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Impact of disguised pay on directors’ loans

If HMRC treats all directors’ loans as disguised remuneration, then there will be implications for insolvency practitioners recovering payments made to directors, says Paul Weber, North London area society chair.

Paul Weber

February 2019

The government now seems to categorise tax avoidance, once seen as prudent management, as fraud in the same was as it does tax evasion. After a lengthy period of national austerity, it is only to be expected that the government will do all it can to increase its income from tax. Finance (No. 2) Act 2017 confirms that tax will be payable on disguised remuneration loans that are outstanding on 7 April 2019.

Disguised remuneration is basically remuneration that is paid by means of a loan that is not repaid or is not repayable in order to avoid income tax or PAYE. Employees and self-employed people have to provide information to HMRC of any disguised remuneration loans by 1 October 2019.

The government technical note on this subject, which as usual does not mention insolvency, advises that it is the employer who is prima facia liable for the tax on a disguised remuneration loan. If, however, the employer is unable to pay the tax there are provisions that allow HMRC to seek payment of the tax from the employee. HMRC will apparently consider each case on its merits and it will be interesting to see if HMRC will expect directors of insolvent companies to pay tax on what has been seen as their overdrawn loan accounts.

The tax on disguised remuneration legislation may well have an impact on director’s overdrawn loan accounts, both on their existence and on their recoverability. It is not clear whether all directors’ overdrawn loan accounts will be seen by HMRC as disguised remuneration.

Directors are likely to claim that if HMRC demands income tax on what is seen as disguised remuneration then this is confirmation that what the insolvency practitioner is treating as a loan is really a director’s remuneration and is not to be repaid.

Paul Weber ACA FCCA FABRP from Leigh Adams Ltd is an ICAEW Chartered Accountant and licenced insolvency practitioner, and the chair of the North London Society of Chartered Accountants.

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