Reply to: OK let's say you want to unwind your EBT

[jbryce]

I've got the week off but am doing a lot of "non-work" work on the computer and am bored of it and so surfing too much.

..tell me about it. You and Webberg should go for a pint together. Frankly, we all need the pair of you...

[Iliketax]

IlikeTax. - I like your missives - and like many others welcome them, but why is someone so eminently qualified hanging out on Contractor forums?

I've got the week off but am doing a lot of "non-work" work on the computer and am bored of it and so surfing too much.

[jbryce]

The updated draft legislation has just been published. It is pretty much identical to the March draft but has some tweaks to prevent people avoiding the tax liability. One minor change is to prevent a loan being treated as being repaid where a repayment is made that should have been taxed but the tax hasn't been paid. Another is to allow HMRC to revoke approval (to defer tax on certain qualifying loans that will almost certainly have no relevance to contractors) where deliberately inaccurate information has been given.

IlikeTax. - I like your missives - and like many others welcome them, but why is someone so eminently qualified hanging out on Contractor forums?

[Iliketax]

If I assume that:

1. the new government brings in the legislation in roughly the same way as the March 2017 draft,

The updated draft legislation has just been published. It is pretty much identical to the March draft but has some tweaks to prevent people avoiding the tax liability. One minor change is to prevent a loan being treated as being repaid where a repayment is made that should have been taxed but the tax hasn't been paid. Another is to allow HMRC to revoke approval (to defer tax on certain qualifying loans that will almost certainly have no relevance to contractors) where deliberately inaccurate information has been given.

[FormerContractor]

In the run up to the 2019 retro tax, if might make sense to unwind an EBT. Let's say you own the company and have taken out £1mill. HMRC says that if you pay the loan back you are home free.
1) Do you need to pay the stipulated loan interest rate to avoid BIK?
2) All the time the company has been getting Corp tax deductions which HMRC didn't object to. What is HMRC's current thinking on these historic CT deductions.
3) Can you pay the loan back to the company or does it have to go via the trustee? Assume direct.
4) So your company which has been dormant now has £1mill and buys a franchise or does something else and then is sold and you pay entrepreneurs relief (possibly property - accepting pitfalls of ER on a prop coy).

You get ER on the sale of the business, are you home free?

Thoughts on a postcard, or this forum. Somehow you still need to get your £1m out.

My concern with type of approach is this. If HMRC reviews the trustee's paperwork and sees "Joe Bloggs has paid back his EBT loans", then they would surely come and look at Joe Bloggs' tax affairs. They will see this very out of character ER transaction. Given they will already know about the loan repayments, would this not be seen as the money being returned, even if via a circuitous route and be caught in the GAAP rule.

[Iliketax]

What happens if the end client, the employer, holds up their hands and say's 'gee we need to pay the tax on the net cash that went to the employee'.
Then what happens to the loan charge? Does it still apply?

The government said:

The government acknowledges that in some cases the current legislation is silent on how double taxation should be addressed. Therefore, the government is introducing comprehensive double taxation relief provisions, to ensure that no DR scheme user has to pay tax twice.

We don't have final legislation for all this yet. But the bit you are concerned about is covered by s554Z5. This makes clear that where the earlier tax liability has been paid in full then the DR tax charge is eliminated. Where the loan is (say) £1,000 and tax was paid on an earlier £800 of earnings then the remaining £200 is subject to the April 2017 loan charge.

[jbryce]

There is existing legislation that stops a double tax charge. And the draft April 2019 legislation contained a provision to stop double tax where an APN had been paid (and reimposed the tax if the APN tax is repaid). So as far as I can see HMRC is making sure that there is no double tax.

What happens if the end client, the employer, holds up their hands and say's 'gee we need to pay the tax on the net cash that went to the employee'.
Then what happens to the loan charge? Does it still apply?

[Iliketax]

It gets rid of the loan which HMRC may view as a cash cow.
Even if employer pays tax, what's to stop HMRC still pursuing the 2019 loan charge.

It would be morally repugnant of them to chase for both taxes. But that's HMRC for you.

There is existing legislation that stops a double tax charge. And the draft April 2019 legislation contained a provision to stop double tax where an APN had been paid (and reimposed the tax if the APN tax is repaid). So as far as I can see HMRC is making sure that there is no double tax.

[BrilloPad]

It gets rid of the loan which HMRC may view as a cash cow.
Even if employer pays tax, what's to stop HMRC still pursuing the 2019 loan charge.

It would be morally repugnant of them to chase for both taxes. But that's HMRC for you.

HMRC have proved themselves way beyond morally repugnant.

[Whysoserious]

If the employer pays tax that defeats the object doesn't it?

Plus I was under the impression mos payments into trust were recorded as business expenses to avoid corporation tax?

Apologies if I am missing something obvious.

It gets rid of the loan which HMRC may view as a cash cow.
Even if employer pays tax, what's to stop HMRC still pursuing the 2019 loan charge.

It would be morally repugnant of them to chase for both taxes. But that's HMRC for you.

[WalterWhite]

If the tax has already been paid then I agree that this works. But it won't work if the tax is not paid.

If the employer pays tax that defeats the object doesn't it?

Plus I was under the impression mos payments into trust were recorded as business expenses to avoid corporation tax?

Apologies if I am missing something obvious.

[Iliketax]

You don't need a "scheme" to avoid the loan charge.

Take out a commercial loan and payof the trust loan. 2019 tax charge disappears.

The employer pays the tax due when the money entered the trust.

The Trustees of the Trust decide to pay off the commercial loan, acting in your best interests as they are legally bound to do.
This is not caught in disguised arrangement schemes.
The money is never returned to you and cannot be taxed. It's paid to the bank or financial institution who gave you a commercial loan.

If the tax has already been paid then I agree that this works. But it won't work if the tax is not paid.

[Whysoserious]

You don't need a "scheme" to avoid the loan charge.

Take out a commercial loan and payof the trust loan. 2019 tax charge disappears.

The employer pays the tax due when the money entered the trust.

The Trustees of the Trust decide to pay off the commercial loan, acting in your best interests as they are legally bound to do.
This is not caught in disguised arrangement schemes.
The money is never returned to you and cannot be taxed. It's paid to the bank or financial institution who gave you a commercial loan.

[jbryce]

....there will be plenty of 'schemes' or 'products' that purport to find a way around the 2019 charge. Even if in the 1 in a zillion chance that one of these products work, HMG and HMRC will just legislate (again) to nullify their benefit. It's just kicking the can down the road.

One of the schemes I was involved in still insists that their product is not impacted by the 2019 Loan Charge. Total nonsense and I'm ignoring them.

For me, I joined BG as their approach to a settlement with HRMC is more realistic.

[Iliketax]

You ask the trustee to pay the cash to the company. It does. Your company has a PAYE/NIC obligation.

Cheers, I did read this but don't understand why the company has a PAYE/NIC obligation if the money has come back to the company. HMRC's legislation invites taxpayers to pay the money back. This seems pointless if the tax is the same.

You paying cash to the trust to settle your loan from the trust is fine.

The trust then paying money to the company is something that is within the scope of the existing disguised remuneration legislation (in the same way as you asking the trust to pay money to you or your mum). It may (arguably) be different if the company originally lent money to the trust to lend to you. But if that is what happened then tax would originally have been due under the loans to participator rules.