Disguised Remuneration & the 2019 Loan Charge

Tens of thousands of contractors, agency workers and employees used disguised remuneration schemes in the 2000s and 2010s, many after being told the arrangements were legal. The 2019 loan charge was designed to collect the tax HMRC said was always owed, in one year, on the entire outstanding loan. For many people the consequences have been devastating. This guide explains what happened, what the law says and what options remain.

What Are Disguised Remuneration Schemes?

Disguised remuneration (DR) schemes were tax avoidance arrangements promoted from the 1990s onwards, primarily targeting employed individuals, contractors and high earners. The common feature was that money was paid to workers not as salary (which is immediately taxable as earnings) but as “loans” from a trust or other vehicle, with no genuine expectation that the loans would ever be repaid. The worker received cash; the promoter said no income tax or National Insurance Contributions (NICs) was due because the payment was technically a loan.

The arrangements took many forms. Employee benefit trusts (EBTs) were used by companies to route salary payments to employees via a discretionary trust which then “lent” the money to the employee. Contractor loan schemes routed fees through offshore trusts or umbrella vehicles that paid contractors via similar loan mechanisms. Many participants were self-employed professionals, contractors in the IT sector and employees of sports clubs and media companies.

Employee Benefit Trusts and Contractor Loan Schemes

An Employee Benefit Trust (EBT) is a discretionary trust set up by an employer for the benefit of employees. In a legitimate EBT, contributions are used for genuine employee benefits. In the abusive form, salary was contributed to the EBT, the trust then made “loans” to the employee equal to the salary, the employee had the money and the employer claimed a deduction. The loan was rarely repaid and attracted no interest or very low rates.

Contractor loan schemes worked similarly: a contractor’s fees were paid to an offshore trust or limited liability partnership, which lent the money back to the contractor. The contractor paid a small amount as “salary” (taxed) with the remainder as a “loan” (untaxed, on the scheme’s analysis). Many schemes were structured through offshore jurisdictions, Isle of Man, Guernsey, Jersey, to add complexity.

The Rangers FC Case: HMRC v Murray Group Holdings [2017]

The Supreme Court’s decision in HMRC v Murray Group Holdings Ltd [2017] STC 1148 (the Rangers FC case) was the landmark ruling on the legality of EBT arrangements. The case concerned payments made by the Rangers football club to players and executives through an EBT. HMRC argued that the contributions were earnings and taxable; the taxpayers argued they were loans from the trust and not earnings.

The Supreme Court upheld HMRC’s position. Contributions to an EBT which are earmarked for specific employees and which the employee can expect to receive, even via the mechanism of a “loan” from the trust, are “earnings from employment” and subject to income tax and NICs at the point the employee is entitled to receive them. The trust mechanism does not change the character of the payment.

Although Murray Group Holdings concerned a specific EBT structure, its reasoning effectively confirmed HMRC’s long-standing position that most DR loan arrangements did not work, the loans were always earnings and the income tax and NICs were always due.

The 2019 Loan Charge: How It Works

Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), inserted by Finance Act 2017, introduced the loan charge. The charge operates as follows:

• Scope: Any outstanding “disguised remuneration loan” (broadly, a loan from an EBT or similar vehicle that has not been repaid or charged to tax) outstanding at 5 April 2019 is treated as employment income of the individual at that date.
• Single-year bunching: All qualifying loan balances are aggregated and treated as income in the single 2018–19 tax year, regardless of when the loans were made. This “bunching” effect often pushes the income into the highest tax bands.
• Income tax and NICs: The deemed income is subject to income tax and (if the scheme was employment-related) employee and employer NICs.
• Employer liability: Where the scheme was set up by an employer, the employer may also have PAYE and NICs liabilities, though in practice many employer-sponsors are insolvent or no longer trading.

