Loans from an employer

[webberg]

We all have our views and mine is that the complexity and "abusive" elements seen in the scheme described in the GAAR opinion are not present in the majority of the structures we see.

In my opinion, the rules in Part 7A will be sufficient on their own, should HMRC choose to exercise them, and they are avoidance, but not abuse.

Understand if a more pro HMRC version of events is taken or a more hardline than my own.

[Iliketax]

In relation to mass-marketed schemes...

The arrangement discussed by the panel included a complicated mechanism to remove the obligation to repay loans to any party other than the EFRB and involved the creation and exchange of deeds of covenant and the benefit conferred by them. These steps are not usually seen in the mass marketed versions of schemes.

The GAAR Advisory Panel's opinion seems to be very much on a mass-marketed scheme. Where an EFRBS is used as a proper EFRBS, there will be no loans. Where there is an EFRBS and a loan, it will almost certainly be part of a mass-marketed scheme.

[webberg]

As luck would have it the GAAR Advisory Panel gave its view on something similar recently (published yesterday). It basically said that in the circumstances it considered, GAAR applied. Full facts are here: https://assets.publishing.service.go..._June_2018.pdf

In very brief summary though:

1. A trust was set up and the employer agreed to contribute £x + a bit.
2. The employer lent the employee £x
3. The employer, employee and trustee agree that the employee now owes the trustee and the employer does not need to pay anything to the trustee

As I mentioned earlier in this thread, the DR rules were changed to stop this from 6 April 2017. But the GAAR Advisory Panel says that this was done in November 2013 and GAAR stops it working. November 2013 was before the 60% GAAR penalties were introduced.

To bring some balance to the above GAAR opinion, the panel accepted that the "comparable" transaction would have been a contribution from the company to the EFRB and a loan from the EFRB to the employee and that Part 7a of ITEPA in intent and legislation applied a PAYE charge on the employer, which in a close company can be visited upon the employee/shareholder. Thsi situation was what Part 7A was for.

The arrangement discussed by the panel included a complicated mechanism to remove the obligation to repay loans to any party other than the EFRB and involved the creation and exchange of deeds of covenant and the benefit conferred by them. These steps are not usually seen in the mass marketed versions of schemes.

Whilst I do not doubt the GAAR Panel's analysis of the intent and purpose of Part 7A, I think it important not to admit to mission creep here.

In my view the use of a third party (in this case an EFRB) is avoidance which is adequately countered by Part 7a.

The use of the third party alongside a series of legal documents and transfers is probably "abuse" which the GAAR Panel is there for.

HMRC want to draw that line as close to the mass market schemes as they can and we must be vigilant in stopping that and ensuring that GAAR is used as intended.

[Iliketax]

Thank you for this link.

Whilst the ruling is clear, how does this then relate to LC19? In particular, if "A Ltd" no longer exists.

You should take your own independent professional advice on this. But basically, you'll have to pay the tax due. If you did whatever you di when GAAR applied then you should talk to your professional adviser about that. If it had anything to do with anything offshore, you should talk to your adviser about HMRC's requirement to correct legislation too. This can have some quite scary implications so take advice from someone who is independent of the promoter.

[Iliketax]

Just to be clear, for those whose loans were from an employer.

If the loans were transferred to a trust, in say 2008, they are caught by the loan charge?

Yes.

Here's HMRC's guidance on it: https://www.gov.uk/hmrc-internal-man...anual/eim47035

They use a loan made in 2008 and transferred in 2014 but the principles are the same.

Some people will say its wrong to look at HMRC's manuals but it is easy enough to use that to follow along with the actual legislation.

[RickG]

As luck would have it the GAAR Advisory Panel gave its view on something similar recently (published yesterday). It basically said that in the circumstances it considered, GAAR applied. Full facts are here: https://assets.publishing.service.go..._June_2018.pdf

Thank you for this link.

Whilst the ruling is clear, how does this then relate to LC19? In particular, if "A Ltd" no longer exists.

