Reply to: Repaying back loans

[DonkeyRhubarb]

And the lesson is, be careful who you listen to...

Opinions to be treated with a huge pinch of salt:

1) mates who were in the scheme
2) armchair lawyers on these forums
3) professional types on these forums that you don't know exactly who they really are
4) scheme promoters, or others, who may have a vested interest in only viewing things one way

Bottom line is, be a lot more cautious about what you do now than when you originally joined the scheme.

[webberg]

The position is a complicated one.

Loans made by an employer are (as said above) subject to a tax code that see the benefit of any loan as taxable income deriving from the employment. That "benefit" may include the subsequent writing off of that loan.

This then gives rise to lots of questions.

What if the loan was repayable originally but is subsequently written off?
What if the employee leaves the job/employer?
Are the employer and lender (assumed to be a trust) related and to be treated as the same person?
What happens if the employer no longer exists and the lender/trust writes the loan off?

Loans made to a self employed person are both easier and more difficult.

If the self employment is genuine, continuing and the loan was made to the business (I've paraphrased that bit) then a write off is probably income of the business.

If the self employment was really an employment, see above.

If the self employment has subsequently ceased, would the loan write off be seen as income for a business no longer trading (post cessation income) or would it be seen as miscellaneous income (from an activity that does not amount to a trade but is more than a tax nothing?)

The FACTS will be determinative here and each scheme may have different facts leading to different conclusions.

Flying a flag for the tax profession here.

You will get to a proper answer ONLY but considering all the facts, applying the various pieces of legislation applicable at the time of loan/write off, considering the principles arising from judicial review.

That REQUIRES expertise.

The normal way to do this is for a day to day tax numpty to do the research and formulate the questions based on the facts and then to discuss and consider those facts with more experienced tax specialists, probably Counsel.

What you get is an OPINION.

That opinion may then be tested with HMRC. If HMRC disagree then everybody goes to Court and a JUDGE considers the position and makes a decision.

Make no mistake here.

It is ONLY a decision from HMRC and/or a Judge that is FINAL.

Everybody and his dog can have a view and a guess and the man in the pub (acknowledged expert as he is and having reached his view after careful research and analysis) is probably the cheapest option, but until that final decision, we're all speculating.

What is clear is that a view from a source which is focussed ONLY on the facts and the application of law/cases to those facts is going to be about as objective as you can get.

It's very difficult for those who have a personal involvement in any such arrangement to achieve objectivity and inevitably subjective considerations come into the equation as we all like to arrive at an answer that suits us.

I accept that the above may be seen as self serving and an advert for using tax professionals. However I offer no apology. My opinion is that there is no substitute for an objective opinion from an acknowledged specialist and no better person/team to take that opinion to HMRC to get an answer that can be relied upon. There are plenty of tax people to be found via Google; there are some well known names already active in this area who can back expertise with experience.

Whilst the above people may get the answer wrong, I can guarantee that they have a better chance of arriving at the right answer than an uninformed person.

Rant over - thanks for your time.

[DonkeyRhubarb]

If the original loan is employment-related then there is a specific piece of income tax law that says the waiver of that loan is taxable.

If you are self-employed and the loan is to do with your trade then it is likely that the waiver would be recognised as income under generally accepted accounting principles. As such, profits would be increased and so more income tax would be due.

According to a QC opinion I've seen, the tax treatment of waiver (write-off) will depend on various factors.

[Iliketax]

If the original loan is employment-related then there is a specific piece of income tax law that says the waiver of that loan is taxable.

If you are self-employed and the loan is to do with your trade then it is likely that the waiver would be recognised as income under generally accepted accounting principles. As such, profits would be increased and so more income tax would be due.

You may be correct. However if my Granny had lent me a sum and then decided later that repayment wasn't necessary then it would be a gift not income.

If it is a waiver by your Granny then the original loan (probably) has nothing to do with your employment or trade. And so neither the loan nor the waiver would be subject to income tax. [Caveat - the 'probably' in there is because it is fact specific and there are plenty of pieces of tax legislation that can catch the making of loans by someone who is not an employer.]

[DonkeyRhubarb]

Well the money has no longer been lent to you, but has been given to you. I would suspect that it would then be immediately treated as income, and therefore taxable. No?

If it were that easy then the providers/promoters would surely have lent the money and then, shortly afterwards, written it off.

Unless you are a tax advisor, or better still tax counsel, it is unwise to speculate.

The answer may vary according to the specifics of a scheme.

[TAF4]

Well the money has no longer been lent to you, but has been given to you. I would suspect that it would then be immediately treated as income, and therefore taxable. No?

You may be correct. However if my Granny had lent me a sum and then decided later that repayment wasn't necessary then it would be a gift not income. I can understand a 'Gift' of enormous value causing Hector to salivate so maybe a partial write off each FY would be the way to go.

The real difficulty (in addition to Hector's interest) is that the loan provider might see the the loan book as an asset to be leveraged or sold.

[Krieger]

I don't see how the write-off of a loan is anything more than the removal of a liability (or debt). How could that possibly attract a tax charge?

Well the money has no longer been lent to you, but has been given to you. I would suspect that it would then be immediately treated as income, and therefore taxable. No?

