HMRC Enquiry letters on Loans from EBT and other schemes

[cojak]

Are you sure you don't have a choice? You could set up a Limited Company or you could use a PAYE umbrella company.

With regard to the loan - when you are loaned money from a bank you sign a contract which commits you to paying the loan back over a given period of time at a set rate of interest. The arrangements HMRC are targeting are invariably sham arrangements - there is no intention that the 'loan' will ever be repaid. The money received is earnings from a contract and the loan arrangement serves no other purpose than to avoid tax.

Mind you, some are now worrying in case they're NOT a sham...

Hands up - before I get hit with a shower of abuse I started using a scheme in 2013. Pretty dumb - yes. Ignorance - yes. First contractor position - yes. Not enough research - yes. Introduced by a (former) friend (who was only too keen to trouser his introduction fee) - yes. Please feel free to have a chuckle - when I'm not kicking myself I do as well - my user name was chosen based on how I feel !!!

Ok now to the questions. All of the posts appear to be about previous years use of schemes and HMRC seem to be focused on 2008 -2011. Why the particular focus on these years? Is it that's how behind they are? Is the cut off at 2011 to coincide with the Disguised Remuneration rules?

Has anyone approached HMRC off their own back to declare use of these schemes after these dates?

In HMRC's own releases they are using the date of Jan 2015 for people to be able to approach and settle without penalties. Anyone know if this would apply if you contacted them re. 2013/2014? I am assuming that anyone using a scheme after 2011 is going to get hit hard and am wondering as well as trying to get this millstone from around my neck whether it makes much more financial sense to try and sort it out now.

Additionally has anyone ever had a "loan" recalled from any of the companies providing this sort of scheme. My paranoia is working overtime now and I wonder if out of spite any companies would do this if you settled with HMRC. And then where do you stand.....

[LisaContractorUmbrella]

Mind you, some are now worrying in case they're NOT a sham...

A case of damned if you do and damned if you don't really

[horrada]

Are you sure you don't have a choice? You could set up a Limited Company or you could use a PAYE umbrella company.

With regard to the loan - when you are loaned money from a bank you sign a contract which commits you to paying the loan back over a given period of time at a set rate of interest. The arrangements HMRC are targeting are invariably sham arrangements - there is no intention that the 'loan' will ever be repaid. The money received is earnings from a contract and the loan arrangement serves no other purpose than to avoid tax.

Are they a sham? Have they been proven an sham?

[LisaContractorUmbrella]

Are they a sham? Have they been proven an sham?

Give me the details of the scheme and I'll tell you if it was a sham arrangement - if there was no commercial reason for entering into the arrangement other than to reduce tax liability then chances are it will be viewed as a sham arrangement

[ireland2013]

Are they a sham? Have they been proven an sham?

Fair point here - some people may have their opinion that these where sham's but has there been any FTT decisions which states this?

Was Rangers case a sham?

[LisaContractorUmbrella]

Fair point here - some people may have their opinion that these where sham's but has there been any FTT decisions which states this?

Was Rangers case a sham?

In the Rangers case the EBT recipients were genuine employees whose services were used by the club, they weren't contractors who worked for a third party and then put their contract earnings through a 'scheme'. With regard to case law:

Rangers Football Club

Murray Group Holdings & Others v HMRC [2012] UKFTT 692 (TC)

Outcome: Taxpayer win, HMRC to appeal

An appeal by Murray Group Holdings, the previous owners of Glasgow Rangers Football Club, against HMRC assessments for income tax and national insurance in relation to loans made to players and executives through an EBT. The arrangements in question have now been blocked by anti-avoidance legislation commonly known as the ‘disguised remuneration’ legislation. The taxpayer’s appeal was allowed by the First Tier Tribunal (FTT) (by a 2:1 majority), although HMRC is taking the case to appeal at the Upper Tribunal. The hearing, which is set for a date between January to March 2014, is to be held in public.

PA Holdings

HMRC v PA Holdings Ltd [2011] EWCA Civ 1414

Outcome: HMRC win

PA Holdings Ltd had created shares in a subsidiary company to pay bonuses to its employees, via an EBT, as dividends rather than as employment income. This would incur lower rates of income tax for employees – being taxed as dividends, rather than under PAYE – and avoid national insurance charges for both employees and employer. PA Holdings also tried to claim a corporation tax deduction for the bonus payment arrangements. Both the First Tier Tribunal and the Upper Tribunal had ruled that the cash received by the employees was both dividend income and employment income, however the Court of Appeal decision upheld HMRC’s arguments that an arrangement intended to deliver a bonus through an EBT was subject to tax and national insurance as earnings.