[Loan Ranger]

Just to be clear, for those whose loans were from an employer.

If the loans were transferred to a trust, in say 2008, they are caught by the loan charge?

[Iliketax]

The third is a more worrying development. We have a letter from HMRC claiming that although the legislation clear that a third party is needed, the "intention" of Parliament was that all disguised remuneration arrangements should be included, whether or not that condition is met! Tested in Court I can see HMRC very definitely losing that argument, but it is a concern.

Assuming that this has nothing to do with the self-employed rules, is not a circumstance in which Chapter 3 Part 7A applies or s554C(1)(aa) applies (or the equivalent April 2019 loan charge), that is complete and utter bollocks. You should, politely, ask them to pull the other one as it will make a nice sound.

With yesterday's GAAR Advisory Panel opinion, I'll also add that HMRC's view makes sense if the loan was made to the employee and then transferred to another person post-GAAR (July 2013). It also makes sense if the employer made the loan on behalf of another person (so the employer was acting as trustee) or the individual was acting as trustee.

[Iliketax]

Good analysis.

For someone whose loan did not originate from a 3rd party (trust etc), I guess the question is:

Would it be reasonable/justifiable for them to conclude that they are outside the scope of the LC and, therefore, there is no requirement on them to disclose?

Certainly, that's what the written law says.

As luck would have it the GAAR Advisory Panel gave its view on something similar recently (published yesterday). It basically said that in the circumstances it considered, GAAR applied. Full facts are here: https://assets.publishing.service.go..._June_2018.pdf

In very brief summary though:

1. A trust was set up and the employer agreed to contribute £x + a bit.
2. The employer lent the employee £x
3. The employer, employee and trustee agree that the employee now owes the trustee and the employer does not need to pay anything to the trustee

As I mentioned earlier in this thread, the DR rules were changed to stop this from 6 April 2017. But the GAAR Advisory Panel says that this was done in November 2013 and GAAR stops it working. November 2013 was before the 60% GAAR penalties were introduced.

[phil@pmtc]

My thanks to Iliketax.

I accept that I was trying to present a readable summary rather than a technical analysis and as such I'm grateful for some of the blanks being filled in.

I'm also of the view that what HMRC thinks the law says; what I think the law says; what the law says; how a Judge may consider what the law says, are often far apart.

In the pecking order of who I'm more inclined to believe on any particular point however the bottom two places are occupied by HMRC and the original promoter (and not always in that order).

There is a scale here. if you ask HMRC if the loan is subject to the loan charge, they will say yes first and perhaps think about it as they walk into Tribunal. If you ask the promoter, they will say no but for a reasonable fee will exit you from the arrangement - straight into another enquiry. These represent either end of the scale.

Most advisers would sit between them and dependent upon circumstances, will prefer one end or the other. That judgement however is more than a dry technical discussion and will include a number of personal factors.

Excellent post and absolutely how I view this matter. Its rather depressing just how correct the following is "if you ask HMRC if the loan is subject to the loan charge, they will say yes first and perhaps think about it as they walk into Tribunal. If you ask the promoter, they will say no but for a reasonable fee will exit you from the arrangement - straight into another enquiry."

As i've often said, the only opinion that currently matters unless you're willing to fight is HMRCs. Some people are willing to challenge and others aren't. That isn't something I can tell you how to choose (nor will most advisors). I know which i'd do but that's irrelevant, it all comes down to the individual and whether you wish to take the risk. I'd suggest people think about that and explain to your advisor how you feel (How you feel about risk that is - I don't mean phone Me/Graham/a.n.other and tell us that you're sad about your kids school report). Tax doesn't need to be taxing - But it sure as hell is.

[webberg]

My thanks to Iliketax.

I accept that I was trying to present a readable summary rather than a technical analysis and as such I'm grateful for some of the blanks being filled in.

I'm also of the view that what HMRC thinks the law says; what I think the law says; what the law says; how a Judge may consider what the law says, are often far apart.

