2019 tax charge - consultation preparation

**DonkeyRhubarb** · 5 May 2016, 08:25

If courts are considering whether loans are taxable income, then the 2019 charge could be straying into this territory.

http://researchbriefings.files.parli...53/SN06053.pdf

"This is complemented by the sub judice rule that guards against Parliamentary interference in cases currently before the courts."

**Iliketax** · 5 May 2016, 09:38

Originally posted by webberg View Post

The proposed new tax charge on 5th April 2019 is going to apply (we're told) to all outstanding loans from a disguised remuneration scheme.

If a case is taken to Tribunal and before the above date, proves that the loans are just that, loans, does that mean that the charge in 2019 cannot apply or will it still apply if the loan remains outstanding as, although not taxable as income, they remain disguised remuneration loans?

At this stage there is a lot of guessing. But the whole intention of this change is to tax untaxed 'bad' loans. So if it is a 'bad' loan (e.g. one that (i) would fall within Part 7A if the current legislation was in place at the time the loan was made, (ii) not excluded for it be 'innocent' (e.g. a cheap loan from a proper bank that is not part of a tax avoidance scheme), and (iii) not already taxed as income) then it will be taxed. It won't matter what the Special Commissioners or FTT has said before (e.g. Dextra and Sempra people still have to worry about this - although they've probably already settled).

Originally posted by webberg View Post

For me, it would be completely counter-intuitive for a win in Court to be overturned retrospectively by legislation and would (or should) spark a huge backlash over legal protections for taxpayers etc.

From contractors maybe. But in the real world I don't see that. It would be portrayed as (i) we all know the loan is really pay, (ii) their laywers were a bit too clever, and (iii) we've finally caught up with them. The government would say that there is no retrospection. They would say that they are just taxing some dodgy loans that haven't been repaid for a long time (and then point to all the complaining going on when the lender tries to ask for 10% of this dodgy loan to be repaid). But I think that the chances of a win for the [non-] taxapayer after the Supreme Court in UBS is very unlikely.

Originally posted by webberg View Post

What happens if the litigation wins (loans not taxable) before 2019 but it is reversed after that date?

As the technical note says, HMRC will ask for tax, NIC and interest on the original event and then offset the 2019 tax against that. So you could have more tax to pay (e.g. if original tax was due at 50% and 2019 amount is taxed at 45%).

Originally posted by webberg View Post

Would the litigation have to try and prove that the arrangements used, even if the loans are not taxable income, are not part of a "disguised remuneration" scheme. That is a phrase that is difficult to pin down legally and it is not impossible for a judge to say that the loan is not taxable but is still disguised remuneration, especially for pre December 2010 payments.

I'm not sure what litigation you mean? Litigation on the 2019 charge? I think it will be relatively trivial to define what is a 'bad' loan. All the new legislation has to say to catch 'bad' loans is to assume that a sum (being the original loan with the original circumstances) was paid on 5 April 2019 so that Part 7A has to be considered on 5 April 2019. As I mention above, I'm guessing that there will be some exemptions for 'innocent' loans that might accidentally be caught. But who knows?

**DonkeyRhubarb** · 5 May 2016, 09:43

JOURNALS OF ROBERT MAAS: HOW OFTEN DOES YOUR GOVERNMENT LIE TO YOU?

"The document goes on to say, “the package of changes announced by the Chancellor at Budget 2016 will ensure that those who have used or continue to use a disguised remuneration tax avoidance scheme will pay tax and NIC on that remuneration as Parliament intended”.

Parliament in fact enacted legislation against disguised remuneration (which includes some payments by EBTs) in 2011, but only in relation to transactions undertaken after 8 December 2010. That suggests that Parliament has no view on disguised remuneration before that date. Yet the Budget announcements are mainly directed at pre 8 December 2010 EBTs, so it is wrong to pretend that those changes are in any way aimed at what Parliament intended.

So, if I am not a fan of EBT loan arrangements, and some, at least, of them, like that in Murray Group, do not avoid tax at all, why should I care if HMRC and/or the government lie to me and the rest of the citizenry in order to seek to persuade us that the Chancellor is right to attack such arrangements entered into pre 2011? Well, apart from the fact that I don’t like being lied to full stop, it is because the lies are to hide the fact that the Chancellor intends to introduce retrospective legislation to tax now (or rather in 2019) the loans that were made by EBTs before 2011. Parliament is normally violently opposed to retrospective legislation. It accordingly seems that by pretending that Parliament was opposed to such loans pre 2011, the Chancellor thinks that they will not realise how clearly retrospective his proposed legislation is. What the Chancellor is really saying is that if a person received a loan from an EBT before 8 December 2010, he should either voluntarily pay tax on the capital amount, even though it is probably not taxable at all under current laws, or he should repay the loan before 5 April 2019, and if he chooses to ignore both of these options and insist on exercising his legal rights under the loan agreement, then Parliament will introduce a new law to tax him in 2019 on money he received in a non-taxable form in 2001 or 2009, or even 1979. That is retrospection with a vengeance!"

