Finance (No.2) Bill

Further written evidence submitted by the Institute of Chartered Accountants of England and Wales (ICAEW) (FB04) Finance (No.2) Bill 2017-19 Clauses 11 & 12 and Schedules 1 & 2
Employment income and trading income provided through third parties, alias disguised remuneration loan charge

Submission by ICAEW on 22 December 2017 to House of Commons Public Bill Committee in response to invitation dated 14 December 2017 to "have your say"


1. Please see Appendix 1.


2. We recommend that:

A. the new disguised remuneration (DR) close company gateway (CCG) (in paras 2-8 of Sch 1) should be dropped because it will result in unintended employment tax charges on non-employment related commercial transactions and other benign arrangements outside of HMRC’s stated target;

B. on the information requirements for those liable to the loan charge (in paras 9-11 of Sch 1 and in Sch 2), greater reasonable excuse protection from penalties is needed for employees and traders where the information cannot be obtained despite the contractor having tried their best; and

C. the proposal to transfer the PAYE liability on the loan charge to employees in certain circumstances (in para 12 of Sch 1) needs further consideration in terms of its wider implications.

A CLOSE COMPANY GATEWAY (CCG) (paragraphs 2 to 8 of Sch 1)

The measure

3. This measure creates a new way to tax as employment income benefits from certain arrangements involving third parties derived by close company shareholders as shareholders and not as directors/employees. The charge will arise by creating a new gateway (the CCG) into the disguised remuneration legislation in Part 7A of ITEPA 2003. For more information on the measure see Appendix 2.

Our concerns

4. We are concerned that the charge will apply more widely than intended. The CCG relegates employment to a minor consideration – all that is needed is for the individual to have been an employee or director at some point in the three years before a ‘relevant transaction’. This is not the point at which the taxpayer receives any benefit – that may not happen until 20 or more years after the ‘relevant transaction’, but given this criteria the CCG may be satisfied which would give rise to a tax charge.

5. We believe that this will result in unintended employment tax charges on commercial transactions and other benign arrangements outside of HMRC’s stated target.

6. One prime example of collateral damage is the newly legislated protected trust regime for deemed domiciliaries introduced in F(No2)A 2017 after 2 years of consultation involving both HMT and HMRC.

7. For certain non-domiciliaries settling family companies, the CCG has the potential to trigger a life-changing UK tax charge in scenarios where it is clear that Parliament does not wish to levy tax.

8. What is more, that tax charge would be an employment income tax charge (even in scenarios where it is absolutely clear there has been no avoidance of employment income) and so take on the special territoriality rules that apply to that charge.

9. In the example that we provided to HMRC [1] previously, the CCG could operate to impose an employment tax charge in scenarios where there has been no avoidance of employment income tax and the individual has had no links to the UK for 20 years. Worse still is that this result is arbitrary in the sense that a taxpayer in an identical scenario who serendipitously ceases to be employed at a later date could fall outside the CCG entirely.

10. Levying a UK tax charge on an individual who has been non-UK resident for 20 years is a significant expansion in the scope of UK taxation and we are concerned that this has not been appreciated. There appears to be no underlying principle upon which the UK should be asserting a right to tax. There may be Human Rights implications as a consequence . We have not even considered enforceability.

11. Clearly something is very wrong if the CCG can generate such inappropriate results.

12. At the time of writing a query has been submitted to an ICAEW sub-committee querying whether a commercial arrangement involving an LLP and a partner’s company will be within the scope of the CCG. We are currently investigating but this illustrates another aspect of the collateral damage which does not seem to have been considered.

13. The CCG is incredibly widely drafted and is designed to be very wide. Such width in the drafting works fine for the existing gateway into the DR legislation as that gateway is anchored by the need for there to be employment income tax avoidance. This is a natural and intuitive boundary.

14. The CCG has no such boundary. It is so broad that it spills out across a huge range of transactions. It will need to be considered in any commercial transaction involving sale/purchase of a private company, any succession arrangements involving trusts. Indeed, any transaction involving a close company will need to be measured against the CCG. Even if the CCG does not apply, the administrative task of making sure that it does not apply will have to be undertaken. This is because the risk of getting it wrong could be a life-changing and unexpected tax liability. We note that there is no advance clearance service.

15. This is a significant burden to place on the majority of UK companies (i.e. private, family owned businesses). And yet no mention or reference is made to this in the impact assessment [2] .

Our recommendation

16. We recommend that a better way of taxing value extracted from close companies should be devised and that this measure should be dropped from the Finance Bill .

Suggested amendment

17. Bill page 45, line 1 to page 53, line 20

Delete all of paras 2 to 8.


