“P”) would, apart from this paragraph, be treated as taking a relevant step within paragraph 13(1) by reason of a loan made to a relevant person, and

(b) the loan gives rise to a charge to tax under section 455 of CTA 2010 by virtue of section 459 of that Act (loans treated as made to participators).

(2) Paragraph 13(1) does not apply if, before the end of 5 April 2019, the charge to tax mentioned in sub-paragraph (1)(b)—

(a) has become due and payable, and

(b) is paid in full.

23 (1) Sub-paragraph (2) applies where—

(a) P is treated as taking a relevant step within paragraph 13(1) by reason of a loan made to a relevant person, and

(b) the loan is an employment-related loan (within the meaning of Chapter 7 of Part 3 of ITEPA 2003).

(2) The effect of section 55Z2(2)(a) of ITEPA 2003 (value of relevant step to count as employment income: application of Part 7A instead of the benefits code) is that the loan is not be treated as a taxable cheap loan for the purposes of Chapter 7 of Part 3 of that Act for—

(a) the tax year in which the relevant step is treated as being taken, and

(b) any subsequent tax year.

52

24 In section 554Z2 of ITEPA 2003, at the end insert—

“(4) See paragraph 23 of Schedule 1 to FA 2017 for provision about the effect of subsection (2)(a) in a case in which the relevant step is within paragraph 13(1) of that Schedule.”

Supplementary

25 (1) ITEPA 2003 is amended as follows.

(2) In section 554A(2) (meaning of “relevant step”), after “or 554D” insert “, or paragraph 13 of Schedule 1 to FA 2017”.

(3) In section 554Z(9) (interpretation: reference to definition of “relevant step”), at the end insert “, but see also Part 2 of Schedule 1 to FA 2017”.

(4) In section 554Z(10) (interpretation: relevant step which involves a sum of money) omit “or” at the end of paragraph (b) and after paragraph (c) insert “or,

(d) a step within paragraph 13 of FA 2017.”