In the pecking order of who I'm more inclined to believe on any particular point however the bottom two places are occupied by HMRC and the original promoter (and not always in that order).

There is a scale here. if you ask HMRC if the loan is subject to the loan charge, they will say yes first and perhaps think about it as they walk into Tribunal. If you ask the promoter, they will say no but for a reasonable fee will exit you from the arrangement - straight into another enquiry. These represent either end of the scale.

Most advisers would sit between them and dependent upon circumstances, will prefer one end or the other. That judgement however is more than a dry technical discussion and will include a number of personal factors.

[Iliketax]

Good analysis.

For someone whose loan did not originate from a 3rd party (trust etc), I guess the question is:

Would it be reasonable/justifiable for them to conclude that they are outside the scope of the LC and, therefore, there is no requirement on them to disclose?

Certainly, that's what the written law says.

No, tax law does not say that. If the loan started from the employer and the loan receivable was then transferred to someone else (e.g. a trust) then there is a requirement to disclose. If you don't know what has happened to the loan receivable then you should take professional tax advice.

[Iliketax]

A loan from an employer is subject to its own tax code. That code seeks to measure the benefit that loan conveys on the grounds that the reason for the loan is the employment status and not a commercially objective lending of money based on credit criteria. The benefits charged to tax are usually the difference between an official interest rate and the actual interest rate and if the loan is written off, the value of the write off.

Where there are no third parties involved,i.e. just employer and employee, then there is no legal reason why the loan should be taxed in any other manner.

That assumes that Chapter 3 of Part 7A does not apply. I would not normally expect it to apply, but where it does apply the employer is treated as the relevant third person and so you don't need an actual third party to make a payment.

Second, the loan charge is rooted in the disguised remuneration rules in Part 7A ITEPA. This opens with a list of conditions that have to be present for the rules to apply in section 554A. One of the subsections (1)(d) requires that a third party is involved in the transfer of funds from employer to employee. In most cases this will be a trust of some description.

Not quite. Have a look at s554C(1)(aa) ITEPA 2003. This can apply after the employer lends money to the employee. This also applies for the April 2019 loan charge - see para 1(1) and 2(2) Sch 11 F(No2)A 2017.

There are three developments there. The first is that a loan made by an employer but subsequently moved to a trust may be within that condition. It requires a bit of judicial contortion but I would not bet against HMRC convincing a Judge it is within the rules.

No contortion is needed from 6 April 2017 or for the April 2019 loan charge (see references above).

The second is that HMRC has been claiming recently that there is a third party involved because the usual flow of money is end client > agency/agencies > employer > you. they seem to be saying that the end client - a commercially distant and unconnected entity - is somehow complicit in the remuneration arrangements. I have to say that such a description denies the self evident facts and in normal circumstances I would be amazed if that argument was advanced in Court. However HMRC are desperate and I would not be surprised to see it made but would be utterly astounded if a Judge agreed with it.

Where the client is onshore and the employer is offshore employers, HMRC have been arguing this for quite a while. It seems completely unfair for an unconnected client who had no idea that there was a loan arrangement. Where the client is aware / encouraged this, then that seems fairer. But the legislation is there and HMRC have been prepared to claim (formally) the PAYE/NIC from these unconnected clients. HMRC seem to recognise that it is unfair and so have disapplied this section for the April 2019 loan charge.

The third is a more worrying development. We have a letter from HMRC claiming that although the legislation clear that a third party is needed, the "intention" of Parliament was that all disguised remuneration arrangements should be included, whether or not that condition is met! Tested in Court I can see HMRC very definitely losing that argument, but it is a concern.

Assuming that this has nothing to do with the self-employed rules, is not a circumstance in which Chapter 3 Part 7A applies or s554C(1)(aa) applies (or the equivalent April 2019 loan charge), that is complete and utter bollocks. You should, politely, ask them to pull the other one as it will make a nice sound.

