In the aftermath of the Paradise Papers leaks, there may not be too much sympathy for UK-based taxpayers who have been using offshore trusts to reduce their tax bills. However, the country’s leading body of accountants is warning that a government crackdown on one type of offshore trust threatens to land many ordinary people – including nurses, teachers and cleaners – with unexpected tax bills.
The Institute of Chartered Accountants in England and Wales (ICAEW) is worried about plans unveiled in George Osborne’s 2016 Budget to demand tax from people with employee benefit trusts. The government reckons the levy, which will be backdated by up to 20 years, will raise as much £1bn. In an employee benefit trust, the employer pays some or all of the employees’ remuneration into an offshore trust. This vehicle then loans money to the employee, typically on an interest-free basis and under terms that mean the loan will never be repaid. The effect is to substantially reduce the tax bills of both employer and employee.
In recent years, the government has taken a tough line with these “disguised remuneration” schemes, winning a landmark ruling against Rangers Football Club earlier this year that has encouraged it to pursue tax revenues lost to such arrangements in the past.
In the case of employee benefit trusts, any loans made to an employee between 5 April 1999 and 5 April 2019 and still outstanding at the latter date will become subject to a tax charge. Effectively, HMRC will be claiming back income tax on payments received by employees that go back up to 20 years.
The ICAEW says it accepts the principle of the crackdown – though it thinks the government should have acted sooner – but fears many people will struggle to pay. While employee benefit trusts were widely used as part of sophisticated tax-avoidance strategies, a wide spread of employers took up the scheme, often without explaining the detail to their staff.
For example, workers such as teachers and nurses have sometimes been paid in this way, often without understanding the implications, says the ICAEW. All such workers will now be caught up in the crackdown, irrespective of their circumstances or income. Below, we look at what to do if you think you might be in for an unexpected tax bill.
Get ready for the crackdown
If you have ever been paid using an offshore trust, it’s a good idea to start thinking now about how you will pay any outstanding tax due on income paid between 5 April 1999 and 5 April 2019. Some taxpayers are in for substantial bills, with the ICAEW warning that in the worst cases bills will tip people into bankruptcy.
While there is no legal way to avoid the charges, there is still time to start putting money aside. The crackdown will effectively take place during the 2018-19 tax year, for which taxpayers do not have to settle their final tax bill until January 2020. In April 2019, once you know how much you will owe, it’s important that you contact HM Revenue & Customs as quickly as possible if you think that you’ll be unable to settle the bill.
The agency has already signalled that it will look sympathetically on such cases. Its “Time to Pay” scheme gives it the power to allow taxpayers who genuinely can’t meet tax bills in full to make payments in instalments. Deals lasting beyond 12 months after the payment date are unusual, but HMRC insists that each agreement will be tailored to the individual taxpayer’s circumstances.
Tax tip of the week
If you give “normal” gifts such as Christmas or birthday presents out of your income in the seven years before your death, these will not attract inheritance tax (notwithstanding other exemptions). To qualify for this exemption, a gift must not prevent you from maintaining your normal standard of living, and you must not have had to dip into capital to pay for it.
The level of expenditure that counts as “normal” for you will be judged on a subjective basis, taking into account your previous habits. Although single gifts can qualify for this exemption, case law suggests that such gifts must be “within a settled pattern” for you, says law firm Warner Goodman. If all conditions are met, you can give away surplus income without an upper limit.
HMRC backtracks on helping contracted-out savers
HM Revenue & Customs has decided not to send statements to savers who were “contracted out” of the state second pension, despite the hope that such statements would help people to check that their state pensions are correct. The decision stands to affect members of occupational pension schemes who were contracted out of the “state earnings related pension scheme” (Serps) between 1978 and 1997. These savers paid less national insurance than other workers, receiving refunds that were invested in their schemes in the expectation that they would produce more valuable benefits than Serps itself.
Unfortunately, such schemes have routinely failed to accurately record who was contracted out, and over which periods. Since people with reduced national insurance contribution records may not qualify for a full state pension under today’s rules, such errors could prove costly. HMRC had previously said it would send letters containing savers’ contracting-out history from December 2018, but confirmed last week that it no longer planned to do so.
Although information on contracting-out histories is not currently included in online state pension forecasts, you can ask HMRC to provide you with details of your contribution records.