**webberg** · 5 May 2016, 10:42

Originally posted by Iliketax View Post

I'm not sure what litigation you mean? Litigation on the 2019 charge? I think it will be relatively trivial to define what is a 'bad' loan. All the new legislation has to say to catch 'bad' loans is to assume that a sum (being the original loan with the original circumstances) was paid on 5 April 2019 so that Part 7A has to be considered on 5 April 2019. As I mention above, I'm guessing that there will be some exemptions for 'innocent' loans that might accidentally be caught. But who knows?

Thanks. To clarify.

My assumption was that a litigation on whether loans are income starts say next year. The FTT comes out and says these loans are loans, not part of a disguised remuneration scheme and therefore not in Part 7A.

Before a further hearing at UTT the 5/4/19 date rolls around. Because the loans are not in Part 7A then no charge can arise.

The UTT (or later) hearing says that the loans are loans and are NOT taxable, BUT the whole arrangement is a disguised remuneration scheme. Given that the 5/4/19 date has gone and we are told that the charge is a one off, what then?

I think this scenario is one of the more unlikely at this stage but it highlights the potential difficulties.

**Iliketax** · 5 May 2016, 11:12

Originally posted by webberg View Post

My assumption was that a litigation on whether loans are income starts say next year. The FTT comes out and says these loans are loans, not part of a disguised remuneration scheme and therefore not in Part 7A.

So you are talking about something that happens after December 2010 (since the FTT is thinking about Part 7A). So, for example, they could be thinking about an individual who is not an employee. In that case, the FTT could say that Part 7A does not apply since there is no employment. Or they could say that Part 7A does not apply because although there was a loan it was structured by some clever chaps to get out of Part 7A (which is probably a cloud cuckoo land scenario).

Originally posted by webberg View Post

Before a further hearing at UTT the 5/4/19 date rolls around. Because the loans are not in Part 7A then no charge can arise.

So the question now is whether the loans are (in my words) 'bad' loans and so caught by the April 2019 charge. The question then is what the definition of a bad loan will be and I can only guess at that. But the technical note talks about "similar avoidance schemes" and so the new legislation could, for example, extend the definition of an employee for this new tax or provide a deeming rules that Part 7A is to be read as if "contractor" (or whatever) was an employee. So that would say the April 2019 charge would apply but the government would need to be explicit.

The 'cloud cuckoo land' scenario may not have been in Part 7A when it was originally done but, for example, the TAAR in FB2016 may mean it is now (and will be in April 2019). In which case the government would not need to do anything else (based on what I set out in my first post) to ensure the April 2019 charge applies. If it still wasn't within Part 7A then (again on the basis I set out in my first post) there would need to be something extra to bring it into the April 2019 charge.

Originally posted by webberg View Post

The UTT (or later) hearing says that the loans are loans and are NOT taxable, BUT the whole arrangement is a disguised remuneration scheme. Given that the 5/4/19 date has gone and we are told that the charge is a one off, what then?

In my world view of what HMRC would do, the April 2019 tax would already have been paid (or due).

Originally posted by webberg View Post

I think this scenario is one of the more unlikely at this stage but it highlights the potential difficulties.

I agree that this is unlikely (very unlikely) but there are lots more difficulties to think through. For example, let's say the employer has disappeared, will the employee who now gets the transferred liability have to pay the employer's NIC and apprenticeship levy on top of the PAYE and their own NIC and have their pension tax relief tapered? That will be hugely expensive. How does it interact with an APN on the individual and a reg 80 determination on the end user? What about the serial tax avoiders legislation if someone is in multiple schemes? And none of this means that the liability to repay the loan is removed.

**webberg** · 5 May 2016, 11:39

Originally posted by Iliketax View Post

So you are talking about something that happens after December 2010 (since the FTT is thinking about Part 7A). So, for example, they could be thinking about an individual who is not an employee. In that case, the FTT could say that Part 7A does not apply since there is no employment. Or they could say that Part 7A does not apply because although there was a loan it was structured by some clever chaps to get out of Part 7A (which is probably a cloud cuckoo land scenario)..