We (and I'm sure others) are trying to get some clarity on this but from where? HMRC has their view as above. Promoters say "no disclosure". Short of taking a case to a Judge (and spending tens of thousands and years) we will again be reduced to analysis and a decision based on uncertainty because HMRC has chosen - very deliberately - to say that they can ignore the clear words of the law. AGAIN.

Tax law, especially a lot of the niche newer stuff, is full of uncertainty. That is life these days and I understand the policy reason for that. It's in these circumstances that professional tax adviser need to give clients actionable advise based on their circumstances and risk appetite.

As I said, I invite alternative analysis.

There's lots of other provisions that can create a tax charge on loans (e.g. s18, s809EZA, s23A, s850C, s455) and case law is developing (e.g. Esprit) so it gets even more complicated than you suggest.

[Loan Ranger]

Good analysis.

For someone whose loan did not originate from a 3rd party (trust etc), I guess the question is:

Would it be reasonable/justifiable for them to conclude that they are outside the scope of the LC and, therefore, there is no requirement on them to disclose?

Certainly, that's what the written law says.

[webberg]

There is speculation on some threads here (which I am not permitted to use) around the situation is a loan has been made by a limited company that is (or was) your employer. The question is whether the loan is subject to the loan charge rules.

I offer my view below and invite any other specialists to comment/confirm/deny the analysis.

A loan from an employer is subject to its own tax code. That code seeks to measure the benefit that loan conveys on the grounds that the reason for the loan is the employment status and not a commercially objective lending of money based on credit criteria. The benefits charged to tax are usually the difference between an official interest rate and the actual interest rate and if the loan is written off, the value of the write off.

Where there are no third parties involved,i.e. just employer and employee, then there is no legal reason why the loan should be taxed in any other manner.

I am aware that some promoters maintain that this is what has happened and as such no loan charge declaration is needed.

We then get to the muddying of the waters.

First, was it really a loan? If it was in fact a payment for being an employee, then following the Rangers decision, it's entirely possible that a Judge might see section 62 ITEPA as applying to treat the money as remuneration. That puts the liability at the door of the recipient of funds and you would then be relying upon the PAYE rules and the inability of HMRC to transfer that liability to employee outside of certain circumstances, to avoid paying. If that was the case however, again I see no need to make a declaration of loan balance for the purposes of the loan charge. You may still be taxable, but not via the loan charge.

Second, the loan charge is rooted in the disguised remuneration rules in Part 7A ITEPA. This opens with a list of conditions that have to be present for the rules to apply in section 554A. One of the subsections (1)(d) requires that a third party is involved in the transfer of funds from employer to employee. In most cases this will be a trust of some description.

There are three developments there. The first is that a loan made by an employer but subsequently moved to a trust may be within that condition. It requires a bit of judicial contortion but I would not bet against HMRC convincing a Judge it is within the rules.

The second is that HMRC has been claiming recently that there is a third party involved because the usual flow of money is end client > agency/agencies > employer > you. they seem to be saying that the end client - a commercially distant and unconnected entity - is somehow complicit in the remuneration arrangements. I have to say that such a description denies the self evident facts and in normal circumstances I would be amazed if that argument was advanced in Court. However HMRC are desperate and I would not be surprised to see it made but would be utterly astounded if a Judge agreed with it.

The third is a more worrying development. We have a letter from HMRC claiming that although the legislation clear that a third party is needed, the "intention" of Parliament was that all disguised remuneration arrangements should be included, whether or not that condition is met! Tested in Court I can see HMRC very definitely losing that argument, but it is a concern.

Given that the loan charge is based on the DR rules, the above arguments, if correct might be seen as requiring disclosure.

We (and I'm sure others) are trying to get some clarity on this but from where? HMRC has their view as above. Promoters say "no disclosure". Short of taking a case to a Judge (and spending tens of thousands and years) we will again be reduced to analysis and a decision based on uncertainty because HMRC has chosen - very deliberately - to say that they can ignore the clear words of the law. AGAIN.

As I said, I invite alternative analysis.