Reply to: Non-AML Schemes and the 2019 Loan Charge

[cojak]

I would like to know why as well...

[Iliketax]

clearly HMRC are getting desperate.

Why do you say that?

[DontSettle]

If your legal adviser goes down the "there was no trust" route then you also need to understand what the implications for the tax returns that you / the company has previously done (PAYE/NIC due on the payments to you?). Presumably, it was supposed to be offshore EFRBS (so the payments would have been made to / from an offshore person) and so that brings you in the "requirement to correct" regime.

blatant scaremongering and nudging with the settlement deadline approaching.

clearly HMRC are getting desperate.

[Iliketax]

I do, however, feel quite annoyed at the trustees and that they seem to be taking advantage of the desire of most people to settle everything and have the loan written off. I'm trying to ascertain how much exposure I have leaving the loan in place, and / or what pressure I can apply on them to reduce their fees. Any thoughts?

Loan written off? What does the trust deed / plan rules say? Can the trustee actually write it off before retirement? Typically, this is leaving service aged 50+. As you've left your company, if you are over 50 (or whatever the rules say) then why not follow the retirement part of the plan and say you've retired and ask them to transfer the loan receivable to you as your pension? It won't affect the April 2019 loan charge but it will mean that the trust can just end and fees will stop.

If you are under 50 (or whatever the rules say), there's probably no way to stop the trust. But you might be able to change the trustee to a dormant company you set up and own. Then there would be no fees (but you'd have a little bit of hassle filing in forms each year for a dormant company). How you do this (and if you can) will be in the trust deed.

Whatever you decide to do, make sure it is only after you've taken professional advice based on your own circumstances.

[RickG]

I appreciate your response and I think you are right that hmrc will have to be settled with one way or another. Also, arguing the trust does not exist serves no other real purpose.

I do, however, feel quite annoyed at the trustees and that they seem to be taking advantage of the desire of most people to settle everything and have the loan written off. I'm trying to ascertain how much exposure I have leaving the loan in place, and / or what pressure I can apply on them to reduce their fees. Any thoughts?

[Iliketax]

The so-called "loan" was directly from the LTD to me. ...

The LTD contributed it's right over this loan to the EFRBS/trust.

The company lent you money. It then contributed it to the EFRBS.

Nothing you have said says that original loan is invalid. You don't need to have any documentation to make a loan. Nothing about the validity of the loan depends on the validity of the EFRBS.

Let's pretent that everything that happened with the EFRBS never happened (which is very likely not the case) then you still owe the company for the money. But as the company had been struck off, you owe the queen (google bona vacantia).

If we pretend that the loan receivable did go to a relevant third party (the EFRBS trustee) then the April 2019 loan charge applies (see quasi-loan definition it the link I did below).

I'm not sure what position it leaves me in with regards to the money paid, as it was not declared as income or anything else. The LTD no longer exists so I don't know what (if anything) can be done now with regards to that money.

I guess your independent tax adviser will be able to help you with that sort of thing.

I do not believe the EFRBS is off-shore. In fact, I'm pretty certain it isn't, but not sure how I would check?

Ask them? Or look at the address of their registered office. If it is UK then they are UK resident, if it is Jersey or somewhere like that, then they are probably not.

Whilst avoiding the LC19 would be one goal of trying to prove the trust / loan did not exist, a secondary goal is to avoid the punitive fees the trustees are now charging to have the loan written off and close the trust. The contract between the trustee, LTD and myself makes me liable for all of the fees associated with the trust. I believe this contract has also not been executed correctly and this clause is not something I signed up to (I have documentary evidence of this). My understanding is the LTD is the settlor and it is responsible for fees. As it no longer exists, the trustees have no way of being paid. What happens in this circumstance?

This is something you should take advice on. But the fact that for the last X years everyone seems to think that there is a trust suggests that there is one from a legal perspective.

Furthermore, the IHT liability of writing off the so-called loan falls on the LTD and / or the trustees. Leverage to encourage the trustees to close the trust?

Have a look at s201(1)(c) and 205 IHTA, that doesn't seem to give you much leverage - https://www.legislation.gov.uk/ukpga...51/section/201 https://www.legislation.gov.uk/ukpga...51/section/205

Finally, circling back to the trust being invalid. Is it possible that if this can be proven, the entire structure can be deemed not to have existed and the loan declared invalid?

