EBT & other loan schemes

[Alan Jones]

There are a number of IR35 loan schemes particularly one’s using Offshore Employee Benefit Trusts (often referred to as EBT’s). If these schemes are operated as set out in the Opinion provided by (normally) a Tax Barrister then – if the Tax Barrister says the scheme is OK, it should be OK. Please note, this does not stop HMRC/Treasury changing the law to close down these schemes – in fact a Budget Notice issued this year stated that EBT loan schemes would be closed down from April 2011.

BUT and this is a big BUT - if in order to obtain a “sale” the promoter (or its Agent) makes a promise that the loan is never repayable then this changes things. ARE we now in the realms of “fraudulent avoidance” and if so what are the consequences.

BEWARE
A/ If you have an email or any other written “side” document (even a copy of a presentation slide) with some kind of promise that the loan is NOT repayable then you should seriously consider your position and take advice. (further beware – having read this you could delete the email BUT what if unbeknown to you a copy ends up on HMRC desk e.g. HMRC decide to raid the promoters premises)
B/ If you have been told verbally that the loan is never repayable WHAT will you do/say if you are questioned “under caution” by HMRC (and not knowing what information HMRC have gathered from the promoter. (NB this situation is very different in law from initially being told/promoter confirming the loan is repayable BUT it actually gets written off in the future - this is (in my opinion) NOT “fraud” BUT there will be tax consequences resulting from the write-off which will depend on your personal circumstances/situation at the time of write-off)

FINALLY - In the “world of Tax” there are very few fraud/criminal cases taken by HMRC BUT the taxpayer and/or promoter usually ends up in prison if found guilty. YES “fraudulent avoidance” = criminal = maybe PRISON. Normally the only way to obtain a “don’t go to prison card” is to make the first move i.e. you hand yourself in before they catch you.

[Cosmo]

Oh give it a ******* rest.

[Alan Jones]

HMRC intentions re EBT Loans etc

....... in fact a Budget Notice issued this year stated that EBT loan schemes would be closed down from April 2011.

On same day i posted above there was a question from Contractoruk answered by some Tax guy - which totally missed the point. See Contractors' Questions: Any new tax avoidance measures? :: Contractor UK

Please check out following:-

HM Revenue & Customs: The Budget 2010: Enforcement & Compliance - Last Budget under Labour
Anti Avoidance - Earnings paid through Trusts or other entities
"The Government will be taking action to prevent attempts to avoid tax and National Insurance contributions through the use of Employee Benefit Trusts and other arrangements to disguise payments of remuneration and intends to introduce anti-avoidance legislation to take effect from 6 April 2011."

HM Revenue & Customs: The Budget 2010: Enforcement & Compliance - 1st Budget under Conservative
Anti-Avoidance: Employment Income and Pensions Contributions

"The Government will be taking action to prevent efforts to avoid tax and National Insurance Contributions (NICs) on earnings provided through the use of trusts and other vehicles. Employers and employees are entering into arrangements using trusts and other vehicles that seek to avoid, defer or reduce liabilities to income tax and NICs on earnings or that seek to avoid restrictions on pensions tax relief. Arrangements in some cases seek to rely on the use of complex intermediary structures, some of which may be offshore. The Government is considering options for tackling these arrangements, including those which seek to avoid the restrictions on tax relief for pension schemes, and intends to introduce legislation in due course to take effect from 6 April 2011."

[Vallah]

Great, look forward to seeing what they come up with.

[LisaContractorUmbrella]

"If these schemes are operated as set out in the Opinion provided by (normally) a Tax Barrister then – if the Tax Barrister says the scheme is OK, it should be OK"

Alan, will you please stop saying that. The legal opinion of a barrister, however senior or experienced, is just that - an opinion. The people who determine whether or not a 'scheme' is OK are HMR&C and their minds will not be changed because a barrister was of the opinion (at some time in the past) that they would accept it as OK. The opinion of a barrister may influence a tribunal or it may not but I am sure that most contractors wouldn't like to put it to the test.

