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Loan charge - direct loan from employer

The new loan charge applies to third party loans but should direct loans also be disclosed?

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I have a client who had received loans from umbrella companies for a few years up to 2017. It seems unlikely that the loans will ever be repaid and so far, no interest has been paid although it has apparently been accrued. I originally thought that all such loans that had not been repaid or in respect of which settlement had not been reached with HMRC would have to be disclosed on the 2019 tax return (and notified to HMRC by 30 September 2019). However, one umbrella company has stated that we should not disclose the loans that it (or its predecessor companies) had made as they were made direct from the umbrella company with whom the employee had an employment contract rather than via a third party. Articles I have read on this subject suggest that all loans are likely to be caught unless specifically exempt (e.g. certain commercial loans). My reading of S.554A ITEPA does indeed seem to require there to be third party involvement for the loan charge to apply, so can I advise the client to accept the umbrella company's advice or can readers point me in the right direction for further research?

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By Rammstein1
18th Jun 2019 14:20

What do the P11D's say? If he just has an overdrawn DLA, that is a different matter. No doubt the umbrella company has paid the full S455 tax to HMRC!

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Replying to Rammstein1:
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By John R
18th Jun 2019 14:48

There have been no P11Ds issued and he is not a participator for the purposes of S.455.

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Replying to John R:
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By Tax Dragon
18th Jun 2019 14:56

"Apparently accruing" for interest is not paying interest, so the P11D point is well made.

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By John R
19th Jun 2019 12:13

Anyone else have any thoughts on this?

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By Tax Dragon
19th Jun 2019 13:52

Let me ask one back at you: Do you think your client is paying the right amount of tax?

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Replying to Tax Dragon:
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By Tax Dragon
19th Jun 2019 14:04

And I mean "right" as in "in accordance with the law"; no moral judgments here.

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Replying to Tax Dragon:
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By John R
19th Jun 2019 19:19

I don't know. That's why I am seeking the views of others. I certainly do not want to advise the client that he is liable for the loan charge (which will in fact bankrupt him) unless the law requires him to disclose it, and I also do not wish to be sued by the client for giving him wrong advice.

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Replying to John R:
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By Tax Dragon
19th Jun 2019 23:48

I meant on the benefit of the loan. Issuing new loans to pay interest on old loans, or whatever it is that the umbrella company is up to, may well be just adding to your problems.

On your actual question, I agree. But it's not much comfort. What's the exit strategy?

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By Matrix
19th Jun 2019 19:31

I would look at the contractor sites or Keith Gordon’s notes on this. I would not let your client rely on advice from the umbrella company.

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Psycho
By Wilson Philips
19th Jun 2019 22:11

How does your client feel about having to repay the loan?

How does he feel about tax, interest and penalties for incorrect tax returns? Regardless of whether P11Ds were issued, he ought to have reported the loan benefits on his returns.

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Replying to Wilson Philips:
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By Matrix
20th Jun 2019 06:25

I thought that the whole point of these schemes is that the loan is never repaid. Why is everyone going on about P11D and benefits, I thought it was the tax scheme that had to be disclosed on returns and now the loan included as income on the 2018/19 tax return?

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By Tax Dragon
20th Jun 2019 06:43
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Replying to Matrix:
Psycho
By Wilson Philips
20th Jun 2019 12:18

Matrix wrote:
I thought that the whole point of these schemes is that the loan is never repaid.

My question was rhetorical. If the taxpayer believes (and/or was advised) that he will never have to repay the loan then he should not be surprised, or should be advised not to be surprised, if and when HMRC seek to charge the loan as income.

Matrix wrote:

Why is everyone going on about P11D and benefits, I thought it was the tax scheme that had to be disclosed on returns and now the loan included as income on the 2018/19 tax return?

You may be thinking of different types of umbrella company.

There are the 'traditional' ones, that sit between individual(s) and end-client. Remuneration and loans from these companies should probably (possibly?) be taxed, P11D'd etc as normal (until such time that HMRC determine the loans to be a sham).

Then there are the umbrella companies, EBTs etc, that sit between the taxpayer's company and himself. Loans routed through those entities are the ones that fall squarely within the loan charge.

