EBT & other loan schemes

[THEPUMA]

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?

Lisa

If you don't know how these schemes work, how can you say with such absolute authority that they don't work?

Puma

[Vallah]

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.

BIKs only accrue while an indifidual is an employee, so I imagine that it'd also be very easy to avoid.

[LisaContractorUmbrella]

Lisa

If you don't know how these schemes work, how can you say with such absolute authority that they don't work?

Puma

As I understand it and I am sure you will tell me in no uncertain terms if I am wrong - there is not just one type of 'scheme' in place - hence the question.

[LisaContractorUmbrella]

BIKs only accrue while an indifidual is an employee, so I imagine that it'd also be very easy to avoid.

So then what happens to the loan, which is, by definition, a benefit to an employee, when the employment ceases? And how is a loan which is never to be repaid a loan? Surely it is a gift?

[ASB]

BIKs only accrue while an indifidual is an employee, so I imagine that it'd also be very easy to avoid.

Vallah,

Isn't it also the case that if a commercial rate of interest is paid then there is no BIK?

By coincidence I rather imagine the trustees might be happy to loan it back to you, so in effect one is paying the interest to oneself and avoiding the BIK charge. So, does this work in practice? [Ignoring whether or not the scheme may or may not fail for other reasons]

[THEPUMA]

As I understand it and I am sure you will tell me in no uncertain terms if I am wrong - there is not just one type of 'scheme' in place - hence the question.

The point I am making is that you appear to be staunchly of the view (per the quote below) that these schemes cannot possibly work. Yet you clearly don't understand the mechanics of how they claim to work.

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.

Personally, I make no money from promoting these schemes. Indeed they are a direct competitor. But I couldn't possibly tell people that they didn't work without having done a lot of due diligence on them and even then in most cases I would bow to the superior tax knowledge of the QC who has offered their opinion on the robustness of the structure.

My personal opinion is that some work and some don't but it is very difficult to tell the wheat from the chaff until they have been through the due judicial process.

On an aside, it is entirely possible to acheive a take home substantially exceeding 80% (entirely legitimately) without putting through any expenses and at high levels of income (> £200K pa) if you can live off £80K net per annum.

Puma

[cojak]

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.

Which they will then probably do retrospectively, and since I don't have Threaded's time machine to confirm one way or the other I'll give this sort of thing a miss...

[Vallah]

Which they will then probably do retrospectively, and since I don't have Threaded's time machine to confirm one way or the other I'll give this sort of thing a miss...

How would they do it retrospectively? HMRC's argument (pack of lies that it is) in the Huitson case is that the "retrospection" is really just clarifying a point of law. As it has never been argued that loans from EBTs are income (indeed, the Dextra case specifically says that they're not) then it's hard to see how they'd attack it retrospectively. You could argue that they could try and introduce retrospection on anything they like, but that's not a view I subscribe to. EBT schemes are exceedingly robust, and to try and go after them retrospectively would be a step too far even for HMRC.

And to answer Lisa, most EBT type scheme loans are made by independent trustees, not from the actual companies themselves, and trustees always have to do things in the best interests of the beneficiaries.

[DonkeyRhubarb]

EBT schemes are exceedingly robust, and to try and go after them retrospectively would be a step too far even for HMRC.

HMRC have already introduced further retrospective legislation.

Retrospective tax law ‘on the increase’ :: Contractor UK

If they ultimately win BN66 then I don't think any scheme could be regarded as immune from retrospection.

[Alan Jones]

HMRC have already introduced further retrospective legislation.
Retrospective tax law ‘on the increase’ :: Contractor UK
If they ultimately win BN66 then I don't think any scheme could be regarded as immune from retrospection.

I don't think that anyone can say that such schemes will NOT be "stopped" retrospectively. It will depend on the level (or perceived level) of "artificiality".

Plus I think that regardless of what (if any) legislation is introduced in the March 2011 budget, HMRC will have grounds to "attack" these schemes under the "fraudulent tax avoidance" banner (see the opening post to this thread). Maybe the mere advertisement of "85% take home pay" will be enough to defeat these schemes. BEST ask your EBT scheme provider if the tax barrister knows about and/or commented on such advertising.