Reply to: BN66 and full empoyment status

[ASB]

Firstly I personally wouldn't go for a loan based scheme or an any sort of artificial scheme because I don't like the risk. In any event future legislation could render it obsolete and retrospective. There are a number of lines of attack.

As a general principle loan schemes CAN work. There was in fact specific legislation related to the construction of some schemes to render them ineffective. These were largely based on EBTS and onshore EBTS had rules changes related to the tax advantages of the settlor into the trust (essentially they were not allowable for CT purposes until such point as loans were actually repaid).

Dextra and Sempra have been mentioned. Arguably schemes structure the way these were were sucessful. Though ultimately that is for the supreme court to decide should it ever get that far. Even then there is the possibility of appeal to any superior authority (potentially europe).

Some point which may be relevant, and it depends upon how things are structured:-

- Is the management of the trust (if any) within the remit of UK taxing authorities?

- Who makes the loan? If it is made by an offshore trust can this be looked through?

- If it is offshore what is the overall NI and tax position on any salary?

- Is the loan an employment related loan? If so income tax is due if it is written off.

- Does the loan cease to be an employment loan if the borrower leaves the employ of the firm? If it is not an employment related loan no tax is due on write off.

- Does the loan cease to be an employment loan on death of the borrower?

- If the loan is made via a trust what does the trust deed allow in terms of how the funds can/must be used when and if the loan is called in?

- Is it possible that in any challenge the judiciary may take a purposive rather than literal view?

- What case law is relied upon in support of the assertion that the scheme works?

- Has it been tested against the scheme structure?

- Has it been tested against other scheme structures and how was it applied?

- What case law do HMRC rely upon in order to attack and how has this been applied in other cases?

- What things may ones estate be able to do if the trust is wound up on death in order to remove the funds from the IHT net?

- Should the scheme be declared with a registration number by the promoter?

- If it is not disclosed where would the swinging penalties lie with the consumer or with the promoter?

- Has the user declared it's use on their tax return?

- How confident is a user that the glaring loophole which arguably means an employment related loan ceases to one at some point giving a potential tax advantage will remain open?

If the scheme in question has been running for may years unchanged (or is based on somebody elses scheme) then it may be that it is either very vulnerable or simply doesn't work. If it's regularly updated then it is probably safer.

If one is (legitimately) arranging ones affairs to convert income into either capital or something that is not income by "artificial" means then it is absolutely clear there is a substantial risk (and reward) in this. The fact that a conclusion of avoiding taxes would be maybe a bit odd doesn't mean that is the wrong conclusion. Whether it can be closed down prospectively or retrospectively is a different matter.

Loan schemes can work. But generally they need to be tailored to the circumstances of the individual and targetted towards them and their overall objectives. This needs to be regularly review in light of constant changes to the FA, case law and general judicial principles as these change over time. The cost of this will often outweigh any benefit for all but the very rich.

[OnYourBikeGB]

Perhaps it is better to think of it this way. Are you doing anything that lowers your tax burden (forget about if it is legal or not, this only makes the difference between penalties and interest and interest on its own)? If you are, then you are in their scope. Then, to what degree is what your doing purely designed to lower the amount you pay in tax? To me, this is very sweeping, it covers a lot of territory. If you answer yes to 1 and 2, then as BB pointed out, you are at risk. HMRC will take a view as to whether or not what you are doing is artificial, not you or your advisors. Both now, and in the future you can be landed with an additional charge and interest backdated to whenever you began that action, if this ruling is allowed to stand. It's really that simple. And don't depend on tax returns being closed or 6 year rulings.

[LisaContractorUmbrella]

That’s not what the Special commissioner ruled in Dextra and Sempra.

How do you prove it's not a loan?

But with Dextra and Sempra the loans were set up for employees of the company or family members of the owners i.e. there was a close relationship and the company benefited from the services of the employees. In the case of an artificial scheme the contractor gives no benefit to the company giving the loan other than the payment of a, usually very high, fee. In most cases the contractor and the scheme provider never even meet.

Unfortunately it is still the case that exisiting legislation does not clarify HMR&C's intention towards avoidance schemes but IMHO anything which is blatantly artificial is likely to cause problems for contractors at some point down the line and with the advent of the application of retrospective tax legislation it will potentially be a very big and expensive problem.

[sal626]

But this is not a loan in reality - it is an avoidance scheme that takes a large proportion of your earnings and calls them a loan. The situtation is totally and utterly artificial and this is HMR&C's objection. You do not work directly for the company giving you the loan, you do not earn you money working in the Isle of Man or Luxembourg etc; you work in the UK and you live in the UK and therefore you are subject to UK tax laws.

That’s not what the Special commissioner ruled in Dextra and Sempra.

How do you prove it's not a loan?

[LisaContractorUmbrella]

not quite true as you are making a big assumption that it is written off at death. as it is a Loan (and thus the same as a mortgage, credit card debt etc), it would actually have the effect of reducing your estate before tax.

and the bit about perceived benefit is laughable come on. that would be like them taxing you now for the potential capital gains that x investment that you made might make over the next 10 years. a loan is a loan, not income

But this is not a loan in reality - it is an avoidance scheme that takes a large proportion of your earnings and calls them a loan. The situtation is totally and utterly artificial and this is HMR&C's objection. You do not work directly for the company giving you the loan, you do not earn you money working in the Isle of Man or Luxembourg etc; you work in the UK and you live in the UK and therefore you are subject to UK tax laws.

