Pay back EBT loan via a Big Con

[Wibble1]

Below is just hypothetical and I and not condoning doing anything illegal.

HMRC's argument is based on EBT loans not being paid back, being a scam and therefor tax is due as if it was pay.

What if there was a way to prove that the loans were paid back or that there is still a legal liability to pay them back?

But how? With the management companies and trusties disappearing, how could it be proved that they have not been paid back? Lack of transaction details recorded on bank statements or a letter from the trustee saying thanks for the money, but what if you had paid it back in cash, gold, services provided, other means? How can that be proved not to have happened?

What if you had a letter from the trustee saying thanks for the money back, but the letter did not come from them, it was forged, could that be proved either real or false?

What if you had a demand from the trustees for repayment or a letter reminding you of the terms / new terms and that it would eventually have to be repaid? That letter might me real of false. Again with the trustees not contactable, how could it be proved not real and would it validate that legal arrangements still exist, the liability to repay still exists and so it was not pay.

There must be something that backs up the legality of the loans that in a court of law would not allow HMRC to say that they should be treated as income with tax due because just like a loan from a bank, it has to be paid back.

What if you had a loan from a bank but you agreed with the manager to write it off and not pay it back. Would HMRC be able to treat that as income and force you to pay tax?

Can you see where I'm going with this. Possibly highly illegal but so what it it cannot be proved to be illegal.

What does everyone think? I guess I'm reaching out to those with a lot more experience in this area, both around tax law etc but also pulling off a big con.

[carling]

Below is just hypothetical and I and not condoning doing anything illegal.

HMRC's argument is based on EBT loans not being paid back, being a scam and therefor tax is due as if it was pay.

What if there was a way to prove that the loans were paid back or that there is still a legal liability to pay them back?

But how? With the management companies and trusties disappearing, how could it be proved that they have not been paid back? Lack of transaction details recorded on bank statements or a letter from the trustee saying thanks for the money, but what if you had paid it back in cash, gold, services provided, other means? How can that be proved not to have happened?

What if you had a letter from the trustee saying thanks for the money back, but the letter did not come from them, it was forged, could that be proved either real or false?

What if you had a demand from the trustees for repayment or a letter reminding you of the terms / new terms and that it would eventually have to be repaid? That letter might me real of false. Again with the trustees not contactable, how could it be proved not real and would it validate that legal arrangements still exist, the liability to repay still exists and so it was not pay.

There must be something that backs up the legality of the loans that in a court of law would not allow HMRC to say that they should be treated as income with tax due because just like a loan from a bank, it has to be paid back.

What if you had a loan from a bank but you agreed with the manager to write it off and not pay it back. Would HMRC be able to treat that as income and force you to pay tax?

Can you see where I'm going with this. Possibly highly illegal but so what it it cannot be proved to be illegal.

What does everyone think? I guess I'm reaching out to those with a lot more experience in this area, both around tax law etc but also pulling off a big con.

Hi. I think this has been covered on here in several places previously. Basically repaying the loans has no bearing on the tax position argued by HMRC.
Writing the loans off is another thing all together. The CLSO had no provisions for this, one of the many things wrong with it. I believe that potentially even if you took up the CLSO, you could still be liable to a) recall of the loans. b) Inheritance tax at some point c) Tax on loan write off.

I'm sure someoen like Webberg can clarify this.

[Wibble1]

Writing the loans off is another thing all together.
I'm sure someoen like Webberg can clarify this.

Now this is the bit I just can't get my head around.

I have a loan governed by law.
HMRC say its a sham so we'll make you pay tax as if it was income.
however they have not proved that yet (that its not a loan and that its income) in court.
Provider comes along and asks for money back.
I repay that loan.
How can HMRC say "no, still don't believe it was a loan, it was income, pay the tax".
How can that be?

[webberg]

Now this is the bit I just can't get my head around.

I have a loan governed by law.
HMRC say its a sham so we'll make you pay tax as if it was income.
however they have not proved that yet (that its not a loan and that its income) in court.
Provider comes along and asks for money back.
I repay that loan.
How can HMRC say "no, still don't believe it was a loan, it was income, pay the tax".
How can that be?

