Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.

There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.

Remember also to Class 1A NIC liability which will arise on the benefit of the loan.

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HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.

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The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.

The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.

Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.

Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.

Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.

It is worth taking time to get this right but done correctly both employer and employees can be winners.

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Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.

From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.

There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).

If this principle based approach is successful in this area, we have to ask – what will be the next step?

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