[cojak]

Is it really a loan if it never gets repayed?

Nail.
Head.

[BlasterBates]

Is it really a loan if it never gets repayed?

[RockTheBoat]

Even if the loan-based schemes run until the day you die, the tax is still due, it just comes out of your estate before any leftovers (yeah, right...)go to the family, unless you manage to do something very clever to avoid it (like giving it all away). Or, were they so minded, HMRC could tax you now on the perceived benefit to you of having the loan capital available for use.

not quite true as you are making a big assumption that it is written off at death. as it is a Loan (and thus the same as a mortgage, credit card debt etc), it would actually have the effect of reducing your estate before tax.

and the bit about perceived benefit is laughable come on. that would be like them taxing you now for the potential capital gains that x investment that you made might make over the next 10 years. a loan is a loan, not income

[BlasterBates]

If you indulge in tax avoidance you take a risk it is a simple as that, and you just need to put enough aside to pay a bill if the worst comes to the worse.

[OnYourBikeGB]

Don't be misled by trying to apply BN66 to your scenario. In the JR, HMRC did not even really attempt to back up their case law assertions, they had been pretty much torn to shreds. What they did do was to persuade the judge to accept that they have a right to create retrospective tax legislation if they feel it is justified. The judge backed the argument that by using legal tax planning you are seeking to lower your tax burden below that accepted as the norm and this can be unfair. If HMRC don't like what you are doing, they can retrospectively legislate against it. Don't be distracted by the fact that it was DTA, or offshore trusts etc etc in the BN66 case. Now you could argue that that HMRC would only do this if they feel that the planning is aggressive, unfortunately it is HMRC who will decide that, not you and not your advisors.

That's why this judgment is causing so much concern, and really needs to be tackled, it is too sweeping. Can you imagine if you are a tax efficient company considering setting up in the UK what you would be thinking at the moment? You have shareholder value to consider, you want to legally maximise your profits, you have lots of highly paid accountants to make sure your money is used efficiently. Can you be certain that in ten years time, HMRC are not going to retrospectively legislate against you? Doubt it.

[malvolio]

Even if the loan-based schemes run until the day you die, the tax is still due, it just comes out of your estate before any leftovers (yeah, right...)go to the family, unless you manage to do something very clever to avoid it (like giving it all away). Or, were they so minded, HMRC could tax you now on the perceived benefit to you of having the loan capital available for use.

Walk away. Like someone else said, if you live and work here, you pay tax here. Anything else is now very risky unless you are a major donor to Gay Gorgon's support organisation.

[sal626]

err I would get out of that scheme like now....

That is a fool proof tax scheme right?

Well that loan is just that, a loan....

How do you know how often these guys haven't wound up the company and started a new one?

...and when they wind it up, they'll call in the loans, and what can you do?

Be afraid .....be very afraid.

I know of one scheme that has wound up, and started a new company and 3 years later - they still havn't recalled any loans. In fact, they have done this twice now, and not one loan has been recalled.

Probably because they have no power to...that belongs to the Trust. Which is the key element of an "EBT".

[LisaContractorUmbrella]

well in that case (with regards the writting off and becoming taxable) surely its more of a tax deferral scheme? ...

not sure about the future legislation retrospectively.. since they are not attempting to clarify (read - change) an existing law, the more likely scenario would be a closure of the loophole going forward, like they have done to just about every other loophole EXCEPT for the BN66 one...

depending on the scheme's set up it could be considered tax deferal but that in itself is not acceptable to HMR&C. PAYE is paid monthly or weekly and, if you work through a Limited Company you will actually paid tax in advance of it being due after the first year of trading. It is therefore highly unlikely that HMR&C would view paying your tax every few years or so as anything other than avoidance.

[RockTheBoat]

Totally agree with BB - this is an obviously artificial scheme which has been designed to avoid paying tax - exactly what HMR&C have taken issue with in the recent BN66 case.

With these particular schemes, if the loan is written off it becomes taxable or it remains an outstanding loan which can be recalled at any time so your position is never secure.

With regard to applying future legislation retrospectively - in these type of circumstances it is not only possible but extremely likely.

well in that case (with regards the writting off and becoming taxable) surely its more of a tax deferral scheme? ...

not sure about the future legislation retrospectively.. since they are not attempting to clarify (read - change) an existing law, the more likely scenario would be a closure of the loophole going forward, like they have done to just about every other loophole EXCEPT for the BN66 one...

[LisaContractorUmbrella]

Totally agree with BB - this is an obviously artificial scheme which has been designed to avoid paying tax - exactly what HMR&C have taken issue with in the recent BN66 case.

With these particular schemes, if the loan is written off it becomes taxable or it remains an outstanding loan which can be recalled at any time so your position is never secure.

With regard to applying future legislation retrospectively - in these type of circumstances it is not only possible but extremely likely.