HMRC enquiries for EBT schemes through SANZAR

[MrO666]

Garraway Tax Liability Issued

I have today seen an official letter from HMRC to an individual clearly setting out a tax liability (according to HMRC) for both 11-12 and 12-13 tax years for use of the Garraway scheme.

What's interesting though, the letter clearly states that because it was a self employed scheme, class 4 NIC's have been added to the total liability.

In addition, the total of loans (which HMRC do not believe are loans) are subject to a a grossing up of 15% to account for Garraways margin.

Has anyone else seen anything like this ?

NIC's are arguable........however surely the addition of the promoters margin is total rubbish. How can somebody be expected to pay tax and NIC on a sum of money that they never received........surely that's just HMRC seeing how far they can push it.

[Fred Bloggs]

The margin question has been mentioned a few times here, I recall. I seem to remember that, indeed, that money is taxable. You earned it, so it's taxable. The fact that you gave the money to a scheme provider is irrelevant, I seem to remember.

[ASB]

income 1000 passed to promoter. loan 850.

if decreed that it was chargeable to tax then it seems rational it would be 1000. that was the base income earned.

if it should have bee s/e income that is surely what they would want to chare class 4 on.

if earned income then ers ni would come off. if chargeable.

if other income no ni.

I am not saying it is right or fair, but does look like the natural starting point.

[MrO666]

I would suggest that the loans should still be treated as "other income" and not subject to NIC's though.

If this does stick, then anybody on the hook for post 2011 schemes are going to being asked for much more than most probably realise.

It'll be interesting all the same.

[jbryce]

I would suggest that the loans should still be treated as "other income" and not subject to NIC's though.

If this does stick, then anybody on the hook for post 2011 schemes are going to being asked for much more than most probably realise.

It'll be interesting all the same.

The self-employed angle is a bit bizarre - didn't Garraway pay users as employees and then deposit cash in a trust? The trust then paid loans?

That'll take some unpicking......or was the whole gig a self-employed thing?

Garraway are still in business.....ffs.

[kmpm]

Gar away switched to a SEmp basis for 2011/12 I think. They advised to pay NI schedule 2 I think. I assume if you did this then no NI claim from hmrc?

[LandRover]

Gar away switched to a SEmp basis for 2011/12 I think. They advised to pay NI schedule 2 I think. I assume if you did this then no NI claim from hmrc?

Correct the real details of the PBT are complex. PBT means "Partnership Beneficial Trust", so a partnership is utterly different to EBT scheme, self-employed, tax on profits etc, it needs careful understanding of, and obviously HMRC have not looked at the details but gone for the scare and frighten people approach. They have used the same calculation on AML PBT too and probably all post 2011 schemes. Partnerships are totally different structures and need people with much more tax knowledge to explain the intricate differences.

[MrO666]

Correct the real details of the PBT are complex. PBT means "Partnership Beneficial Trust", so a partnership is utterly different to EBT scheme, self-employed, tax on profits etc, it needs careful understanding of, and obviously HMRC have not looked at the details but gone for the scare and frighten people approach. They have used the same calculation on AML PBT too and probably all post 2011 schemes. Partnerships are totally different structures and need people with much more tax knowledge to explain the intricate differences.

HMRC's approach is that they're not genuine loans but income (which is nothing new and is a different discussion). However, by the very nature that users of the self-employed schemes clearly deemed themselves to be self-employed on their self-assessments, HMRC's approach is that if somebody clearly stated they are self-employed, then any "profits" should be taxed as such.

That's the argument. HMRC are agreeing that someone is self-employed, and hence they are calculating tax and NIC's which would be owed if any other (builder, shop owner anyone) had declared profits of the same (income + loans).

On the face of it, it does seem difficult to argue that someone is self-employed, but that they shouldn't pay tax and NIC on all income.

The only angle I can see would be to argue that the loans are genuine (which we all believe they legally are) so not subject to any tax & NIC, or at very least that they should be treated as "other income" which would remove the NIC charge. We all know point A won't fly, so the only real argument is that's it's other income, which again i'm not sure will wash.