The measure

18. Contractors whether employed or self employed who are within the scope of the loan charge will be required to provide to HMRC between 6 April 2019 and 30 September 2019 specified information about the loans that they received. For more information on the measure see Appendix 2.

Our concerns

19. Many contractors will be unable to provide the necessary information to HMRC. If the information is more than six years old they may legitimately have disposed of the information. One can expect contractors to ask for bank statements which should give at least some clues as to how much money was borrowed, but banks routinely destroy information after six years as well.

A solution

20. The one party that ought to have the information from which to determine the size of the loans to employees is HMRC as the loans should have been declared on forms P11D. Even where umbrella companies who ran the DR schemes were offshore, they were generally registered for PAYE and so would have submitted forms P11D. This will always give an accurate figure provided that there have been no subsequent movements on the loan account (and there generally will not have been).

Our recommendations

21. We should welcome clarification as to how HMRC proposes to:

· alert contractors in good time to their responsibilities (including the need to contact banks if they have lost the information), and

· deal with cases where the information is simply not available from any source, including themselves (ie HMRC).

22. We should also welcome a ministerial assurance that the contractor will not be liable to a penalty for not providing the specified particulars in cases where:

· the loan is over six years old, and

· the contractor can show that he has asked his bank for statements for the relevant period but the bank is unable to provide them, and

· where the contractor is/was an employee, HMRC is unable to supply the information.


The measure

23. This measure transfers the PAYE liability on the loan charge to the employee when the loan charge applies. This replaces the normal rule that where someone is employed by an offshore employer but is working for another party in the UK, the liability for PAYE rests with the UK party. For more information on the measure see Appendix 2.

Our concerns

24. It is not at all obvious why employees should be made responsible for the failure of employers to pay over the tax at the appropriate time – something that the employers can still correct.

25. Whilst in many cases contractors were well aware of what they were signing up for, in many other cases DR arrangements were missold to contractors, many of whom did not realise that the Isle of Man and Channel Islands, where most of the offshore employers were located, are offshore and outside HMRC’s jurisdiction.

26. Bearing in mind that most of those for whom the contractors were working were large companies or public sector bodies, HMRC would be likely to collect significantly more money by pursuing them, especially in cases, as envisaged in the government’s policy documents, where contractors will be unable to pay without selling their family home or becoming insolvent which is likely to create significant distress.


27. We recommend that further consideration should be given to the wider implications of this measure.

Possible amendment

28. Bill page 59, line 33 to page 60, line 3

Delete all of para 12


As part of our Royal Charter, we have a duty to inform policy in the public interest.

December 2017


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Clauses 11 & 12 and Schedules 1 & 2 are part of a package of proposals announced at Budget 2016 to tackle existing and prevent future use of disguised remuneration (DR) avoidance schemes. Such schemes are (in broad terms) arrangements where employment and trading earnings are routed via a third party and not taxed as earnings.

This legislation will augment sections 554A-554Z21 (Part 7A) ITEPA 2003 ‘Employment income provided through third parties’ which was originally legislated in Finance Act 2011 (FA 2011). It adds to the suite of measures announced at Budget 2016 and legislated in FA 2016, FA 2017 and F(No.2)A 2017.

In broad terms, the legislation in the current Finance Bill relating to employees (clause 11 and Sch 1) and the self employed (clause 12 and Sch 2) has four main objectives:

· Para 1 of Sch 1: To put beyond doubt that charges on contributions to DR schemes can apply under the DR legislation at Part 7A ITEPA regardless of whether such contributions should previously have been taxed as employment income – for detail, see HMRC’s technical notes published on 22 November 2017 and 1 December 2017;

· Paras 2-8 of Sch 1: To introduce a ‘close company gateway’ intended to put beyond doubt when Part 7A applies to the remuneration of owners of close companies – see technical notes published on 13 September 2017 and 1 December;

· Paras 10-11 of Sch 1 for employees and Sch 2 for the self employed: To impose an information requirement on those subject to the loan charge to provide HMRC with specified particulars before 1 October 2019 – see technical notes published on 13 September and 1 December; and

· Para 12 of Sch 1: To amend s689 ITEPA 2003 (which governs from whom HMRC can collect PAYE where there is a non-UK employer) to enable the collection of the tax liability from employees of non-UK employers and from employees who provided services to a UK end client where the non-UK employer is unable to meet the liability or no longer exists – see technical notes published on 13 September and 1 December.

For NIC, the 1 December technical paper links to a draft NIC draft statutory instrument and draft primary legislation to remove NIC liability in prescribed circumstances.

The measure in para 1 of Sch 1 came into force from November 2017 and the other provisions commence in April 2018.


Prepared 10th January 2018