I think my view is that the new rules are seeking to extend Part 7A to periods prior to December 2010. Laying aside semantics about retrospective law and retrospective effect, I think there is a potential issue with litigation on pre 2010 schemes.

Let's assume a taxpayer used a "scheme" in 2008/09.

For whatever reason the FTT judges say "the loans are in substance and form, loans, and in the absence of any statutory charging provision, no tax can be due". However they go on to consider whether the loans would fall foul of Part 7A should the loans have been made post 2010. This may be because the proposed new charge is now in legislation or the scheme extended beyond December 2010.

There are three options.

1. They don't know and can't/won't decide - gets us nowhere
2. They decide that a non taxable loan means that it cannot be a disguised remuneration scheme and therefore is not in Part 7A. Means that the April 2019 charge cannot be applied unless that legislation uses a different definition and risks transgressing the sub judice rules above?
3. They decide that the "scheme" is one of disguised remuneration even if the loan is not taxable.

In that case, as at 5/4/19 we have the following possibilities.

A. A tax charge is raised even though there is unfinished litigation.
B. A tax charge is not levied until the litigation is finished (drafting nightmare)
C. A tax charge can never be levied at the April 2019 charge is a one off.

I suspect that most of the litigation being prepared now is for pre 2010 schemes. As such the lawyers are probably not considering Part 7A. However if the above scenarios come to pass and a judgement is handed down that does not consider Part 7A, there appears to be little or no protection from the April 2019 charge, despite a litigation victory?

To include Part 7A considerations is going to require more time to prepare a case perhaps?

**Iliketax** · 5 May 2016, 11:51

Originally posted by webberg View Post

I suspect that most of the litigation being prepared now is for pre 2010 schemes. As such the lawyers are probably not considering Part 7A. However if the above scenarios come to pass and a judgement is handed down that does not consider Part 7A, there appears to be little or no protection from the April 2019 charge, despite a litigation victory?

To include Part 7A considerations is going to require more time to prepare a case perhaps?

If you were working for the contractor, in what circumstances would you want to mention Part 7A to an FTT? Part 7A is so widely drawn that it is likely to be very, very hard to say that any scheme related to an employee and a loan from someone other than the employer was outside its scope. To convince the FTT to answer that question if it has nothing to do with the case will be hard. To convince them to say that Part 7A does not apply to someone who is an employee will be like getting Harry Houdini to appear on the One Show tonight.

**TheDandy** · 5 May 2016, 11:52

I think you'll be participating in a kangaroo consultation, merely helping to refine legislation to your own detriment. Hundreds of submissions on APN legislation made not a jot of difference, and any remotely inquisitive questioning was dealt with sleight of hand by DG. If no submissions are made DG would say no one cared - but then who does - we are a toxic bunch and we should be held up as an example of why certain taxpayer's rights should be stripped away right?

Save it for the lawyers and the courts - what more experience do you need to acquire to see where this will end up. I am sure however that many will capitulate before anything (if anything), whatever anything looks like makes royal assent so the psychological effect of this proposal will no doubt have had its intended effect.

Ruminating over this on a public forum I don't necessarily see as a good thing IMHO.

**Whysoserious** · 5 May 2016, 12:07

So for the 3 years HMRC will be saying:

HMRC: "We don't believe them to be a genuine loans, but come 2019 we will treat them as a genuine loan and charge tax on it. Up to that point we will be presenting arguments in court proving that these weren't genuine loans". hmmm...

For the proposed legislation to navigate through existing UK case law, corporate law and employment law, it will be dumbed down to such an extent that it will limit its reach to only a few select special cases.

The 3 year waiting period for this legislation to be implemented will only serve the following:
Give 'intelligent' scheme users 3+ years to make themselves asset & cash poor through legal means
Scheme promoters to find another loop hole to make the loans 'disappear' without incurring a tax charge (yes there are ways)
Give the poorly run/uneducated scheme promoters the chance to close up shop, leaving the users facing a transfer of tax liabilities from employer to employee.

In summary this legislation will only catch the ill-informed scheme users and/or poorly run schemes. Even then it will be challenged in court over the next 10+ years without HMRC ever receiving a penny, wasting millions of tax payers money (i.e Murray case which will be overturned in favour of Murray).

2019 tax charge - consultation preparation