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Replying to Wilson Philips:
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By Tax Dragon
20th Jun 2019 14:03

Just to add to that excellent answer (in case Matrix didn't read the bit in the link I gave in which Keith Gordon said that BIK was in point)… we mention P11Ds because loans from an employer (as the OP refers to) are employment related loans.

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Replying to Tax Dragon:
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By Tax Dragon
20th Jun 2019 14:06

Oh... perhaps I should have read the excellent answer before I "added" to it! :-)

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By Matrix
20th Jun 2019 07:07

John, here is a useful article with an email address for HMRC and other links. If this could bankrupt your client then you need to provide them with a definitive answer or pass onto someone who can. I have never needed to look at this but I cannot see any reason why this loan would not be caught (but I have no knowledge of the third party point you raise, there are 3 parties though, your client, the umbrella company and the end client?).

https://www.litrg.org.uk/latest-news/news/180913-are-you-affected-2019-‘loan-charge’-help-available

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Replying to Matrix:
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By Tax Dragon
20th Jun 2019 06:58

Surely the third party point is critical. A loan from an employer is just that. Are you disclosing all DLAs that were overdrawn at the end of 5.4.19?

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Replying to Tax Dragon:
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By Tax Dragon
20th Jun 2019 07:02

(I am wondering about a father whose company had lent to his son's company in which son had an overdrawn DLA... but that's another thread.)

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Replying to Tax Dragon:
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By Matrix
20th Jun 2019 07:13

The article refers to employees of umbrella companies in the context of disguised remuneration schemes.

I have no idea what the third party point is, please would you expand why you think this loan is not caught?

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Replying to Matrix:
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By Tax Dragon
20th Jun 2019 07:22

If you want legislative references, you'll have to wait. John sort of explained in the OP. If he's wrong, you'll need to think about those DLAs.

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By Matrix
20th Jun 2019 07:32

Will have a look later. So what is this third party point that you think that, if it wasn’t present, would affect all DLAs?

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Replying to Matrix:
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By Tax Dragon
20th Jun 2019 09:32

F(No2)A2017 Sch11 para1(1) says that P is treated as taking a relevant step for the purposes of Part 7A of ITEPA 2003 if P has made a loan on or after 6 April 1999 which is outstanding at the end of 5 April 2019.

If P can be the employer and the loan a DLA, you're caught (subject to something else taking you out). If P has to be a third party, you're OK.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
20th Jun 2019 15:50

Assuming that neither the employer nor the employee is
acting as trustee, P must be a person other than the employee or employer (section 554A(7)).

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Replying to Wilson Philips:
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By Tax Dragon
20th Jun 2019 12:43

That answers the OP; s554AA(8) answers Matrix's next question; I was answering his last.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
20th Jun 2019 16:06

And just to add, P must take a relevant step. Although the end-client is undoubtedly a 3rd party in the case of a traditonal umbrella company arrangement, it is unlikely that they will be involved in taking a "relevant step".

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Replying to Wilson Philips:
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By Tax Dragon
20th Jun 2019 16:53

If I may say so, I find that a slightly confusing comment. If a loan was outstanding on 5 April, then someone, somewhere, has made a relevant step. That's what F(No2)A2017 says. It calls that person "P". The next question (as you rightly said earlier) is whether P is the employer or the employee acting as trustee, or a person other than the employee or the employer.

But now you're talking as if P is the end client and then asking whether P has taken a relevant step. While that might be the same question (or, at least, give the same answer) from the other direction, I think coming at it that way could confuse.

But there's just you and me on this thread now, and undoubtedly I have more nits than you, so I don't want to start a picking competition!

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Replying to Tax Dragon:
Psycho
By Wilson Philips
20th Jun 2019 17:09

I'm sure that it will confuse!

I was pre-empting Matrix's suggestion that in a normal umbrella set-up the end-client would be a 3rd party, and therefore P, and therefore bring the arrangements within the loan charge rules. I was attempting to make the point, apparently clumsily, that it would be unlikely (though not beyond the realms of possibility) for the end-client in that case to have made a loan (or other "relevant step") to the individual, and so the arrangements would remain (for now) outside the rules.

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By Tax Dragon
20th Jun 2019 17:32

There has to be a minding your Ps and Qs gag here somewhere....

