Originally posted by jbryce
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Compare a contractor agreeing to do some work for a bank.
One way of doing this is for contractor and bank to agree the services in a contract, along with remuneration, expenses etc. The agreement is completed, work begins and invoices are issued. All very commercial. The tax consequences of the invoicing etc are then dealt with by the IR35 rules, or perhaps MSC/PSC rules. The sequence is however commercial deal leading to taxable income. There are no agreements that alter the nature of the income (or at least say they do).
Another way is for the contractor to engage with a third party, perhaps outside the UK, who will effectively invoice the bank. The contractor then has an arrangement with the offshore intermediary under which he/she gets money in the form of salary/loan/dividend etc. The taxation of that cash flow is dealt with by rules that may or may not see the receipt as income, immediate or deferred.
Ask yourself, why did contractor choose one method over another?
Whilst choosing the low tax option is not a crime and is certainly not avoidance, HMRC will ask themselves whether any of the arrangements in the second scenario above are there solely to get a tax effect. For instance, why does the gross invoice value get split into three parts (salary, fees, loan) and are they really loans? If not, what are they? Is this a fiction created by documents because a loan is not taxable and salary is?
If a judge says that, taking a step back and ignoring the legal noise, the documents are just there to create a tax fiction, you are on the back foot.
If on the other hand, the bank said "All my IT is paid for from location X and therefore you make arrangements for a non UK payer to make a payment to a non UK recipient, that is probably more defensible".
The real pain is that many years ago most banks and similar who employed contractors were facing increases in costs as IR35 et al started to bite. The ability of some contractors to charge the same (or lower) rates because they had tax arrangements that reduced their costs, was welcomed and that became the benchmark rate. Competing against that with a gross income type arrangement would see you very soon with no work. The tests above unfortunately DO NOT take into account the fact that the market moved (partly because to do so would mean that tax policy has impacted commercial life and the Government - of all colours - would deny that for ever) and that the EBT style arrangements had BECOME THE NORM.
That is one line of argument that absolutely must be followed although I fear it will be a difficult one to win.
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