Reply to: All you people with EBT/Loan/Dodgy Umbrella schemes - what you gonna do?

[pastalista]

Not sure I totally agree. The risks have been well publicised for many years, going back to the hordes of people flying over to the Isle of Man to cash their Matabele Gumbo Bean postal orders in the 80s. All these schemes depend on a QC's opinion on a convoluted set of otherwise unlikely commercial arrangements, and QCs are very good at saying what you want them to tell you.

However it is also fairly clear HMRC are keeping away from the retrospective application this time around, else they wouldn't have bothered with the 9/12 anti-forestalling regulations. All they've done is put a line in the sand and said "All these schemes stop here, and we will get round to all of them as soon as we can."

So past users should be grateful they got away with it as long as they have, but anyone staying in one now needs their head read.

See my answer to the next post but I agree, HMRC is drawing a line in the sand for future use, but just because they haven't stated that the rules will be applied retrospectively doesn't mean they won't try to do it. Unless there is a mass action as with the BN66 case, there could be a vast number of consultants spending all of their money trying to prove they did nothing wrong. In an HMRC investigation, the money can run out very quickly leaving little choice but to try to settle.

Aggressive avoidance covers a multitude of sins.

All of these folks, BN66 and EBT both have my undying sympathy.

Pastalista

[pastalista]

There is a bit of a difference between a scheme that exploited the way the dual tax rules worked, declaring full income but paid in a different jurisdiction and bunging a Jimmy wig and big nose glasses on income and calling it a never ending set of loans that never have to be repaid. The reason I rejected using any loan scheme was that they all appeared to be begging to be battered repeatedly with a rusty nail filled club.

To be honest I've been more than a little amazed that the loan schemes weren't stamped out ages ago, at least with the depreciating currency loans they were repaid so did at least look a bit loan like, the EBT ones just don't make sense. I've no idea how it could be argued that those loans aren't just income, but that's something the lawyers have undoubtedly got lined up.

Quite a few of the EBT trustees would periodically settle the loans stating that they had been made in a devaluing currency and could now be paid off for very small sums.

I still don't understand why somebody saying "no, you can live and work in the UK but be taxed in the IOM at 0% and because you can't be taxed on the money twice, HMRC won't be able to take any cash from you" is somehow more sophisticated and "believable" than somebody saying "no, you can live and work in the UK but because the bulk of your fees are returned to you as a commercial loan you don't have to pay tax on it because it isn't income". When viewed with hindsight, perhaps it could be said that both approaches were stretching the point, but were simply using existing loopholes.

Both approaches relied on applying tax law in a specific way - both were legal structures but in the BN66 case, HMRC said they had stated the rules previously and were "clarifying" the position in 2008. In the case of EBT, the new law comes into effect in April 11 but with the anti-forestalling announcement it has effect from 09/12/2010.

This doesn't mean that there will be no retrospection with EBT. It merely means that there has been no official attempt by HMRC to enforce retrospection as there was no previous law to "clarify". I can, however, just picture the discussions between Hector and the unfortunate consultants when the matter is raised during an investigation. It will be a case of "guilty until you prove yourself innocent" and that could be tricky because of Hector's "aggressive avoidance" approach.

Pastalista

[TykeMerc]

There is a bit of a difference between a scheme that exploited the way the dual tax rules worked, declaring full income but paid in a different jurisdiction and bunging a Jimmy wig and big nose glasses on income and calling it a never ending set of loans that never have to be repaid. The reason I rejected using any loan scheme was that they all appeared to be begging to be battered repeatedly with a rusty nail filled club.

To be honest I've been more than a little amazed that the loan schemes weren't stamped out ages ago, at least with the depreciating currency loans they were repaid so did at least look a bit loan like, the EBT ones just don't make sense. I've no idea how it could be argued that those loans aren't just income, but that's something the lawyers have undoubtedly got lined up.

[malvolio]

And what makes you believe that HMRC won't be telling EBT users that they should never have used the schemes and that full PAYE + NI + penalties + interest is due? If you do believe that they won't, then perhaps you can explain to people that used companies like Talent Resource Management who are now being investigated (see other threads) what their defence should be. Perhaps too the amount of criticism being levelled at them can also be explained - the dual taxation loophole was just as narrow as the EBT loophole and nobody (at least that I can find) is saying, "well, you were of course completely stupid for using it but we're sympathetic because the legislation is retrospective in nature". There just appears to be a view - dual taxation people - unlucky, EBT users - greedy, stupid, stupidly greedy, unfair evaders of taxation.

