Norla EBT Loan Scheme

[contractor58]

Last year I used a scheme provided by Norla to pay myself. I’ve subsequently done the sensible thing and moved to a Limited company with SJD.

There were several similar schemes out there (don’t think they still exist) but brief background is you get paid in a loan that you never pay back (yeah, dodgy I know – but I was young and greedy). It worked out you retain about 87% of the amount you invoice your client.

Anyway the problem I now has is this interest free loan has appeared as a Benefit In Kind on my P11D. So I have to pay tax on the cash value of the loan this year. But as the plan is never to pay the loan back I assume I will have to treat this as a benefit in kind next year, the year after, the year after that etc etc until the day I die.

I’m only in my 20s so treating this as a benefit in kind for the rest of my lift could result in me paying everything I’ve earned in that period in tax eventually (depending on inflation, interest rates etc) …or I could even end up out of pocket for that work!!!

I thought I’d write this to
1. See if anyone had any advice? Am I correct this will have to go on every tax return for the rest of my life?
2. Warn everyone about schemes likes this
3. Give you all the chance to tell me what an idiot I’ve been

[Ruprect]

One for the accountants I'd have thought. Sry can't be more help..

[max]

.

I thought I’d write this to
1. See if anyone had any advice? Am I correct this will have to go on every tax return for the rest of my life?

Ask SJD.

Let us know how you go.

[malvolio]

IANAA either but as I understand it the accumulated loan becomes a BIK as soon as it is cancelled or paid off on your behalf, which is what you have done. So I think you have to pay up as though the amount of the load was pure earned income (which is always was, it's just that Norla didn't tell you that).

The trick with EBT's is that the tax doesn't go away, it just gets deferred for a while. Eventually you were always going to have to pay it.

[NotAllThere]

Just a thought - but is it the loan that is taxable, or the interest-free part. I.e. is tax owing on the loan, or the notional interest that hasn't been paid.

Not All There

[XLMonkey]

Yep, you are stuffed.

You may be able to minimise the amount of tax that you eventually pay, depending on your circumstances; but you will still be liable for some tax.

Options are
- write off the loan, pay the NI and income tax that is due. Ouch.
- pay it back over a number of years. This can be tax efficient if you can pay yourself less than you spend, and keep yourself below the higher rate tax threshold. However, you will continue to need to declare and pay NI and income tax on the outstanding balance in each year.
- take out a personal loan, use it to pay back the company, then wind up the company and take the cash back out as a capital distribution. You will need advice from an accountant who knows your circumstances on this one - there are various rules that HMRC lay down about capital taper relief that you will need to comply with.

... and then don't do it again.

[Lewis]

There is someone here on a similar scheme. I just asked him and he *thinks* that you only put on a P11D a theoretical interest that you are benefiting from not paying and not the whole loan. e.g. if your loan is £100 you are benefiting from not paying a 'reasonable' interest of 6% so £6 goes on the P11D as a benefit in kind on which tax is paid (e.g. at 40%=£2.40). And that is it, it doesn't go on the P11D again the next year. However that has the ceveat of the person saying "I'm not 100% sure that is right".

Really you need to speak to Norla about this, they are the ones who should be explaining this to you.

[contractor58]

There is someone here on a similar scheme. I just asked him and he *thinks* that you only put on a P11D a theoretical interest that you are benefiting from not paying and not the whole loan. e.g. if your loan is £100 you are benefiting from not paying a 'reasonable' interest of 6% so £6 goes on the P11D as a benefit in kind on which tax is paid (e.g. at 40%=£2.40). And that is it, it doesn't go on the P11D again the next year. However that has the ceveat of the person saying "I'm not 100% sure that is right".

Really you need to speak to Norla about this, they are the ones who should be explaining this to you.

The 'reasonable' rate of interest is defined by HMRC every year and is 5% for 2006-07, which makes the payment £2 per £100 in your example.

I have spoken to Norla, and they have said they won't be preparing for me a P11D in future years because I obviously don't work for them anymore but it is my responsibility to continue to report this to HMRC if necessary (and unfortunately it is necessary, because it will continue to be an interest free loan and I will continue to benefit from the interest it yields in subsequent years and not just the first year!).

So in the long term you are giving the Revenue far more tax than they would ever have got if you just went PAYE initially. This must be the worst scheme ever!

[Lewis]

The 'reasonable' rate of interest is defined by HMRC every year and is 5% for 2006-07, which makes the payment £2 per £100 in your example.

I have spoken to Norla, and they have said they won't be preparing for me a P11D in future years because I obviously don't work for them anymore but it is my responsibility to continue to report this to HMRC if necessary (and unfortunately it is necessary, because it will continue to be an interest free loan and I will continue to benefit from the interest it yields in subsequent years and not just the first year!).

So in the long term you are giving the Revenue far more tax than they would ever have got if you just went PAYE initially. This must be the worst scheme ever!

How bizarre! How do they get any business then? Surely they haven't just come up with a totally flawed product. There are other companies out there doing the same. Are you sure you're not missing something? The guy here says his loans will never be written off (which to me sounds very risky-how can you predict the future and why would you want a loan in the background for the rest of your life!).

[malvolio]

How bizarre! How do they get any business then? Surely they haven't just come up with a totally flawed product. There are other companies out there doing the same. Are you sure you're not missing something? The guy here says his loans will never be written off (which to me sounds very risky-how can you predict the future and why would you want a loan in the background for the rest of your life!).

Simple. I think it comes under the heading of "one born every minute". While they are renewing your never-to-be-repaid loan, they're getting commission on the service and interest on the retained income. You don't think they care about your ultimate tax bill, do you? It's not actually their problem, is it.