The Morse Review and 2019 Changes

Following significant public concern about the retrospective nature of the charge and a number of suicides attributed in part to the financial pressure, the government commissioned an independent review led by Sir Amyas Morse. The Morse Review, published in December 2019, recommended significant modifications which were enacted in Finance Act 2020:

• Pre-2010 loans excluded where the taxpayer made a “reasonable disclosure” of the arrangement on their return at the time, meaning the loan charge only applies to loans made on or after 9 December 2010 in such cases.
• Spreading the charge: Taxpayers could elect to spread the loan charge income equally across the three tax years 2018–19, 2019–20 and 2020–21, rather than taking the full amount in one year, reducing the bunching effect.
• Refunds: Taxpayers who had already paid the full charge for pre-2010 loans became entitled to refunds.

These changes significantly reduced the scope of the charge for some people, but did not eliminate it for those with loans made from December 2010 onwards.

Who Is Excluded from the Charge

A person is not subject to the loan charge if, before 5 April 2019, they had:

• Fully repaid the loan in cash (not by writing it off or novating it);
• Reached an agreed settlement with HMRC in which the underlying tax liability was accepted and paid; or
• Had an open HMRC enquiry or assessment in respect of the loan that was still outstanding, in which case the underlying enquiry or assessment takes precedence over the loan charge for the years it covers.

The interaction between open enquiries and the loan charge is complex: where HMRC had already raised assessments or opened enquiries for specific years, the loan charge does not apply to those years, instead, the underlying assessment process continues. This means some individuals face both historic assessments for pre-charge years and the loan charge for years not covered by enquiries.

DOTAS and Disclosure Obligations

Most disguised remuneration schemes were notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) regime. Scheme promoters were required to notify HMRC of notifiable arrangements and obtain a Scheme Reference Number (SRN). Participants were required to include the SRN on their tax return. The presence of an SRN on a return put HMRC on notice that a particular scheme was in use, but did not constitute HMRC approval of the scheme.

HMRC used the DOTAS data to identify scheme users systematically. If you used a scheme with a DOTAS SRN and disclosed it on your returns, HMRC has known about it since then. If you were in a scheme but did not disclose the SRN (perhaps because you did not know it was required), that can be an aggravating factor in any penalty assessment.

Settlement and the DR Settlement Opportunity

HMRC ran a number of settlement campaigns for DR scheme users, most recently the Disguised Remuneration Settlement Opportunity (DRSO). The DRSO has now closed for new applications. Settlement under the DRSO typically involved:

• Agreeing the income tax and NICs due on scheme payments as if they were salary;
• Paying the agreed tax and NICs (with interest) but with penalties reduced or eliminated for cooperation;
• Receiving clearance from HMRC that the scheme years in question were closed.

Those who settled under the DRSO are excluded from the loan charge for the years covered by the settlement. Those who did not, whether because they could not afford to, chose not to or were not aware of the opportunity, remain within the charge or face ongoing enquiries.

If You Still Have an Outstanding Liability

If you are still facing a loan charge liability, a discovery assessment relating to a DR scheme or an ongoing enquiry, the options available depend on your specific circumstances:

• Appeal a loan charge assessment: Where HMRC has raised an assessment, it may be possible to appeal on the grounds that the loan charge does not apply (for example, because the loan was made before December 2010 and there was reasonable disclosure or because the loan has been repaid).
• Challenge an underlying discovery assessment: HMRC may have raised discovery assessments for individual tax years. These can be challenged on the merits (including whether the scheme worked), staleness and time limits, see our discovery assessment guide.
• Apply for Time to Pay: Where the liability is accepted but unaffordable, HMRC’s Time to Pay arrangements may allow payment by instalments, see our Time to Pay guide.
• Insolvency: Some individuals facing very large loan charge liabilities have entered individual voluntary arrangements or bankruptcy. This is a serious step with long-term consequences, specialist advice is essential before this route is considered.

Time to Pay and Hardship

HMRC has consistently said that it will not pursue individuals into homelessness or bankruptcy where genuine financial hardship exists. A formal Time to Pay arrangement spreads payments over a period agreed with HMRC based on income, expenditure and assets. HMRC has a dedicated loan charge team and there is a formal process for requesting a Time to Pay arrangement.

However, Time to Pay only addresses when you pay, it does not reduce the underlying liability. Specialist advice is essential to determine whether there are any legal grounds to reduce the liability before agreeing a repayment arrangement.

Frequently Asked Questions