Reply to: Still not clear about Umbrella Loan

[pzz76077]

They are difficult to challenge and HMRC have lost a couple of cases (on specific facts of course). However it seems likely to me that they wil be challenged sucessfully eventually. The question then is how far back they go, even without BN66 there is an argument that it can go back to FA 2005 due to the criteria in there about "scheme" registration. Of itself that becomes a minefield, if it turns out it is a "scheme" under those rules then it should be registered. If it is not then a user can be penalised up to 5k per day - though the initial point of attack is the promoter in theory.

Certainly if one is UK domiciled and resident I can see absolutely no reason to take the risk. Of course other folk do, but in some cases I don't think they are remotely aware of the risks they face in the event of a revenue challenge.

Certainly there is probably some mileage for some people in very specific circumstances - eg overseas income and non dom, but then there are probably better ways of dealing with that.

Seems to be a point of legal definition - how can a loan be a loan if you never have to pay it back??
The bottom line is that no judge will agree that UK tax payers should not pay UK tax on all of their income what ever you want to call it.
PZZ

[sal626]

Phil, I agree that if the schemes are defeated, the liability will be with the taxpayer.

But two of your questions are presuming that the schemes have been defeated. But my point is that these schemes are not that easy to challenge. I agree with ASB that they will eventually be successfully challenged, but I don’t believe that will happen until laws are changed. Also, BN66 should not have any bearing. In that case, HMRC have tried to say that BN66 clarified a specific piece of legislation, making certain schemes illegal. That argument does not work with these loan schemes, nor has it been made by HMRC…and there is a good chance it may not even work in the non –loan schemes affected by BN66.

Any tax avoidance scheme or measure has its associated risks, but that doesn’t mean tax avoidance is illegal - or that anyone who has used, is using or going to use these schemes is 100% going to get done.

[ASB]

I just cant see these 'loans' being justified to be anything of the sort in a court of law. I will only take one such case and the whole lot will fall down leaving a thousands of bankrupt contractors given to option to pay up or face tax evasion proceedings.
Whenever that day comes, contractors in these schemes will be left holding the baby.

'Lets see, 85% of a contractors revenue for few years, plus interest and fines: that will be everything you have and more please sir'. (spoken in the voice of a HMRC investigator).



PZZ

They are difficult to challenge and HMRC have lost a couple of cases (on specific facts of course). However it seems likely to me that they wil be challenged sucessfully eventually. The question then is how far back they go, even without BN66 there is an argument that it can go back to FA 2005 due to the criteria in there about "scheme" registration. Of itself that becomes a minefield, if it turns out it is a "scheme" under those rules then it should be registered. If it is not then a user can be penalised up to 5k per day - though the initial point of attack is the promoter in theory.

Certainly if one is UK domiciled and resident I can see absolutely no reason to take the risk. Of course other folk do, but in some cases I don't think they are remotely aware of the risks they face in the event of a revenue challenge.

Certainly there is probably some mileage for some people in very specific circumstances - eg overseas income and non dom, but then there are probably better ways of dealing with that.

[PhilAtBFCA]

Offshore Schemes

sal626

Yes, I would agree with you that the schemes are not easy to "defeat" . They are often very clever, well thought out and have had plenty of money in adviser fees spent on them. ( Most likey seen as an investment by the scheme provider as they will earn stacks out of a successfully marketed scheme)

A couple of things to consider though:-

1. Who still earns the fees whether the scheme fails or succeeds ( Scheme Provider )
2. Who is held responsible to pay the tax,penalties,and interest if the scheme fails ( the tax payer )
3. Who lives and works in the UK after all of this goes wrong ( the tax payer not the scheme provider in most cases )


Phil

[sal626]

What I don’t get, is that if these schemes are so easy to defeat why have they not been closed down already? As far as I am aware, special commissioner has twice ruled against HMRC on this issue. Not one case has even got to court. The last one…HMRC actually withdrew the appeal. I’m not recommending these schemes to anyone, just saying that it’s not 100% certain that these schemes will be closed down, without a change in law.

[PhilAtBFCA]

Offshore Schemes

why are these threads still appearing?

Yes it does seem a good question.

One answer , IMHO, is that many "Contractor Information Websites" still take their advertising spend and so it adds to their "credibility".

Anyone considering this type of scheme does need to go in with eyes wide open and stop kidding themselves about how "safe" it is to do it. If you have to even ask the question, then you may want to consider why you want to risk all the hassle you read about in the BN66 thread for instance.

PAYE with the agency, PAYE Umbrella or run your own business as a Ltd Company - why would you want to risk any greater hassle ?

Phil

[Fred Bloggs]

Any legal arguments may delay payment for a while but no judge is going to agree that it is reasonable to earn your living in the UK and not pay tax.

And, let's be frank about it, most UK citizens would agree with that view.

