EBT & other loan schemes

[LisaContractorUmbrella]

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.

OK Alan. PLease explain, in detail, how an offshore EBT can possibly be a legitimate option for a UK tax resident who resides and works in the UK? Secondly, please explain the tax benefits of an EBT that DOES have to be paid back or is written off?

[Vallah]

EBTs are valid because there's absolutely nothing to stop a UK resident becoming an employee of an IOM company, and thus being entitled to EBTs as a result. HMRC don't like it, obviously, but there's absolutely nothing they can do about it until they change the law in April, if they can be bothered.

Under EBT schemes (ours at least), ALL income is fully declared, and has UK tax paid on it, just not as much as HMRC would like. Which is tough on them, and up to them to close the loop hole. Some people think that people should automatically just cough up the full rate of PAYE and NI, in which case, umbrella schemes are a no no as well.

[RichardCranium]

Some people think that people should automatically just cough up the full rate of PAYE and NI, in which case, umbrella schemes are a no no as well.

With an umbrella scheme you (well, me anyway) do pay the full NI (including employer's NI) and PAYE.

[LisaContractorUmbrella]

EBTs are valid because there's absolutely nothing to stop a UK resident becoming an employee of an IOM company, and thus being entitled to EBTs as a result. HMRC don't like it, obviously, but there's absolutely nothing they can do about it until they change the law in April, if they can be bothered.

Under EBT schemes (ours at least), ALL income is fully declared, and has UK tax paid on it, just not as much as HMRC would like. Which is tough on them, and up to them to close the loop hole. Some people think that people should automatically just cough up the full rate of PAYE and NI, in which case, umbrella schemes are a no no as well.

That hasn't really answered the question - a UK tax resident, working and living in the UK is obliged to pay tax in the UK according to UK tax legislation - how does becoming an employee of an offshore company get round that?

What, in your scheme, makes sure that there is a tax benefit? Is the loan never to be written off, is it to be waived, never paid back?????

[Alan Jones]

What, in your scheme, makes sure that there is a tax benefit? Is the loan never to be written off, is it to be waived, never paid back?????

I did say in my "post" that EBT loans create tax mitigation/deferral. The loan is a tax deferral until/unless

A/ It gets written off at death - NOT taxable
B/ The individual leaves UK and then loan gets written-off - NOT taxable
C/ there are others BUT they are not/should not be communicated/promised in advance.

[Vallah]

That hasn't really answered the question - a UK tax resident, working and living in the UK is obliged to pay tax in the UK according to UK tax legislation - how does becoming an employee of an offshore company get round that?

What, in your scheme, makes sure that there is a tax benefit? Is the loan never to be written off, is it to be waived, never paid back?????

As I've said a few times previously, tax is paid in the UK according to UK tax law. UK tax law at the moment states that oustanding loans are taxed at a lower rate of tax as a BIK.

[THEPUMA]

As I've said a few times previously, tax is paid in the UK according to UK tax law. UK tax law at the moment states that oustanding loans are taxed at a lower rate of tax as a BIK.

Aha that's where you're going wrong. You're trying to apply UK tax law whereas you need to apply the law according to LisaContractorUmbrella.

Easy mistake to make.

[BlasterBates]

Well until it's challenged in the courts we won't know whether it's legal. There are arguments on both sides, i.e. you can argue it's loan, the other side can argue it's "artificial" (i.e. it's a loan wink wink nudge nudge, even though it never gets paid back), which as we heard in the BN66 case is a crucial legal argument.

But what I can see is that it will be fairly easy to slap a tax on any outsanding loans without even having to be retrospective.

Wouldn't touch it with a barge pole.

[LisaContractorUmbrella]

OK so let's say you have a loan of £100,000 which attracts an annual BIK of around £1500 for a 40% tax payer. If you use the scheme when you are 30 and you die at 85, at which point I understand the loan is written off, although there may be a liability for your children, the total BIK will be £82,500? Or is it the case that the BIK only applies whilst the individual is in employment? If that's the case then presumably the loan becomes repayable at the point when the employee is no longer an employee? If not surely that would show the scheme up to be a sham?

[LisaContractorUmbrella]

Aha that's where you're going wrong. You're trying to apply UK tax law whereas you need to apply the law according to LisaContractorUmbrella.

Easy mistake to make.

I never knew you were such a wit Puma