Between us, while we have may have confused the issue for some [you guys please ignore us!], we have hopefully clarified it for others.

(And, yes, I have deleted a long central paragraph because I'm not sure where we're going with this now.)

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Replying to Tax Dragon:
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By Matrix
20th Jun 2019 18:06

Sorry I don’t really understand why this loan would not be caught, it refers to employees in the link I sent, does there have to be a PSC? Is that what you mean by third party?

Luckily I haven’t had to look at it for any clients and no one uses an umbrella so never needed to understand them so sorry don’t have anything to add myself.

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Replying to Matrix:
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By Tax Dragon
20th Jun 2019 18:33

Read Wilson's post at 1550.

And the one I thought I was adding to (but wasn't).

These answer your questions.

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Replying to Matrix:
Psycho
By Wilson Philips
20th Jun 2019 19:29

Put simply, if the loan is directly between company and employee it should (currently) be outside of the loan charge provisions. That is the case even if some 3rd party (ie end-client) was the original source of the funds.

Where the loan charge (might) apply is where a 3rd party (umbrella co, EBT etc) has been interposed between employer company and individual to disguise (see what I did there?) his remuneration as something else.

I take the point that a direct non-repayable loan might be considered to be disguised remuneration (hence my various caveats), and I agree that, morally, if the intention of both parties is that the loan will never be repaid it should be caught (perhaps simply under GAAR) but at present since there is no 3rd party involved such a loan should be outside the specific loan charge provisions.

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Replying to Wilson Philips:
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By Matrix
20th Jun 2019 19:32

Is this because there isn't a PSC?

In the link I sent the facts look the same as the OP.

So shouldn't John's client go back to the umbrella company and ask why no P11d benefit was paid assuming the loan exceeded £10k and no interest was paid?

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Replying to Matrix:
Psycho
By Wilson Philips
20th Jun 2019 19:56

That article is not explicit but the implication is that there does need to be a 3rd party between employer (which might be an agency) and the worker for the specific loan charge provisions to apply.

But, yes, the client needs to at least consider the beneficial loan BIK position. He could ask why no P11D was prepared but as I noted above it doesn’t really matter - the onus is on him to report the benefit on his tax return.

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Replying to Matrix:
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By Tax Dragon
21st Jun 2019 08:54

Matrix wrote:

Is this because there isn't a PSC?

No. A PSC is an employer. A loan from an employer is outside Part 7A.

Part 7A applies where loans(*) are made by someone other than an employer (eg an EBT funded by the employer).

A loan from an employer made on terms such that it's never going to be repaid may well be taxable under s62 when it's made, but that's a whole different question, not related to Part 7A - and not related to the loan charge, which only applies to Part 7A loans. If it was taxable under s62 though, then the BIK issue might go away(?) and it puts the onus on the umbrella company for having failed to operate PAYE. The OP is in an invidious position here... but it is possible that it's the company, not his client, that has the big questions to answer (and, maybe, the big bills to pay).

Edit... I forgot my (*)… I was going to say, not just loans. Pt7A is wider than that. The loan charge though is on (3rd party) loans... that's kind of in the name!

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By Rammstein1
21st Jun 2019 07:43

So after all of the comments, we are back to the P11D question. That is where I would start.

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By Tax Dragon
21st Jun 2019 08:51

Along with the s62 question, I agree.

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By Tax Dragon
21st Jun 2019 09:25

Actually, talking of PAYE, s695A(1)(a) brings the loan charge within PAYE. That puts the onus on the employer, no? Employers (especially public sector employers) won't be bankrupted. Doesn't that remove a lot of the kerfuffle? [Sorry… this isn't directly relevant to the OP, but it is interrelated.]

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st Jun 2019 11:14

Very true, but if you were the employer would you not want to recover any PAYE charge from the employee?

Of course, if I were the worker and had been told that the arrangements would result in no tax being due by me I'd tell the employer to go and whistle.

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Replying to Wilson Philips:
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By Tax Dragon
21st Jun 2019 11:45

Well, don't forget that they might call in that loan, or lean on the third party to call in the loan, so telling them to whistle might require some fortitude.

That said, you would hope that no (responsible) employer would want to drive their workers (or, even, their former workers) to suicide.

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