tax question

[delorean]

Hi Folks,

I'm looking for some help calculating my potential tax bill from a very ill-advised foray into the use of an employer who remunerated via an offshore loan "scheme". At the moment it's just a general HMRC enquiry into the system rather than anything specific, but I'm trying to avoid a huge bill at a later stage.

This was back in my early days as a contractor - a very silly thing to do in retrospect - and I have been PAYE through my limited company for the last few years (I left mainly because I was very uncomfortable with the system when I found out the details).

I'm trying to calculate what I should save/put away in a CTD just in case the scheme fails and assessments are issued.

(the below assumes income is all higher rate for simplicity)

Say I recieve £10,000 as a loan, and HMRC "look through" this and decide it's all income and I need to pay tax on it.

The way I have seem this described on the other threads (for different schemes) is that the tax due is roughly:

Gross income: £10,000

12% employer's NI : £1200
1% employee's NI : £100
40% income tax: £4000

Total: £5,300 (ish)

However, my accountant has raised the possibility that the £10k may be treated as salary, net of tax, and hence the actual amounts payable may be based on a notional 'gross' salary:

Gross Salary = amount recieved net / ( 1 - (tax - NI / 100))

= 10,000 /( 1 - 0.40 - 0.12 - 0.01)

= £21,276

then the figures would be:

12% employer's NI : £2553
1% employee's NI : £212
40% income tax: £8510

Total: £11,275 (ish)

This obviously amounts to more than the amount originally received, and would be totally unpayable for me when scaled up to the correct figures. It also has implications for interest and penalties.

Does anyone have a view as to which of these is the correct way to look at it? Is there a precedent from other cases? (this is not one of the ones caught by BN66 incidentally).

I was with this company for 20 months in total and am worried that I won't be able to meet my liability should the system be adjudged to be ineffective by HMRC.

I have enquired as to whether there is any way to eject from the scheme but apparently there is no guarantee that even if I unwound all of the arrangements (pay loan back or get it written off and pay full PAYE on it) that the taxman wouldn't decide it was all due (again) anyway.

Suffice it to say that I would recommend against the use of these systems at all costs...if I could pay it all back now (with compound interest etc) I would do it in an instant.

Also, can anyone confirm that CTDs can't be used against an NI liability?

Cheers,
MMcF

[Alan @ BroomeAffinity]

I'd agree with your accountant. The payment is likely to be deemed net.

[BrilloPad]

Who owned the scheme? Have you asked them your liability?

I read on the bn66 thread that monp gave someone an estimate of tax bill if montp lose (this is the double taxation thing).

[Cheshire Cat]

yep, looks like you're fooked.
Sell the beemer, plead insanity and tell them you'll give them £5 a week.

[xoggoth]

That sounds crazy. How can tax be more than the gross amount actually earned?

[expat]

I'd agree with your accountant. The payment is likely to be deemed net.

They are likely to deem it net, but (logically at least) that can be disputed. It depends on where the money to pay the tax comes from. If you personally pay it from your own money, we may say that it is paid out of the £10,000 so that £10,000 is gross - you personally do not get to keep all £10,000. But if it comes from company money and you personally get to keep all of the £10,000 then obviously it is £10,000 net.

I suspect in this case there is no company money to pay it with, so you will have to pay it from your own money. I.e. it will become clear that the £10,000 was gross, even if at the time you thought it was net.
Of course that means that you shouldn't have taken it as if it had been net, but that's another question.

[ChimpMaster]

Makes you wonder how this differs from the Montpelier scheme. They both use some kind of "loan" or such payment, so why would HMRC demand that one is deemed a gross payment while the other is deemed a net payment.

[ChimpMaster]

Delorean - what was the name of the scheme you were on ?

[DonkeyRhubarb]

I suspect it might have been the Castlemaine loan scheme.

The real killer if you lose your appeal is the interest. I was in the MontP scheme 2001/2/3 and because HMRC levy a hefty interest rate (currently 7.5%), I have estimated that the interest to date is already 40% on top of the original tax liability.

HMRC have made their intention clear that they will litigate against any tax avoidance scheme wherever they can. My advice to anyone thinking of using a scheme is to think about it very carefully. You are almost certainly going to get investigated, and with the new disclosure regime there is no way of hiding.

If you are determined to use a scheme, then consider the following to protect yourself:

1) Do not spend the money saved

2) Put it all into a CTD at the end of each tax year to protect yourself from interest penalties

And bear in mind it may be many years before it's safe to use the money. My 2001 tax return has already been under investigation for 5 years. The wife has joked that we'll probably be dead before it's sorted out.

Of course there is another option: use the most aggressive scheme you can find, run it for as long as you can and then bugger off abroad before the tax demand arrives.

[ASB]

The wife has joked that we'll probably be dead before it's sorted out.

They'll chase the estate......