Do you honestly believe that Hector is going to give EBT scheme users a pass prior to 09/12/10?

I personally sympathise with anybody that used any kind of scheme that, at the time, was legal and is now deemed to be otherwise. I believe that they were exercising their right to mitigate their liability to taxation in any legal way possible and they should not be criticised for that.

Pastalista

Not sure I totally agree. The risks have been well publicised for many years, going back to the hordes of people flying over to the Isle of Man to cash their Matabele Gumbo Bean postal orders in the 80s. All these schemes depend on a QC's opinion on a convoluted set of otherwise unlikely commercial arrangements, and QCs are very good at saying what you want them to tell you.

However it is also fairly clear HMRC are keeping away from the retrospective application this time around, else they wouldn't have bothered with the 9/12 anti-forestalling regulations. All they've done is put a line in the sand and said "All these schemes stop here, and we will get round to all of them as soon as we can."

So past users should be grateful they got away with it as long as they have, but anyone staying in one now needs their head read.

[pastalista]

I think the sympathy comes from the fact that the legislation was applied retrospectively

And what makes you believe that HMRC won't be telling EBT users that they should never have used the schemes and that full PAYE + NI + penalties + interest is due? If you do believe that they won't, then perhaps you can explain to people that used companies like Talent Resource Management who are now being investigated (see other threads) what their defence should be. Perhaps too the amount of criticism being levelled at them can also be explained - the dual taxation loophole was just as narrow as the EBT loophole and nobody (at least that I can find) is saying, "well, you were of course completely stupid for using it but we're sympathetic because the legislation is retrospective in nature". There just appears to be a view - dual taxation people - unlucky, EBT users - greedy, stupid, stupidly greedy, unfair evaders of taxation.

Do you honestly believe that Hector is going to give EBT scheme users a pass prior to 09/12/10?

I personally sympathise with anybody that used any kind of scheme that, at the time, was legal and is now deemed to be otherwise. I believe that they were exercising their right to mitigate their liability to taxation in any legal way possible and they should not be criticised for that.

Pastalista

[Fred Bloggs]

What annoys me a great deal is that when you look at the way the schemes are advertised, the unwary/naive punter could be totally unaware that it was a tax avoidance scheme rather than a pretty regular brolly type company.

[TykeMerc]

I think the sympathy comes from the fact that the legislation was applied retrospectively

Absolutely, I investigated and rejected the Montpelier approach years ago, however I support the BN66 cause (I've sent letters etc) because I object to the retrospection.
I'd take the same supportive stance if the EBT loans were attacked retrospectively. Retrospective law goes fundamentally against my appreciation of the word justice.

I've no problem with people exploiting loopholes in badly written tax law, it's the Governments fault if they draft crappy legislation, but my personal and long held opinion is that if income is disguised in a ludicrous fashion then it will get clobbered at some point and it deserves to.
Loan schemes (I've looked into a few over the years) have always appeared to be fairly absurd disguises and I'm not at all surprised they're now Georgette, the only surprise is that it's taken this long for the Government to get around to attacking them.
I'd expect people who use such approaches to know they're using a risky strategy and take appropriate steps.
I happen to think that tax avoidance is perfectly moral and reasonable where as tax evasion is criminal activity, I object to avoidance being termed as if it is evasion or immoral.

[LisaContractorUmbrella]

Hector's work is complete. Talking about avoidance schemes like they are evasion is exactly what they wanted to happen. All this talk of "fairness" in the tax system seems to have worked.

Avoidance has been enshrined in law for a long time - these schemes were no more or less "dodgy" than the BN66 boys' operation and yet I don't see people talking about them like they are criminals.

Avoidance is still legal. It has simply become the whipping boy of HMRC and the Government / press. When people involved in businesses that use these schemes start turning on their own, it's worse for everyone.

I have nothing but sympathy for the BN66 folks - where is the reciprocal sympathy for those who used EBT and other loan schemes?

Pastalista

I think the sympathy comes from the fact that the legislation was applied retrospectively

[pastalista]

So the estate benefits from income that wasn't taxed? Ok.