[Alan Jones]

"If these schemes are operated as set out in the Opinion provided by (normally) a Tax Barrister then – if the Tax Barrister says the scheme is OK, it should be OK"

Alan, will you please stop saying that. The legal opinion of a barrister, however senior or experienced, is just that - an opinion. The people who determine whether or not a 'scheme' is OK are HMR&C and their minds will not be changed because a barrister was of the opinion (at some time in the past) that they would accept it as OK. The opinion of a barrister may influence a tribunal or it may not but I am sure that most contractors wouldn't like to put it to the test.

Lisa, I don't disagree with you BUT i was trying to make the point that a scheme has more chance of success if a barrister says its ok THAN if he says "scheme is crap". At the end of the day whether a scheme works rests with the Courts BUT someone considering a scheme needs to start his/her research somewhere and the starting point could be the tax barrister's opinion BUT (THIS WAS MY REAL POINT) no matter that the barrister may say its ok IF scheme is operated differently to what the barrister is commenting on IT will lead to problems with the taxman.

[LisaContractorUmbrella]

Lisa, I don't disagree with you BUT i was trying to make the point that a scheme has more chance of success if a barrister says its ok THAN if he says "scheme is crap". At the end of the day whether a scheme works rests with the Courts BUT someone considering a scheme needs to start his/her research somewhere and the starting point could be the tax barrister's opinion BUT (THIS WAS MY REAL POINT) no matter that the barrister may say its ok IF scheme is operated differently to what the barrister is commenting on IT will lead to problems with the taxman.

No! Someone considering a scheme should have the starting point of - Is this company promising to pay me more than 80% take home without asking any questions about my personal circumstances? If you know your expenses will be minimal, you're a 40% tax payer and you live and work and are tax resident in the UK, the scheme provider could say that Gordon Brown was of the opinion that the scheme was 'OK' but it wouldn't make a scrap of difference you would still not be entitled to 80%+ take home.

[ASB]

The people who determine whether or not a 'scheme' is OK are HMR&C.

[pedant]
No it isn't. They also only express an opinion that it is not OK. Ok, a lot of people will accept it, but if one doesn't it need a judge to state it doesn't work.

[LisaContractorUmbrella]

[pedant]
No it isn't. They also only express an opinion that it is not OK. Ok, a lot of people will accept it, but if one doesn't it need a judge to state it doesn't work.

Yes and no. HMR&C have the power to issue penalties and fines based on their opinion - you would have to appeal and be prepared to go to court to have their opinion tested - many people would not be prepared to go to those lengths.

[Alan Jones]

No! Someone considering a scheme should have the starting point of - Is this company promising to pay me more than 80% take home without asking any questions about my personal circumstances? If you know your expenses will be minimal, you're a 40% tax payer and you live and work and are tax resident in the UK, the scheme provider could say that Gordon Brown was of the opinion that the scheme was 'OK' but it wouldn't make a scrap of difference you would still not be entitled to 80%+ take home.

I think we need to concentrate on a "real" example. I have seen many Tax Barrister's opinions that say Offshore EBT's work in mitigating/deferring tax.

HMRC can only "attack" such schemes on basis that the loan is artificial and should be treated as salary. However, this has already been tested in the Courts in Dextra Accessories Ltd & Ors v Inspector Of Taxes [2002] UKSC SPC00331 (25 July 2002) where (there were a number of issues being challenged/tested) HMRC claimed that the multi-miillion pounds loans from the EBT should be treated as salary.
HMRC lost the case BECAUSE the judge said (using my words) that the scheme had been operated correctly insofar as the loans were processed correctly and that they were "real" loans repayable (i.e. no side agreements about the loan NOT being repayable etc) to the EBT. The two main beneficiaries of this scheme were the well known Caudwell Brothers of Phones4u fame.

HMRC put a lot of effort in attacking the EBT multi-million pound loans made to two individuals AND failed. SO these schemes have worked in the past and can still work if implemented properly.

Footnote : the Dextra scheme failed to achieve the desired tax savings because the House of Lords ruled that the contributions by the UK company to the offshore EBT did not qualify for corporation tax deduction (this had nothing to do with whether the loans were "artificial"). Current EBT schemes get round the House of Lords ruling in various ways i.e. the employer company is offshore based and therefore does NOT need to rely on UK law re deduction for contributions to EBT e.g. Isle of Man company tax is zero (subject to conditions) therefore does not matter whether contributions are deductible or not.