Repaying back loans

[demby]

I have also received a demand from the EBT trustees for a 10% repayment. They have even offered instalment terms.

I'm not sure if this is welcome news or not.

Which year ae they referring to?

Can you tell us exactly what it says in the letter you have received

[webberg]

This appears to be a relatively new development and as yet not all providers are asking for loans to be partly/wholly repaid.

Some important things to consider:

1. Does the loan agreement have anything to say about whether the lender can actually ask for the money? Usually loan terms can be changed by one or other of lender or borrower and/or require both parties to agree. If the loan terms are unable to be altered at all, or without joint consent, what authority does the lender rely upon?

2. As has been said above, the current state of play on many schemes is that the loan has been made from funds that should have been taxed as they arose from the payer of remuneration. The payer has the tax liability in the first instance. However the separation of payment and loan into two independent, separate legal issues, means that repaying the loans WILL NOT impact that tax argument and WILL NOT mitigate the liability in any way.

3. In some schemes, the above argument is harder for HMRC to convince a Court of. In that case, if you are being asked for a loan repayment, ASK the lender for a detailed explanation, backed by Counsel opinion, of why repayment will affect the tax argument. Unless you are convinced that it will have a material impact on the tax argument, revert to 1 above.

4. BEFORE you pay anything, ask the Trustee what they intend to do with the funds. They have an obligation to act in the best interests of the beneficiary (you). Unless that repayment is coming back to you as a distribution of assets, how is there a benefit to you? Remember that the trust/trustee is NOT involved in the tax argument. As such it's hard to see why the money repaid should not come back to you immediately. Also ASK why a similar tax/legal effect cannot be achieved by a write off of part of the loan? ASK to see a copy of the trust deed with an explanation as to why and how the funds will be used.

5. Check whether the trustee is connected with the original promoter. It may be that the provider has run out of cash to continue to "fight" HMRC and needs more money for fees. Perhaps they see a trustee whom they control being able to pay them to continue that fight upon payment of the partial repayment to them. I'm not a trust law expert but I'm going to guess that such an action is going to be at the edge of legality.

Overall, I have no reliable data on the loans outstanding. My guess is that it might be around £1bn. If every loan was 10% repaid, that's £100m.

Where is that going?

To a provider already rich on fees from running the scheme?

GET PROPER LEGAL ADVICE.

My view, from a tax perspective, is that loan repayment in the vast majority of schemes pre December 2010 WILL HAVE NO EFFECT ON THE OUTCOME OF WHETHER THEY ARE TAXABLE OR NOT.


If any provider wants to demonstrate the benefit, technical argument, use/abuse of loan or trust legal documents, etc, I'd be pleased to hear from them.

[Emmybeckmann]

I'm not sure if this is welcome news or not.

Which year ae they referring to?

Can you tell us exactly what it says in the letter you have received

I was with this provider for several years pre the 2011 changes.

[Emmybeckmann]

This appears to be a relatively new development and as yet not all providers are asking for loans to be partly/wholly repaid.

Some important things to consider:

1. Does the loan agreement have anything to say about whether the lender can actually ask for the money? Usually loan terms can be changed by one or other of lender or borrower and/or require both parties to agree. If the loan terms are unable to be altered at all, or without joint consent, what authority does the lender rely upon?

2. As has been said above, the current state of play on many schemes is that the loan has been made from funds that should have been taxed as they arose from the payer of remuneration. The payer has the tax liability in the first instance. However the separation of payment and loan into two independent, separate legal issues, means that repaying the loans WILL NOT impact that tax argument and WILL NOT mitigate the liability in any way.

3. In some schemes, the above argument is harder for HMRC to convince a Court of. In that case, if you are being asked for a loan repayment, ASK the lender for a detailed explanation, backed by Counsel opinion, of why repayment will affect the tax argument. Unless you are convinced that it will have a material impact on the tax argument, revert to 1 above.

4. BEFORE you pay anything, ask the Trustee what they intend to do with the funds. They have an obligation to act in the best interests of the beneficiary (you). Unless that repayment is coming back to you as a distribution of assets, how is there a benefit to you? Remember that the trust/trustee is NOT involved in the tax argument. As such it's hard to see why the money repaid should not come back to you immediately. Also ASK why a similar tax/legal effect cannot be achieved by a write off of part of the loan? ASK to see a copy of the trust deed with an explanation as to why and how the funds will be used.

5. Check whether the trustee is connected with the original promoter. It may be that the provider has run out of cash to continue to "fight" HMRC and needs more money for fees. Perhaps they see a trustee whom they control being able to pay them to continue that fight upon payment of the partial repayment to them. I'm not a trust law expert but I'm going to guess that such an action is going to be at the edge of legality.

Overall, I have no reliable data on the loans outstanding. My guess is that it might be around £1bn. If every loan was 10% repaid, that's £100m.

Where is that going?

To a provider already rich on fees from running the scheme?

GET PROPER LEGAL ADVICE.

My view, from a tax perspective, is that loan repayment in the vast majority of schemes pre December 2010 WILL HAVE NO EFFECT ON THE OUTCOME OF WHETHER THEY ARE TAXABLE OR NOT.


If any provider wants to demonstrate the benefit, technical argument, use/abuse of loan or trust legal documents, etc, I'd be pleased to hear from them.

Thank you for a very detailed response Webberg. I will continue this discussion on the BIG Group forums.

[Iliketax]

I have also received a demand from the EBT trustees for a 10% repayment. They have even offered instalment terms.

I've not heard of a trustee asking for a nominal repayment of a loan in the context of employees (I have no experience of contractors). I've seen demands for a full repayment of a loan before but there have been specific reasons for that.