You've said nothing that suggests that the original loan is invalid. And there is a lot of proving to be done. I'm not a trust lawyer but it looks like there is a trust. Certainly, everyone has acted and behaved as if there is a trust. And the law places a lot of weight on that sort of thing.

[RickG]

The so-called "loan" was directly from the LTD to me. This is the loan I deem to be invalid as the deed was not executed correctly. I'm not sure what position it leaves me in with regards to the money paid, as it was not declared as income or anything else. The LTD no longer exists so I don't know what (if anything) can be done now with regards to that money.

The LTD contributed it's right over this loan to the EFRBS/trust. The trustee's are a third party. Given the loan is invalid, this makes the contribution invalid also. Again, though, the LTD no longer exists, so I'm not sure what can be done now to correct this position.

If it the money was paid direct to you from your limited company (not acting as trustee) then there is no relevant third person involved and so the April 2019 loan charge will not apply.

This is correct.

Presumably, it was supposed to be offshore EFRBS

I do not believe the EFRBS is off-shore. In fact, I'm pretty certain it isn't, but not sure how I would check?

Whilst avoiding the LC19 would be one goal of trying to prove the trust / loan did not exist, a secondary goal is to avoid the punitive fees the trustees are now charging to have the loan written off and close the trust. The contract between the trustee, LTD and myself makes me liable for all of the fees associated with the trust. I believe this contract has also not been executed correctly and this clause is not something I signed up to (I have documentary evidence of this). My understanding is the LTD is the settlor and it is responsible for fees. As it no longer exists, the trustees have no way of being paid. What happens in this circumstance?

Furthermore, the IHT liability of writing off the so-called loan falls on the LTD and / or the trustees. Leverage to encourage the trustees to close the trust?

Finally, circling back to the trust being invalid. Is it possible that if this can be proven, the entire structure can be deemed not to have existed and the loan declared invalid?

[Iliketax]

The setup of the trust by the LTD and the loan agreement between myself and the LTD were all done through deeds. I am unsure of the validity of these deeds. They needed to be witnessed when signing, which did not happen (reading online indicates this means the deeds were not executed correctly) and in some cases, pages which needed to be signed and / or initialled, were not done by me. This was because, due to expediency, the promoter did this themselves. It's possible the entire trust being setup is invalid. But at the very least, the loan itself is invalid. Where would I go with this if I wanted to explore this further - a solicitor?

An EFRBS is a trust. In England and Wales, most trusts don't need to be written down. Obviously that makes things more tricky when you want to be certain that the settlor and the trustee has agreed to (especially if the beneficiaries were not there) so people do write them down and get them properly executed. But it is key that there is an intention to creat a trust and that intention may well be there (e.g. you, as director of your company, signed the deed and then transferred the company's money to the trustee). That is a legal thing, not a tax thing though. But it will have tax implications if you decide (or because of the legal analysis, are required to) repay the money plus interest.

From the April 2019 loan charge perspective, it doesn't really matter whether the loan is invalid or not. This is because it defines a loan to include something purported to be by way of a loan - Finance (No. 2) Act 2017

The question then is whether it is within the scope of the April 2019 loan charge and that depends on who the lender was. If it the money was paid direct to you from your limited company (not acting as trustee) then there is no relevant third person involved and so the April 2019 loan charge will not apply. But if was from someone else (the promoter, the trustee (including your limited company acting as trustee)) then it will apply even if there is no trust (since a relevant third person made the payment) to you.

If your legal adviser goes down the "there was no trust" route then you also need to understand what the implications for the tax returns that you / the company has previously done (PAYE/NIC due on the payments to you?). Presumably, it was supposed to be offshore EFRBS (so the payments would have been made to / from an offshore person) and so that brings you in the "requirement to correct" regime.

So if you choose to take your own professional advice, you are likely to need to take it from a trust lawyer and a tax specialist. If you took the legal advice without the tax advice you might find yourself in the fire.

[Loan Ranger]

The setup of the trust by the LTD and the loan agreement between myself and the LTD were all done through deeds. I am unsure of the validity of these deeds. They needed to be witnessed when signing, which did not happen (reading online indicates this means the deeds were not executed correctly) and in some cases, pages which needed to be signed and / or initialled, were not done by me. This was because, due to expediency, the promoter did this themselves. It's possible the entire trust being setup is invalid. But at the very least, the loan itself is invalid. Where would I go with this if I wanted to explore this further - a solicitor?