[LisaContractorUmbrella]

I am sure that most tax advisors could put together an artifical scheme using existing loopholes which would 'guarantee' all its members could retain 95% of their earnings but, and it is a big but, part of HMR&C's remit is to ensure that, if you earn in the UK you will pay tax in the UK. Therefore, IMHO, it is only a matter of time before all avoidance schemes are targeted and closed down - and their members will be presented with a huge tax bill courtesy of HMR&C. Any legal arguments may delay payment for a while but no judge is going to agree that it is reasonable to earn your living in the UK and not pay tax.

[pzz76077]

At last we agree on something!!!!

Let's be sensible about this.
HMRC have proven that they're willing to engage a time machine to retrospectively attack tax planning and since these loan schemes have infinite duration loans the users would arguably have a current scheme that wouldn't even require retrospection.
These loan schemes are begging to be battered by HMRC and I fully expect them to mount a concerted attack before too long. The bloodbath which results will make BN66 look like a picnic as there are quite a lot of loan schemes out there with loads of users to assault.

There were many of these schemes being operated out of Delaware and South Africa back in the 80's when I was contracting in the States. All of them were spectacularly crushed by the US courts, jail terms for the poor contractors shafted by the scheme operators.

Not much chance this time round IMV.

PZZ

[TykeMerc]

I just cant see these 'loans' being justified to be anything of the sort in a court of law. I will only take one such case and the whole lot will fall down leaving a thousands of bankrupt contractors given to option to pay up or face tax evasion proceedings.
Whenever that day comes, contractors in these schemes will be left holding the baby.

'Lets see, 85% of a contractors revenue for few years, plus interest and fines: that will be everything you have and more please sir'. (spoken in the voice of a HMRC investigator).

At last we agree on something!!!!

Let's be sensible about this.
HMRC have proven that they're willing to engage a time machine to retrospectively attack tax planning and since these loan schemes have infinite duration loans the users would arguably have a current scheme that wouldn't even require retrospection.
These loan schemes are begging to be battered by HMRC and I fully expect them to mount a concerted attack before too long. The bloodbath which results will make BN66 look like a picnic as there are quite a lot of loan schemes out there with loads of users to assault.

[pzz76077]

Actually even that is not necessarily true (but it can be). The write off of the loan on death is not necessarily a chargeable event. In fact currently if the loan is not an employment related loan then the write off of the loan is not a chargeable event (doesn't mean it won't be next year). If it's not an employment related loan then it's not due for BIK either (under current rules). Of course, actually ensuring it is NOT an employment related loan is not necessarily easy....

I just cant see these 'loans' being justified to be anything of the sort in a court of law. I will only take one such case and the whole lot will fall down leaving a thousands of bankrupt contractors given to option to pay up or face tax evasion proceedings.
Whenever that day comes, contractors in these schemes will be left holding the baby.

'Lets see, 85% of a contractors revenue for few years, plus interest and fines: that will be everything you have and more please sir'. (spoken in the voice of a HMRC investigator).



PZZ

[ASB]

Only thing to remember is that the tax will always be due at some point, usually when you shuffle off this mortal coil. So your nice inheritance for your family will go to pay all the taxes you've not been paying. Cheerful thought...

It's also a very small step to make the benefit of the loan a BIK, and again you'd be stuffed. That one may well happen.

Actually even that is not necessarily true (but it can be). The write off of the loan on death is not necessarily a chargeable event. In fact currently if the loan is not an employment related loan then the write off of the loan is not a chargeable event (doesn't mean it won't be next year). If it's not an employment related loan then it's not due for BIK either (under current rules). Of course, actually ensuring it is NOT an employment related loan is not necessarily easy....

[mailric]

why are these threads still appearing?

did tykemerc not spell it out clear enough above?

[malvolio]

Only thing to remember is that the tax will always be due at some point, usually when you shuffle off this mortal coil. So your nice inheritance for your family will go to pay all the taxes you've not been paying. Cheerful thought...

It's also a very small step to make the benefit of the loan a BIK, and again you'd be stuffed. That one may well happen.

[ASB]

That's the absolutely critical point. If it was a viable, safe strategy then every accountant and umbrella would be using it.

The risks of being clobbered by HMRC at a later date are very high and it would be incredibly silly to think that the companies offering these "loans" will never recall them especially if they ever get into financial problems.
Far too high a risk for anyone rational.

I think the risks associated with loan repayment are actually nil - if the scheme is properly set up. The funds should be paid to some sort of trust with a format trust deed. This then makes the loan to it's beneficieries and the objective of the trust is clearly defined. Upon death the trust can then recall the loan from the estate. There is now a set of money and the trust deed should ensure it is in fact paid to the inheritors. Done properly there isn't the risk of recall.

If the money is simply lent by the company to the employee then there is obviously a risk (signficant) of the loan being recalled (though this would be good evidence it was a loan - even though you are probably now bankrupt ).

As to what taxation charges these may cause on either the entity making the settlement into the trust or the individual receving the loan, and whether that loan is employment related will depend upon the individual arrangements. It is plausible that an offshore entiy might be outwith the rules which meant there was no allowance on payments into a trust - not an expense and thus CT chargeable.

I don't doubt for a moment that these sorts of arrangements can work. However they need to be tailored to the individuals circumstance. Generally they are expensive to set up properly and the return is only worth it where large sums are earned.