All you people with EBT/Loan/Dodgy Umbrella schemes - what you gonna do?

[malvolio]

Good points, but what Mal forgot to mention was that joining PCG is still a good idea, whatever the outcome.

WHS...

[Alan Jones]

Disguised Remuneration "DR" / EBT update

A/ What Bedouin are trying to say is that if in the future i.e. post 8 Dec 2010, the loans are made by the employer to the employee this is OK (as opposed to the Employer Benefit Trust making the loan to the Employee). SORRY this is "poppycock wrong".

On 21 February 2011 HMRC issued guidance/clarification on the draft legislation of 9 December 2010 in the form of 33 FAQ's.
FAQ no. 6 states that as drafted loans made by the employer are caught by DR - as stated by me in my previous post.
HOWEVER, HMRC state this was "unintended" and the draft legislation will be changed to exclude the employer i.e. if the employer makes the loan it is NOT caught by the DR.

This is quite amazing. Therefore no clever schemes required to avoid DR just simply dispense with the EBT and pay the loan from the (offshore) employer.

I suppose we now have a new type of legislation in the form of "pro-avoidance"

[LisaContractorUmbrella]

http://www.hmrc.gov.uk/budget-update...ation-faqs.pdf

6. The wide definition of “trustee” in section 554A(8) means that there
doesn’t need to be third‐party involvement. Accordingly, a direct
employer/employee transaction will be caught if the employer is holding a
sum of money as part of an arrangement.

We agree that, as drafted, Part 7A would have this unintended consequence.**
The intention is therefore to narrow the definition of “trustee” in
section 554A(8).

[malvolio]

On 21 February 2011 HMRC issued guidance/clarification on the draft legislation of 9 December 2010 in the form of 33 FAQ's.
FAQ no. 6 states that as drafted loans made by the employer are caught by DR - as stated by me in my previous post.
HOWEVER, HMRC state this was "unintended" and the draft legislation will be changed to exclude the employer i.e. if the employer makes the loan it is NOT caught by the DR.

This is quite amazing. Therefore no clever schemes required to avoid DR just simply dispense with the EBT and pay the loan from the (offshore) employer.

I suppose we now have a new type of legislation in the form of "pro-avoidance"

Assuming you are genuinely the employee of the parent company (or some part of the associated daisy chain most of them use) an that the income you receive as a result is not liable to normal taxation as a BIK - which is what the EBT was aiming to avoid. It works the other way round as well: the original wording might have pulled genuine offshore employees working the UK into the taxation net regardless of the 183 day rules.

Don't think this changes anything. It apparently kills the original intention, but I don't see it has any effect on your taxation status. UK resident employees pay UK tax on all earned or gifted income - simples.

[Alan Jones]

If only that simple

Assuming you are genuinely the employee of the parent company (or some part of the associated daisy chain most of them use) an that the income you receive as a result is not liable to normal taxation as a BIK - which is what the EBT was aiming to avoid. It works the other way round as well: the original wording might have pulled genuine offshore employees working the UK into the taxation net regardless of the 183 day rules.

Don't think this changes anything. It apparently kills the original intention, but I don't see it has any effect on your taxation status. UK resident employees pay UK tax on all earned or gifted income - simples.

SORRY i think you are missing the point.
A/ Prior to the DR announcement on 9 December 2010 there were probably > 10,000 contractors who were employed by IOM companies. IOM Company paid minimum wage (deducts PAYE and pays to HMRC) with balance of "pay" as loan through EBT. Unless the EBT collects interest on the loan it is subject to UK tax under the beneficial loan rules i.e. tax is payable on a deemed interest of 4% (for 2010/11). This means a basic rate tax payer would pay £400 tax to HMRC on a £50,000 loan (50k * 4% interest * 20% tax). Even this £400 could be avoided - see D/ below.

B/ On 9 December 2010 along comes Disguised Remuneration and says the loan will be treated as taxable pay and the tax/NI on a £50,000 loan will be circa £17,000 instead of the £400 in A/ above.