If it were that easy then the providers/promoters would surely have lent the money and then, shortly afterwards, written it off.

[TAF4]

Has anyone approached any of the trustees requesting a write-off of the loan?

I assume that any write-off would immediately be liable for income tax but, assuming the employee is happy with that and the income tax is paid, would that be the end of it? (i.e. no loan and no further tax liability)?

I don't see how the write-off of a loan is anything more than the removal of a liability (or debt). How could that possibly attract a tax charge?

[Krieger]

However, in the context of the argument advanced for full/partial loan repayment, i.e. "it shows that the loans were real and reduces the HMRC argument", a write off is just as effective. A write off shows that the loan terms are real and have legal effect. That is the key argument.

Has anyone approached any of the trustees requesting a write-off of the loan?

I assume that any write-off would immediately be liable for income tax but, assuming the employee is happy with that and the income tax is paid, would that be the end of it? (i.e. no loan and no further tax liability)?

[Loan Ranger]

Cross post.

http://forums.contractoruk.com/hmrc-...ml#post2241356

[stonehenge]

There's no mention of CCA in the loan agreement.

It's only a couple of pages long and looks nothing like any other loan agreement I've signed. Usually there's reams of small print.

Btw, the loans were unsecured and interest free.

[Iliketax]

Q
Are the laws affecting the consumer different in the Isle of Man than the UK?

A

In general laws on the IoM mirror those in the UK but there are significant differences in certain items of legislation.

For specific details of legislation that may affect you in your business or leisure on the IoM please contact our office by letter, telephone, fax or email with your enquiry and we will advise you appropriately.

I'm far from an expert on the CCA but had assumed that if you, the borrower, were resident in the UK then the UK CCA would apply even if the lender is offshore. But that is just an assumption. And there would be lots of hoops to go through that may be insurmountable (does the company that acts as trustee have a credit business? Perhaps not in its capacity as trustee? But if it makes lots of these loans as an important part of its overall business?). I just don't know. But I would guess that this is the bit a lender in the IoM would have focused least on. They would have done their best to make sure that the repayment terms in the loan agreement was watertight as that is important for the tax. But the CCA is frequently ignored. Who knows.

[elpinar]

does the CCA apply in the IOM ?

Q
Are the laws affecting the consumer different in the Isle of Man than the UK?

A

In general laws on the IoM mirror those in the UK but there are significant differences in certain items of legislation.

For specific details of legislation that may affect you in your business or leisure on the IoM please contact our office by letter, telephone, fax or email with your enquiry and we will advise you appropriately.

[stonehenge]

Thanks Iliketax.

The problem with our trust is one man has control of everything. He's both the scheme operator and trustee. And rumours are his company is in financial trouble.

Put two and two together and it starts to smell a bit off.

[Iliketax]

This thread isn't about strategies for avoiding the 2019 charge. It's about the Trustees demanding 10% of loans be repaid.

What I don't get is this.

The trustees lent me money but I'm also a beneficiary of the trust. Can the trustees really do anything to harm me, seeing as how they are supposed to act in the best interest of the beneficiaries?

Taking legal action against beneficiaries doesn't sound like it would be in their best interest.

I don't know anything about your trust. But a typical employee benefit trust will have a defined listed of unnamed beneficiaries (e.g. employees, former employees and their dependants). There will often also be a "long-stop" beneficiary, usually some sort of charity, if no other beneficiaries can be found. Now sometimes the trustees put money into a sub-trust before the sub-trust lends the money to you. The sub-trust limits the range of beneficiaries (e.g. to you and your dependants). This sub-trust can be irrevocable (or not). If it is revocable then there will be something that sets out when / how its assets can be put back in the main trust (i.e. with the wider group of beneficiaries).

The trustee also want to be paid for their services. Typically, the trustee will want a responsibility fee (e.g. a percentage of the assets in the trust) and a time-based fee (e.g. hourly rate for doing something). These fees (and other expenses) can normally be charged before anything goes to a beneficiary. Most of the trustees who are involved in employee loans are professional trustees who have offices, staff, etc and so will very much want to charge fees.

My understanding is that the deal for many of the loan-based schemes was that the trustees fees were paid upfront for a five-to-ten year period. If that period is coming to an end then the trustees are going to want to get some money from someone. If the only asset of the trust is the receivable from you, how else are they going to get some cash to pay themselves?

If the beneficiaries of the trust are widely drawn (i.e. not just you) then there is nothing to stop the trustees choosing to benefit another beneficiary instead of you. Or they may even think it is for your benefit to pay fees to make sure they don't have to call in the rest of your loan. How far they could go and cause you active grief is not my area though. I would expect it to be very fact specific though. You need to talk to someone who has seen (i) your loan agreement, and (ii) the trust deed, who understands how the money originally got into the trust, who understand the contract law that governs your loan, the consumer credit act, the trust law that governs your trust. Even then, I guess there will be a big grey area. So asking for repayment of £50,000 when you have £500,000 of equity in your house may be different to asking for repayment of £500 from someone with no job and no assets. I just don't know. One thing I would say though is that the consumer credit act is something I would consider first as I've often seen it missed. If the CCA is not dealt with properly then the loan won't be enforceable without the consent of the court.