Thanks for the info DR, I thought it might be something like that, but I admit that it makes no sense to me. I'm not in the least surprised that law is in the works to stamp these schemes out, it's hard for that arrangement to look any more artificial and blatant as income disguise goes.
It's a glasses/nose/moustache getup without the wig and a damn great target at forehead height.

Hector's work is complete. Talking about avoidance schemes like they are evasion is exactly what they wanted to happen. All this talk of "fairness" in the tax system seems to have worked.

Avoidance has been enshrined in law for a long time - these schemes were no more or less "dodgy" than the BN66 boys' operation and yet I don't see people talking about them like they are criminals.

Avoidance is still legal. It has simply become the whipping boy of HMRC and the Government / press. When people involved in businesses that use these schemes start turning on their own, it's worse for everyone.

I have nothing but sympathy for the BN66 folks - where is the reciprocal sympathy for those who used EBT and other loan schemes?

Pastalista

[TykeMerc]

The loan is extinguished on the death of the beneficiary, as is the case with other commercial loans.

Pastalista

So the estate benefits from income that wasn't taxed? Ok.

Thanks for the info DR, I thought it might be something like that, but I admit that it makes no sense to me. I'm not in the least surprised that law is in the works to stamp these schemes out, it's hard for that arrangement to look any more artificial and blatant as income disguise goes.
It's a glasses/nose/moustache getup without the wig and a damn great target at forehead height.

[pastalista]

I may be wrong but I think this is one of the reasons that, in many cases, the loan is made by a Trust not by the companies.

Trusts are governed by strict regulations and the trustees have to act in the interests of the beneficiaries, and obviously calling in the loan would not be in their interest. There is nothing to stop the Trust extending the term of the loan periodically, and presumably this can be done ad infinitum.

Even if the scheme promoter goes bust, the loans are protected by the Trust.

Not sure what happens to the loan if someone dies though.

The loan is extinguished on the death of the beneficiary, as is the case with other commercial loans.

Pastalista

[DonkeyRhubarb]

Sorry to quote myself, but can anyone answer these questions?

I may be wrong but I think this is one of the reasons that, in many cases, the loan is made by a Trust not by the companies.

Trusts are governed by strict regulations and the trustees have to act in the interests of the beneficiaries, and obviously calling in the loan would not be in their interest. There is nothing to stop the Trust extending the term of the loan periodically, and presumably this can be done ad infinitum.

Even if the scheme promoter goes bust, the loans are protected by the Trust.

Not sure what happens to the loan if someone dies though.

[TykeMerc]

Surely these loans have to be paid back (or they aren't loans) when does that happen and how?

If a loan is written off at some point in the future how is that treated by the tax man?

What happens if the body that makes the loan goes bust in some form and a liquidator wants to call in debts to pay off creditors?

If the answer is that the loans are never paid back or written off then what happens when the person who owes the loan dies?

Sorry to quote myself, but can anyone answer these questions?

[DonkeyRhubarb]

to best of my knowledge all previous promoters of EBT based IR35 schemes continue to offer schemes albeit modified.

If that is the case then it's inviting a retro "clarification" of the law, à la BN66, at some point in the future.

If I was in one of these schemes then I wouldn't stay in for too long.

In hindsight, the mistake many of us made with these schemes was not using them but putting too many eggs in one basket.

[malvolio]

What i meant was "would allow certain IR35 schemes to continue with minimum amendment" . For e.g. to best of my knowledge all previous promoters of EBT based IR35 schemes continue to offer schemes albeit modified.

I think a more elegant solution would be to move UK-based freelance businesses out of scope of IR35 and leave the rest - including offshore schemes - in scope. So F2Ms and forced incorporation become clearly non-viable and offshore schemes continue to fail the "legitimate business-related avoidance" test. And HMRC have some clearly defined targets for their depredations

IR35 is not about tax avoidance anyway, it's actually about NIC avoidance by use of dividends, as I'm sure you know. But since those dividends derive from a fully legal (and totally compliant, whatever that means) UK Limited Company, it's hard to see how they would target it any more closely than they already do - which is very badly. Unless they try to introduce a third category of business vehicle, which would be ridiculous. For the money involved - no more than £400m at the absolute tops - it's hardly worth the bother.