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IOM company Subcontractor. can the Revenue turn water into wine?

IOM company Subcontractor. can the Revenue turn...

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Client A for commercial reasons entered into a contract with an IOM company to handle his business. Contracts were negotiated between IOM company and his clients. He carried out work and invoiced company for it. IOM company received payments from contracted clients. Client declared all his income on which he charged VAT. HMRC are claiming a sham but cannot state why. Are they right? As part of the deal, IOM company made a loan of 40k to client documented and repayable over 10 years. IOM company director had adverse publicity in national papers which caused client to terminate the relationship abruptly. IOM company subsequently wrote off the loan. HMRC claim client is subject to tax, possibly PAYE. If a UK company, would have been treated as paid net of tax with company bearing the liability. There is case law which states that you cannot turn a liability into an asset and cannot treat it as income. Can the REvenue turn water into wine?
Ben Clarke

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By AnonymousUser
21st Jul 2006 10:35

A sham ...
... is a legal subterfuge i.e. the apparent contractual relationships between the parties do not reflect the underlying reality. You say that the interposition of the IOM company was for commercial reasons and if the contracts actually do reflect the commercial reality the sham doctrine should not apply (I have to say it all sounds a bit dodgy though, which is presumably what HMRC think).

If your client's relationship with the IOM company is in the nature of self-employment i.e. the contracts are for services not of service, then there cannot be any BIK.

If a self employed individual is paid other than in money the value of what he receives is still taxable as a profit of the trade. The question therefore is whether the write-off of the loan is a profit of the trade. I don't think we know enough about the circumstances to answer that definitively but that seems to me how the write-off should be taxed if it is taxable at all.

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By vowlesj
20th Jul 2006 13:08

remember Taxation doesn't take faith only hard cash!
The loan represents a benefit-in-kind whilst it is still a loan - the benefit being the interest forgone by comparison with the taxman's official rate.
Whilst it is a loan and is techically capable of repayment (don't have to make repayments but the facility exists) then it can only be a loan and therefore a liability of your client.

Now that it has been written off you have a difficult question to answer. Was it written off in such a way that it can be considered a termination payment (S401 ITEPA says first £30k is tax free) Is it caught as employment income by S62 ITEPA? Obviously the section that the taxman is using at the moment to claim PAYE, which should be operated even though the notional employer is not resident and cannot be forced to do so!

Jonathan

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By Anonymous
21st Jul 2006 12:10

Watch your language!!
You have said "Contracts were negotiated between IOM company and his clients". They weren't his clients , were they? They were the clients of the IOM company. I suspect the Revenue could argue , if you persist in trying to resist them, that your client was in the circumstances a PE of the IOM company, so is liable to tax on the IOM profits earned through him.

In the alternaive, as others have suggested, he was an employee of the IOM company, and the loan would be a benefit. The question then becomes one of concentrating on the write off of the loan. How was that done-how does your client know that a liquidator of the IOM company won't pursue him?

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