HMRC are very careful to NOT say that the loan is a sham. They say that the loan is legally valid.

The argument in Murray is that the cash coming from the employer becomes legally due to the employee the moment it appears. The fact that the employee chooses to allow the employer to use some of it to make a contribution to a trust which then loans money, is irrelevant to the tax treatment as the employee is already liable on the full value.

Now in Murray, it was a given and agreed FACT that the individuals were employees. As such the above works. If you were NOT an employee, does it make a difference? Probably - time will tell.

For those cases that are definitely not employee based (PBT's), clearly the above is useless. however in that case HMRC argue that ToAA rules mean that if "arrangements" exist so that funds are available from an offshore source which is non taxable (allegedly) then the rules can tax it, regardless of the legal form. Again, not tested yet.

Does that help?

[Iliketax]

what if you had paid it back in cash, gold, services provided, other means?

Maybe they would also ask you whether you paid tax when you first received the gold? And then HMRC might say that if this was repaid after 5 April 2011 then the trustee might well have earmarked the gold for your benefit and so ask for more tax and NIC. Then when you try to explain how there wasn't any gold, they might invite you in for an interview under caution.

But as has been said, the Murray case suggests that the tax point for employees is before the money was paid to the trust and so what happens to the loan is, from an initial employment income tax and NIC perspective, irrelevant.

[Wibble1]

HMRC are very careful to NOT say that the loan is a sham. They say that the loan is legally valid.

The argument in Murray is that the cash coming from the employer becomes legally due to the employee the moment it appears. The fact that the employee chooses to allow the employer to use some of it to make a contribution to a trust which then loans money, is irrelevant to the tax treatment as the employee is already liable on the full value.

Now in Murray, it was a given and agreed FACT that the individuals were employees. As such the above works. If you were NOT an employee, does it make a difference? Probably - time will tell.

For those cases that are definitely not employee based (PBT's), clearly the above is useless. however in that case HMRC argue that ToAA rules mean that if "arrangements" exist so that funds are available from an offshore source which is non taxable (allegedly) then the rules can tax it, regardless of the legal form. Again, not tested yet.

Does that help?

Whilst I have already been reading everything that's been going on with the Murray case either here or from tax experts blogs etc, I'm still trying to get my head around the above so go with me on this please... Are you saying....

With an EBT scheme, because a contractor was an employee of say Edge, when the money from the client (a bank), that paid the agent that got the contractor the contract, and the agent paid that money to Edge, if the contractor was an employee of Edge, what was paid to the employer becomes legally due to the employee, the contractor, and because of that income tax is due on that amount. Is that what you are saying?

If that is the case, how does it differ from this situation....

An employee (not a contractor) works for IBM professional services. IBM professional services provides that employee as a consultant working for a client (a Bank) on a 6 month project on a time and materials basis. IBM invoice the client monthly. The bank pay IBM for the services of the IBM employee. But when the money from the bank gets to IBM, it does not become legally due to the employee and the employee does not pay tax on it. The employee only pays tax on the wage they get form the employer.

[handyandy]

The difference is that IBM do not also send a payment to an offshore trust which then loans money to the employee - if they did then HMRC would argue it is remuneration and expect IBM to ensure it was dealt with through PAYE so tax and NIC's were paid. If IBM argued that it genuinely was a loan then HMRC would expect to see loan repayments deducted from the employees salary - they may or may not agree a dispensation but if it's interest free it will often attract a BIK charge.

IBM often pay their employees bonuses based on personal or business unit performance - when they do it is taxed and payment made through PAYE. Other benefits are also treated in the same way.

Do IBM use tax planning schemes - I know they do. Do they use them for employee remuneration - very very unlikely. The closest most companies come is to take advantage of avoided employers NIC's when benefits are provided through salary sacrifice but that is fairly small beer.

