The Government announced an independent review of HMRCs loan charge in September 2019.  In this blog we consider the effect of the review on directors who have or are settling claims with HMRC and highlight that the review does not impact on potential claims against directors of insolvent businesses.

Regardless of the outcome of the review, employee benefit trusts (“EBT”) which are not legitimate, are still tax avoidance schemes.

If former directors of insolvent companies have acted in breach of duty, causing loss to the company as a consequence of the EBT, they may still be personally liable to the insolvent estate.

Employee Benefit Trusts

EBTs were used by some companies as a tax saving scheme, whereby a company paid an employee’s gross remuneration into an EBT. The EBT subsequently loaning the total to the employee on non-interest bearing terms with re-payment on demand (the “Loan”).

In practice, repayment of the Loan was never demanded; the employer avoided accounting to HMRC for employer national insurance contributions (“NIC”) and the employee received their gross remuneration, without income tax or employee NIC being deducted.

Payments from those type of EBTs were in effect disguised remuneration and therefore tax avoidance, rather than a tax saving scheme.

What is the loan charge?

The disguised remuneration loan charge (the “Loan Charge”) introduced by the Finance Act (No 2) 2019 provided a mechanism for HMRC to purse the beneficiaries of an EBT directly for repayment.

The Loan Charge, enabled HMRC to claim the value of income tax and employee NIC that would have been payable on monies paid as remuneration but which had been avoided through the use of an EBT.

Where the employer is insolvent and cannot pay, the responsibility for repaying the Loan Charge therefore rests with the beneficiary, who is often the director/shareholder.

Those responsible for repaying the Loan Charge were required to report the unpaid tax liabilities to HMRC before 5 April 2019.   If reported, HMRC would agree the amount owing and a repayment plan.

Many directors of insolvent companies have reported and paid HMRC, others have agreed a repayment plan whilst many are still negotiating.  However, following the Government announcing a review of the Loan Charge, what does this mean for directors who benefited from disguised remuneration schemes?

What is the effect of the review on settlements?

In short:

  • It has no effect on employees who have already reached settlement with HMRC and paid in full or are paying in instalments.However, depending on the outcome of the review (which will consider whether the Loan Charge is itself appropriate) could this mean repayment if the review concludes that it is not? We will have to wait and see.
  • If the employee has provided all required information to HMRC but a settlement has not yet been reached, HMRC will allow the employee to wait for the Government’s response before completing the settlement.

What is the effect of the review on insolvency claims against directors?

The major beneficiary of a disguised remuneration schemes is the employee, commonly the director(s).

Directors have both fiduciary and statutory director duties, including the duty to act in the best interest of the company. If the directors act in breach of duty and cause loss to the company then an insolvency practitioner can bring proceedings against the culpable director for misfeasance.

Misfeasance is not the only claim available to an office-holder where the company has used an EBT. It could also be a transaction at an undervalue or a transaction defrauding creditors, but the point is, that the review does not alter the fact that the EBT is a tax avoidance scheme.

Therefore, where a company had an EBT:

  • office-holders should consider whether there is a misfeasance (or other insolvency) claim against the directors as a consequence of directing that the company transfer money to an EBT; and
  • directors must also take note that the review does not prevent a claim against them under the insolvency legislation.

Interaction between insolvency claims and the Loan Charge

HMRC indicated that it would not enter into direct agreements with individuals where the company is subject to insolvency proceedings without informing and seeking to include insolvency practitioners in the negotiations.   However, HMRC have also advised that they are unable to act this way where individuals have approached them directly regarding a settlement.   A direct settlement with HMRC will not however absolve a director from liability for a misfeasance claim.


The report is anticipated mid-November 2019 and we will report its findings once published. Until then, insolvency practitioners should continue to liaise with HMRC in respect of any misfeasance claims.

Should the outcome of the review alter HMRC’s ability to claim the Loan Charge, former directors of an insolvent business should be alive to the fact that they may still be liable and culpable for their actions under the insolvency legislation.