How HMRC’s disguised remuneration charge could affect realisations from directors’ loans.

Disguised remuneration schemes, whereby a director or self employed person is remunerated by means of payments described as a loan but which is understood never to be repayable, have been extensively marketed over the last 20 years or so. The employer may have made the so called loan via a trust, although this is not a requirement for a disguised remuneration scheme. The benefit of such a scheme  to the director or self employed person was that tax was not payable on a loan and HMRC not surprisingly categorised such disguised remuneration schemes as tax avoidance.

Disguised remuneration legislation became effective from 6 April 2011. HMRC then introduced the loan charge, the tax payable on disguised remuneration loans taken out since 1999 and which had not been settled by 5 April 2019. People who had disguised remuneration loans were encouraged to come to a settlement with HMRC as to the amount of tax due, and the last date for reaching such a settlement was 5 April 2019.

It is understood that although many people have reached a settlement with HMRC – someone facing tax of 40% on a disguised remuneration loan would be sensible to reach a settlement – many people have not.

Realising directors’ loans is never easy but insolvency practitioners appointed to companies that include director’s loans among their assets will now have an additional problem, that of identifying whether the outstanding director’s loan according to the statement of affairs is really an company asset. It seems that HMRC may see the outstanding director’s loan as disguised remuneration. The tax payable on this disguised remuneration will initially be claimed by HMRC against the employer, the insolvent company. HMRC will claim the tax from the director if the company cannot pay it.

It is for the employer to advise HMRC of any disguised remuneration schemes, and employees who have benefited from such schemes should have notified their employer of any outstanding balances by 15 April 2019. HMRC has advised that it expects insolvency practitioners appointed to companies with such disguised remuneration schemes to advise HMRC of the outstanding balances of which they become aware, via email to

In the guidance issued by R3 HMRC appreciates that insolvency practitioners may not know if the loan is outstanding as part of a disguised remuneration scheme. Office holding insolvency practitioners acting for the benefit of all creditors should surely now investigate the nature of outstanding directors’ loans as at 5 April 2019 to establish whether they may be realisable for the benefit of the insolvent company or whether HMRC might have a claim as an unsecured creditor for tax payable on a disguised remuneration scheme.

HMRC has confirmed that it does not consider tax payable on a disguised remuneration scheme to be an expense of the insolvency process.

The opinion of the director concerned should also be taken into account as well as that of HMRC and the office holding insolvency practitioner. Consider the example of a balance of £100,000 currently outstanding on a director’s loan paid in 2018/2019 and the employer company went into creditors’ voluntary liquidation on 26 April 2019. The liquidator would investigate the loan, hoping that it was a genuine loan that could be realised for the benefit of all creditors.If the £100,000 was disguised remuneration, the definition of which has already been disputed in court, HMRC would seek to realise tax on the amount paid and if the director concerned had other income of £50,000 in 2018/2019 then HMRC would seek to be paid £40,000 in tax by either the insolvent employer or the director.

The director would seek to pay as little as possible to settle any liabilities that may exist. A director facing potential tax liabilities of £40,000 might be tempted to claim that the loan was genuine in order to settle with the liquidator by paying £30,000, for example. It would be sensible for any settlement to be tripartite, binding on the director, the officeholding insolvency practitioner and HMRC, in order to avoid potential complaints and disputes in court.

The categorisation of the overdrawn loan account for the purposes of the statement of affairs would also be interesting. The director might be unwilling to commit to any definition without first having advice about its implications and the insolvency practitioner would obviously have a conflict of interest in trying to give this advice. The director should be advised to seek independent advice.

Speakers from HMRC gave a very useful presentation on this subject at last week’s IPA conference. HMRC will ‘continue to work with and support the insolvency profession to maximise recoveries’ and ‘engage in discussions around settlement’, which is encouraging.

It is clear that the situation with overdrawn directors’ loan accounts in companies that are subject to an insolvency procedure has just become much more complicated. It is suggested that any such overdrawn loan accounts, whether or not the payments have been made via a trust, are fully investigated in order to establish whether they were ever to be repaid and whether they are really disguised remuneration schemes. File notes should be made detailing these investigations and the reason for the final conclusion.

At the AGM held after the IPA’s conference last week it was announced that I had been elected to the board of the IPA. I am extremely grateful to everyone who voted for me – I have been involved with the IPA for more than 30 years and I am delighted to now be on the board of the IPA so that I can use my experience in compliance and regulation to work for the benefit of the insolvency profession.

Please contact me on or 07854 967976 if you would like to discuss any aspect of this email or if you would like to learn more about the compliance consultancy work carried out by RMCSC regarding insolvency and anti money laundering legislation.