C/ BUT according to the clarification FAQ No. 6 issued by HMRC on 21 February IF the IOM employer makes the loan instead of the EBT then the Disguised Remuneration tax per B/ above does NOT apply and we are back to the benefit in kind tax on loans per A/ above .

D/ PLUS if the IOM employer charges the employee 4% interest on the £50,000 loan on the last day of the tax year then there is NO benefit in kind tax to pay AND the employer can loan the £2,000 (£50k*4%) back to the employee on the first day of the new tax year. This can go on ad infinitum.

[malvolio]

SORRY i think you are missing the point.
A/ Prior to the DR announcement on 9 December 2010 there were probably > 10,000 contractors who were employed by IOM companies. IOM Company paid minimum wage (deducts PAYE and pays to HMRC) with balance of "pay" as loan through EBT. Unless the EBT collects interest on the loan it is subject to UK tax under the beneficial loan rules i.e. tax is payable on a deemed interest of 4% (for 2010/11). This means a basic rate tax payer would pay £400 tax to HMRC on a £50,000 loan (50k * 4% interest * 20% tax). Even this £400 could be avoided - see D/ below.

B/ On 9 December 2010 along comes Disguised Remuneration and says the loan will be treated as taxable pay and the tax/NI on a £50,000 loan will be circa £17,000 instead of the £400 in A/ above.

C/ BUT according to the clarification FAQ No. 6 issued by HMRC on 21 February IF the IOM employer makes the loan instead of the EBT then the Disguised Remuneration tax per B/ above does NOT apply and we are back to the benefit in kind tax on loans per A/ above .

D/ PLUS if the IOM employer charges the employee 4% interest on the £50,000 loan on the last day of the tax year then there is NO benefit in kind tax to pay AND the employer can loan the £2,000 (£50k*4%) back to the employee on the first day of the new tax year. This can go on ad infinitum.

Hmmm...

In which case, why did they ever need the EBT? I still think the DR announcement is wide enough to bring into scope any disposable income from any source, regardless of vehicle (which is why I think the cunning plan of switching from employee to self-employed won't work). Plus, IMHO (which is that of an informed amateur, of course), the loan is not beneficial hence treated as earned income. In any event, it is still ultimately taxable when repaid as one day it must be.

Still, let's see what happens...

[Fred Bloggs]

In which case, why did they ever need the EBT?

An excellent point and one which is unlikely to be properly answered. This, along with everything else to do with these schemes is smoke and mirrors.

[TykeMerc]

D/ PLUS if the IOM employer charges the employee 4% interest on the £50,000 loan on the last day of the tax year then there is NO benefit in kind tax to pay AND the employer can loan the £2,000 (£50k*4%) back to the employee on the first day of the new tax year. This can go on ad infinitum.

Surely these loans have to be paid back (or they aren't loans) when does that happen and how?

If a loan is written off at some point in the future how is that treated by the tax man?

What happens if the body that makes the loan goes bust in some form and a liquidator wants to call in debts to pay off creditors?

If the answer is that the loans are never paid back or written off then what happens when the person who owes the loan dies?

[Alan Jones]

In which case, why did they ever need the EBT?

This is historical when the employees were employed by a UK employer who used the offshore EBT to ensure it obtained a corporation tax deduction for the contributions to the EBT which were used as loans. This was stopped and then UK employer was replaced by Offshore employer who did NOT need to get tax deduction because no company tax payable BUT they continued the structure as before - maybe because there are other non-tax reasons why its prefereable to pay loans from trust.

[Alan Jones]

IMHO (which is that of an informed amateur, of course), the loan is not beneficial hence treated as earned income. In any event, it is still ultimately taxable when repaid as one day it must be.

My point is that if loan paid by employer THEN it is NOT caught by DR - this point has been clarified by HMRC on 21 February 2011.
HOWEVER it does NOT stop HMRC challenging the loan as "earned income" under existing law. EXCEPT that they have tried this before and failed. The case involved a few key guys taking many millions £ as loans and HMRC said it was "disguised salary" BUT HMRC lost.

Re repayable NOT if the person dies first - s.190 itepa 2003