[Wibble1]

The difference is that IBM do not also send a payment to an offshore trust which then loans money to the employee - if they did then HMRC would argue it is remuneration and expect IBM to ensure it was dealt with through PAYE so tax and NIC's were paid. If IBM argued that it genuinely was a loan then HMRC would expect to see loan repayments deducted from the employees salary - they may or may not agree a dispensation but if it's interest free it will often attract a BIK charge.

IBM often pay their employees bonuses based on personal or business unit performance - when they do it is taxed and payment made through PAYE. Other benefits are also treated in the same way.

Do IBM use tax planning schemes - I know they do. Do they use them for employee remuneration - very very unlikely. The closest most companies come is to take advantage of avoided employers NIC's when benefits are provided through salary sacrifice but that is fairly small beer.

Ok, I agree with what you've said. But here the thing which I don't get, Webberg said...

The argument in Murray is that the cash coming from the employer becomes legally due to the employee the moment it appears. The fact that the employee chooses to allow the employer to use some of it to make a contribution to a trust which then loans money, is irrelevant to the tax treatment as the employee is already liable on the full value.

This is implying that irrespective of a trust and loan being in place, as soon as the money hits the employer it becomes due to the employee. So lets say the employer in this scenario did not contribute into a trust and no loan was given. Does that still mean the cash becomes legally due to the employee when the employee gets it? It not, then how can what Webberg say be true or does it only become due to the employee because the intention to loan out via a trust is in place? It can't be both. The loan must have to happen in order to make the scenario valid.

[handyandy]

I wouldn't want to speak for webberg (who I'm sure will reply) but I suspect the Murray finding reference to money 'appearing' is actually specific to the allocation of that money by the employer to any vehicle that benefits the employee. You may have read it as being when the money is received by the employer or an intermediary - I don't think that's the case.

[webberg]

Ok, I agree with what you've said. But here the thing which I don't get, Webberg said...

The argument in Murray is that the cash coming from the employer becomes legally due to the employee the moment it appears. The fact that the employee chooses to allow the employer to use some of it to make a contribution to a trust which then loans money, is irrelevant to the tax treatment as the employee is already liable on the full value.

This is implying that irrespective of a trust and loan being in place, as soon as the money hits the employer it becomes due to the employee. So lets say the employer in this scenario did not contribute into a trust and no loan was given. Does that still mean the cash becomes legally due to the employee when the employee gets it? It not, then how can what Webberg say be true or does it only become due to the employee because the intention to loan out via a trust is in place? It can't be both. The loan must have to happen in order to make the scenario valid.

You need to distinguish between sums due to the employer and sums due to the employee.

The employer is entitled to the full value of the invoice he raises on the end client. When the end client pays the invoice, the cash belongs to the employer. That employer can do whatever he wants with that cash. He can use it to pay his overheads including salaries to employees, buy assets, make contributions to pension funds, pay dividends, walk into the street and give it away. His choice, because legally the money is his.

If the employer chooses to use some or all of the cash to pay you a salary, that's his choice. However there is no direct link between the cash from client and the salary to the employee. Money is fungible and who is to say that there is a direct line of legal and beneficial ownership from end client to employee? Certainly, none of the documents make that position clear.

(It may be that this analysis produces a different tax result however and we have not completely dismissed it).

If a salary is paid but you and the employer agree that some of it will go through the PAYE system and some will go to a third party from where it may be re-routed to you via a loan or trust distribution, HMRC's argument (proven so far in Murray) is that IF the total sum has arisen to you BEFORE being divided into salary/contribution then it's taxable income, more precisely remuneration as an employee.

What happens after that is irrelevant.

I think there are a number of flaws in this argument and clearly HMRC also think so. Their argument in Court was essentially "a simple diversion of sums due to permit payment via a trust/loan, must be tax avoidance and if you (Judges) don't agree, the PAYE system will fail completely". the Judges agreed with HMRC.

I'm not convinced that the arguments are sound and I'm not convinced that a higher Court (Supreme Court next) will overturn the result because of the sums at stake. Not a good reason to uphold a bad decision, but one we've seen before.

I also think that the analysis in Murray is not strictly applicable to ALL schemes using an EBT, nor that it produces a personal liability. We will see.

Does that make it any clearer?