HMRC warns against PSC tax avoidance scheme
27 Mar 2019
In the wake of the Treasury’s report on the disguised remuneration loan charge, due to take effect from 5 April, HMRC has issued another ‘spotlight’ note warning against use of a contractor arrangement which claims to avoid the charge by transferring ownership of shares in a personal service company (PSC)
27 Mar 2019
HMRC has already issued three other spotlight notes specifically warning about a number of schemes and arrangements that claim to avoid the disguised remuneration loan charge.
The latest concerns contractor arrangements being marketed, involving a PSC and a limited liability partnership (LLP) which claims to get around the April 2019 loan charge, by transferring ownership of the shares in the PSC.
HMRC says its strong view is that these arrangements or similar ones do not work and it will tackle the promoters and users of these arrangements.
The arrangements typically involve a number of steps. The contractor provides their services to an end user (for example Business ABC) via a PSC in which they are major/sole shareholder. Both the contractor and the PSC become partners of an LLP based offshore.
The PSC bills Business ABC for the services the contractor provides. Business ABC pays the money to the PSC who then pays the contractor a salary at or a little over the national minimum wage (NMW) rate.
The PSC then transfers the balance of the payment to the LLP. The PSC tells the contractor how much money they can draw on their capital account with the LLP. Since the contractor has not contributed any capital to the LLP, the amount drawn from their capital account is classed as a loan, for the purposes of the loan charge.
The majority of shares in the PSC are then sold to an overseas holding company linked to the scheme promoter, in an attempt to cancel the overdrawn capital accounts. The value of the shares is artificially fixed at an amount which will extinguish the balance of the loan.
HMRC warns that contractors entering into arrangements like these may find that they are tied into further avoidance arrangements for up to three years. These arrangements will not result in an effective repayment of outstanding loans and will not reduce or eliminate the amount liable to the loan charge.
These arrangements aim to disguise the use of loans by transferring assets rather than actually making a genuine repayment. They are deliberately designed to try to avoid the loan charge, HMRC claims.
HMRC says anyone using these arrangements will find the loan charge will still apply and may face a significant penalty in addition to the tax charge.
As regards promoters of such schemes, HMRC says the enablers’ penalty may apply where any of these arrangements have been enabled and entered into on or after 16 November 2017. HMRC will also use its powers under the promoters of tax avoidance schemes regime against those who persist with promoting tax avoidance schemes.
HMRC strongly advises anyone using one of these schemes or arrangements, to withdraw from it and settle their tax affairs, in order to avoid the costs of investigation and litigation and to minimise interest and, where they apply, penalty charges on the tax that should have been paid.
Report by Pat Sweet