I'd telephone them to find out what this is all about and why they are asking for repayment. Then I suggest you take advice as to how it affects your own circumstances. But some off-the-cuff comments for someone who was an employee:

1. I can't see repaying a nominal 10% of a loan helps the historic tax position, especially if the reason for repaying it is to try to help the tax position.
2. If you repay the whole of the loan then I can see that may help the tax position, especially if it does go to the court.
3. If any of the money that is repaid is (whether formally or informally) earmarked for your benefit that will crystallise an immediate PAYE/NIC charge. Similarly, if it is used to pay you a bonus.
4. If you refuse to pay a valid repayment demand then I can see that making the historic tax position worse (on the basis that it implies it wasn't actually a loan in the first place).
5. Repaying part of the loan before April 2019 will mean that the new April 2019 tax charge will not apply to that bit.
6. If this repayment is part of a new scheme to avoid tax then the DOTAS implications need to be considered, same with the new target anti-avoidance rule in Part 7A and the new "serial tax avoiders" legislation (which can get very scary if you've used a number of avoidance schemes).

Putting tax aside:

a. How do you know that the person asking for the money be repaid is actually the lender? I could see a nice little scam going on if someone has got some data on who has those loans.
b. It will obviously depend on what the trust deed says but in the context of EBTs the trust deed will normally allow assets of the trust to be used to pay the trustee's expenses (which could include their admin and legal fees) and provide benefits to a wide group of beneficiaries (typically: employees, former employees and their dependants) so you may never get back what you repay. Trust law may make a difference but you'd need to find out what trust law governs the deed (e.g. whether it is governed by English law)
c. If you don't want to repay the loan then you might want to make sure that everything has been done properly. For example, (i) ask for a copy of the loan agreement you signed, (ii) ask for evidence that they are the actual party to the loan agreement (or that it was assigned to them, etc), (iii) ask for evidence that they actually lent you money, (iv) ask why repaying the money is for your benefit (or more technically for the benefit of all the beneficiaries - but you wouldn't phrase it like that), (iv) ask for evidence that the consumer credit act was complied with, (v) check that the loan is currently repayable (rather than from 1 January 2030 or something), (vi) check that the demand has been properly made in accordance with the loan agreement, etc.

[demby]

Trustees will have a problem if people have moved address in the last 10 years. I know some who have and they certainly haven't written to Edge to keep them up to date with changes of address.

That apart - I reckon this is a scam

[stonehenge]

This must be Newquay Montpelier.

http://forums.contractoruk.com/accou...ml#post2232846

[ChimpMaster]

Webberg when you say "distribution of assets" - in the context of a loan being repaid and then being distributed back to the contractor - does this not imply a capital gain that again would need to be taxed accordingly?

[webberg]

Webberg when you say "distribution of assets" - in the context of a loan being repaid and then being distributed back to the contractor - does this not imply a capital gain that again would need to be taxed accordingly?

As with all things tax, it's a bit more complicated.

You and the trust are separate tax personalities. As such your tax position is calculated separately, except where money/assets crosses the border between you.

The trust has assets. Those are loan made to you. Those assets are capable (usually) of being converted to cash at some point. Once converted, the cash can be distributed to the beneficiary (you). Any income arising on the assets (interest) can be taxed on the trustee.

Where the person who established the trust (settlor) and the beneficiary are the same person, the line between what is trust income is blurred and the settlor/beneficiary can find themselves liable for such tax.

Where the assets are not producing income, that may not matter.

However where the trust realises its assets (wholly or partly) and distributes the proceeds, a charge will usually arise. (I say "usually" because again it's not always the case).

In most instances a trustee would have an obligation to deduct at least basic rate tax on such distributions and pay it over to HMRC. That would be a credit for the beneficiary in calculating the final liability. Where the trustee is offshore and the settlor/beneficiary are the same person, it's possible that the basic rate liability can be transferred to the settlor/beneficiary.

(The above would not apply to a true EBT as a tax charge on the beneficiary arises when the funds are earmarked for them).

So it's possible that a loan repayment that is subsequently distributed to you from the trust will attract a tax charge. In effect you're repaying the loan AND the tax on that amount.

If the loan is repaid and NOT distributed to you, the situation may be different. However you are still out by the loan.

My point is that a similar (tax) effect might arise if, instead of you finding the cash to repay the loan, (and I offer no view on the recipient or destination of that cash), and having it redistributed to you, the trustee simply agrees that the loan (wholly or partly) should be written off as never being able to be collected.

In that case, you, the beneficiary, accept that you will never see that money and that can, in some instances, be treated as distribution. Not always and certainly gives more scope for no charge.

However, in the context of the argument advanced for full/partial loan repayment, i.e. "it shows that the loans were real and reduces the HMRC argument", a write off is just as effective. A write off shows that the loan terms are real and have legal effect. That is the key argument.

I repeat my view, I accept based on thin evidence yesterday but boosted by more material I have since seen, that sending cash to a trustee to "prove" the loan is real and therefore HMRC is wrong, WILL HAVE NO IMPACT UPON THE TAX ARGUMENT.

[WelshRarebit]

<snip>

My point is that a similar (tax) effect might arise if, instead of you finding the cash to repay the loan, (and I offer no view on the recipient or destination of that cash), and having it redistributed to you, the trustee simply agrees that the loan (wholly or partly) should be written off as never being able to be collected.

In that case, you, the beneficiary, accept that you will never see that money and that can, in some instances, be treated as distribution. Not always and certainly gives more scope for no charge.

However, in the context of the argument advanced for full/partial loan repayment, i.e. "it shows that the loans were real and reduces the HMRC argument", a write off is just as effective. A write off shows that the loan terms are real and have legal effect. That is the key argument.

Hi Webberg, thanks for your input. Can you expand a bit more on the above comment? Are you saying that it might be possible to write off the loan without giving rise to a tax charge?