Knowledgepoint 360

HMRC v Knowledgepoint 360 Group Limited [2013] UKUT 007 (TCC)

Outcome: HMRC win

The Upper Tribunal allowed HMRC’s appeal and decided that payments made from an EBT to beneficiaries were not gratuities, and therefore were subject to national insurance, thus overturning the decision of the First Tier Tribunal. The relevant legislation was amended in 2004, meaning the case is largely of historical interest.

Scotts Atlantic

Scotts Atlantic Management Ltd (in members’ voluntary liquidation) & Others v HMRC [2013] UKFTT 299 (TC)

Outcome: HMRC win

Tax adviser John Dryburgh set up various companies – two of which were Scotts Atlantic Management and Scotts Film Management – which made contributions into EBTs with trustees based in Guernsey; these contributions were then used to purchase shares in a new company at a significant premium to their actual value. According to HMRC, ‘the tax avoidance involved trying to extract profits from companies while at the same time securing corporation tax deductions of around £9m. Money was paid into the EBT, and corporation tax deductions were claimed by the employer. The EBT gave undervalued shares in a new company, causing a loss to the employer’. The First Tier Tribunal dismissed the taxpayers’ corporation tax appeal, ruling that the corporate tax deductions were not incurred wholly and exclusively for the purposes of the trade. Although Mr Dryburgh is in bankruptcy and Scotts Atlantic Management is in liquidation, HMRC believes that the cash can be recovered.

Dextra Accessories

Ronald MacDonald (HMIT) v Dextra Accessories Ltd & Others [2005] UKHL 47

Outcome: HMRC win

In this case, it was ruled that a contribution to an EBT was potentially income from employment if there was a realistic possibility that the contribution may be paid as income from employment. The case eventually reached the House of Lords, which dismissed the taxpayer’s appeal and found in favour of HMRC. The Dextra Accessories case has been referred to in later cases involving EBTs, most notably in Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062 (in which the Special Commissioners found in favour of HMRC after considering Dextra Accessories), and in Boyer Allan Investment Services Ltd v HMRC [2012] UKFTT 558 (TC) (where the First-tier Tribunal held that corporation tax deductions for EBT contributions made in 2000 and 2001 were not claimed under a generally prevailing practice and so could be reversed, in part, by discovery assessments made in accordance with Section 43 of the Finance Act 1989 as construed in Dextra Accessories.

[ireland2013]

Fair Point

I am not defending any scheme - just looking for information


Just wondering has there been any FTT case where the EBT vehicle was used primarily to provide interest free loans?

[cojak]

Fair point here - some people may have their opinion that these where sham's but has there been any FTT decisions which states this?

Was Rangers case a sham?

No, Rangers wasn't a sham (although HMRC are appealing), but whose benefit was it for? Rangers were/are in financial difficulties and wanted to defer the payment of tax for 10 years (when they hope to join the Premier League and the cash starts rolling in). The suckers employees just saw the £££ signs in front of their eyes - they will have to pay the loan in 10 years time.

So if you genuinely expect to pay the loan it's not a sham (hope you have all that money tucked away somewhere that's earning good interest, 'cos the interest is all you own).

If you genuinely don't expect to repay the loan (hands up all those saying they can't repay 'cos they've spent it?) then it's not.

[LisaContractorUmbrella]

I am not defending any scheme - just looking for information


Just wondering has there been any FTT case where the EBT vehicle was used primarily to provide interest free loans?

In some ways it doesn't really matter. Loans to employees, interest free or otherwise, are perfectly legitimate. The problem comes when a scheme operator uses a legitimate tax structure but the applies it incorrectly to create an artificial arrangement with no purpose other than to avoid tax - that's what the Courts will consider when making their judgement. See Cojak's comments on the Rangers case - there was an expectation that the loans would be repaid - a contractor entering into an EBT scheme would not expect to have to repay the loan as, in reality, what ended up in their pockets was their earnings from a contract, just with less tax paid.

[ireland2013]

thanks for the information