I'm not a tax expert and have no idea exactly how the Garraway trust was setup, however I doubt that HMRC do either, so if nobody GENUINELY knows this, then how can it be disputed either way.

A difficult one............

[StrengthInNumbers]

HMRC enquiries for EBT schemes through SANZAR

I was self employed and provided my services to X who sold my services to Y (recruitment agency) who provided services to Z (end client). If u follow the money, invoice was from Y to Z - that was Y's earning. Then invoice was from X to Y and that was X's earning. If HMRC is going to tax me X's earning then they will also charge me on Y's earning.

How can that be difficult to defend provided implemented correctly and money trailed can be followed?

I was not in control of Y markup and what they did with their earning and similar was not in control with what X did with earning. X decided to put money into trust after taking all expenses and profit they wanted. A contractor was unable to control any part of the chain.

Tax experts - jump on and rip my post to pieces.

[Iliketax]

I was self employed and provided my services to X who sold my services to Y (recruitment agency) who provided services to Z (end client). If u follow the money, invoice was from Y to Z - that was Y's earning. Then invoice was from X to Y and that was X's earning. If HMRC is going to tax me X's earning then they will also charge me on Y's earning.

How can that be difficult to defend provided implemented correctly and money trailed can be followed?

I was not in control of Y markup and what they did with their earning and similar was not in control with what X did with earning. X decided to put money into trust after taking all expenses and profit they wanted. A contractor was unable to control any part of the chain.

Tax experts - jump on and rip my post to pieces.

I know nothing about your arrangements but the starting point for tax for someone who is self-employed is their accounting profits, not cash. The money you actually receive is just not relevant. Accountants imagine some weird things when it comes to accounting and that can mean that your cash profit can be very different to your accounting profits. But it also means that the elements that make up the profits can also be different. One of the weird things is in the application of substance over form. So they look at the effect of what has been done rather than how the cash has moved. The substance might be that you only got the fees you got. Or that it might be that you effectively agreed to get a higher fee and to pay some expenses and the accountants say that those two should be netted off (e.g. income of £100 and no expenses or they may say that substance over form means income of £110 and £10 expenses, both giving £100 of profit). In the latter case, HMRC might say that the expense is not deductible as it is not wholly and exclusively for the purposes of you trade. In the former case, they could not say that as there was no expense.

For self-employed people who get loans, the point is exactly the same. If, from an accounting perspective, the substance is that the income has arisen then it will be recognised as revenue in the accounts and you will pay tax on it.

Another accounting fiction is trusts, if you have de facto control of the trust then you and the trust are treated as the same person from an accounting perspective. So having money in a trust is (from an accounting perspective) the same as you having money. The trust lending you money is ignored as (from an accounting perspective) you are lending money to yourself. If you want to read about this type of fiction, search for UITF 13 (* but other accounting fictions are available in other forms of GAAP/other periods).

The other thing to remember is that the profits that matter are ones that are calculated in accordance with generally accepted accounting practice. As a self-employed person you can prepare accounts anyway you like. But for tax, profits have to be prepared in accordance with GAAP.

If HMRC are trying to challenge that an amount lent should be included as revenue then I'd say that they are wrong. But if they changed their argument to say that the income should be recognised (even though it has not been paid yet and you've got a loan) then they are probably right. There is a subtle difference here that some, including HMRC, may not get.

If you want to challenge HMRC on what you got rather than what X got less disallowable fees then you need to focus on the accounting. HMRC have accounting specialists. Get them to set out why they are right from an accounting perspective (e.g. para x of FRS y says this). Then find an accountant to say (i) they are wrong because of x, or (ii) there is more than one way to skin a cat and both ways are acceptable under GAAP. If you can't do that, you'll lose. If you can do it, you will be in a better place. But as I have no idea what you did, there might be heaps of other issues.