Who are the trustees of the trust? Was the person who signed the deeds a trustee?

You'd need to get a trust lawyer to examine the paperwork.

However, let's say you could establish that the trust/loan was invalid. What would that mean for the money you received? Would it be deemed as income? I suppose, if the trust/loan was invalid, you could argue that you are outside the scope of the loan charge, although this would almost certainly bring you into dispute with HMRC. One way or another they will want to tax that money.

[RickG]

There doesn't seem to be anyone else in a similar position to me, which is quite surprising. Or maybe this thread is just being overlooked. Is there anyone who has been issued "loans" from an EFRBS setup by their own LTD company?

I have some further thoughts, and I'm not sure if anyone here is qualified to answer, but I'll put them down anyway as I'm unsure where to go with them. They are questions of a legal nature.

The setup of the trust by the LTD and the loan agreement between myself and the LTD were all done through deeds. I am unsure of the validity of these deeds. They needed to be witnessed when signing, which did not happen (reading online indicates this means the deeds were not executed correctly) and in some cases, pages which needed to be signed and / or initialled, were not done by me. This was because, due to expediency, the promoter did this themselves. It's possible the entire trust being setup is invalid. But at the very least, the loan itself is invalid. Where would I go with this if I wanted to explore this further - a solicitor?

[RickG]

Just been researching as my initial thought was they would transfer, however that isn't the case where employer no longer exists so you're fine. Sorry for confusing matters Rick, in short - I was wrong.

Thanks very much Phil - and absolutely no reason to apologise at all.

I have another confusion - ordinarily, one would register an interest to settle for the company which operated the EFRBS. However, in this case, the company no longer exists. I'm not sure if I should register an interest for the company just in case anyway or just leave as is and settle the liability for myself.

There's no guidance from HMRC on this either.

[phil@pmtc]

Just been researching as my initial thought was they would transfer, however that isn't the case where employer no longer exists so you're fine. Sorry for confusing matters Rick, in short - I was wrong.

[RickG]

Reading this page:

April 2019 Loan Charge

It says HMRC would first issue a determination to the employer under Regulation 80. And then transfer liability using Regulation 81. Again, the text specifically says:

A Regulation 81 direction can be issued in respect of notional payments, which includes any charge arising under Part 7A. Regulation 81 only applies in relation to tax, and so there would be no Class 1 NIC liability transferred across to the employee.

[Loan Ranger]

Thanks all for replies and Phil for looking at my documentation.

I'm unclear on whether NIC payments should be due or not. The technical bulletin here describes 3 scenarios (overseas employer, employer unable to pay, dissolved employer) - all of which say Class 1 NICs are not due by the employee.

However, in my case, there is the added complication that the LTD was owned by me. So I'm not sure if that liability will be transferred to me, now that the company is dissolved.

What also confuses me is the rate at which tax is due. If you include employers NIC, employees NIC and income tax, then the combined tax rate is around 60% is it not?! Obviously, a contractor operating through a LTD company would use low salary / high dividends to minimise his or her tax bill

It seems incredibly harsh that they should tax at the highest rate possible, rather than that rate which you probably would have paid at the time. But I suppose now that I've been deemed to have done wrong - I deserve everything I get...

I wouldn't have thought you'd be liable to NICs but see what Phil says.

[RickG]

Thanks all for replies and Phil for looking at my documentation.

I'm unclear on whether NIC payments should be due or not. The technical bulletin here describes 3 scenarios (overseas employer, employer unable to pay, dissolved employer) - all of which say Class 1 NICs are not due by the employee.

However, in my case, there is the added complication that the LTD was owned by me. So I'm not sure if that liability will be transferred to me, now that the company is dissolved.

What also confuses me is the rate at which tax is due. If you include employers NIC, employees NIC and income tax, then the combined tax rate is around 60% is it not?! Obviously, a contractor operating through a LTD company would use low salary / high dividends to minimise his or her tax bill

It seems incredibly harsh that they should tax at the highest rate possible, rather than that rate which you probably would have paid at the time. But I suppose now that I've been deemed to have done wrong - I deserve everything I get...