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What category of income is this?

Interest, commission,trading?

This involves "lending" money to his friend in the motor trade to buy a motor bike.  When the bike is sold my client gets his "loan" returned with 50% of the money made on the deal.  My client never owns (or even sees) the bike.  There will be between 5 and 15 transactions a year depending on what comes up for purchase.

 

I have treated this money as loan interest as I couldn't see that it could be a trade as he does nothing besides paying money out and getting it back.  The money is related to specific bikes.  There is never a loss.

 

The tax helpline people were split on whether he was a trader or money lender.  They said he would have to be registered as a money lender but he only lends to his friend - not the public.

 

It has recently been suggested that the money earned is commission.  I can see the logic of this though it had never occurred to me as a possibility.  What do others think?

 

If it is commission, should there be VAT paid?  He is VAT registered because he does also buy and sell some bikes (I know -  it actually gets worse but I will spare you the details)

 

If it is commission does that mean class 4 NI should be paid?

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25th Jun 2018 16:52

Partnership.

What does the contract say?

Mwahahahahaha!

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25th Jun 2018 17:27

Sounds like alternative finance arrangements to me. You don't have to be a Muslim for the alternative finance rules to apply.

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to lionofludesch
26th Jun 2018 07:07

The money is linked to the bikes, not the loans. Could be a partnership (partner a puts in the money, partner b puts in the time). You could even suggest the financier was a sole trader paying commission to the agent.

The OP needs to reach a conclusion based on the facts.

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to Tax Dragon
26th Jun 2018 09:30

My thoughts.

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to Tax Dragon
26th Jun 2018 10:56

Tax Dragon wrote:

The money is linked to the bikes, not the loans.

You completely misunderstand Shari'a finance. The money is not allowed to be linked to the loans. Hence the need for alternative finance rules in the first place.

Profit sharing on a project is one of the ways in which Shari'a loans work.

I would also question your premise that the money is linked to the bikes.

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to lionofludesch
26th Jun 2018 10:26

This is two friends. Whatever provision the tax statutes make for compliance with Sharia law, that does not apply here.

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to Tax Dragon
26th Jun 2018 10:33

Tax Dragon wrote:

This is two friends. Whatever provision the tax statutes make for compliance with Sharia law, that does not apply here.

Muslims have friends, too. Though the relevance of your comment escapes me.

And I believe it does apply here. I say again, you don't have to be a Muslim for these rules to apply. It is the structure of the deal that is important, not your religious beliefs.

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to lionofludesch
26th Jun 2018 11:40

And who the deal is between - see eg ITA s564C.

Muslims may have friends. Financial institutions don't.

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to Tax Dragon
26th Jun 2018 10:40

Tax Dragon wrote:

The money is linked to the bikes, not the loans. Could be a partnership (partner a puts in the money, partner b puts in the time). You could even suggest the financier was a sole trader paying commission to the agent.

The OP needs to reach a conclusion based on the facts.

One of the facts is - who owns this bike ?

If it's not trader AND lender, it's not a partnership.

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to lionofludesch
26th Jun 2018 11:29

Partnership Act 1890. Section 1(1) states: "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit"

Pursuit of profit in the selling of bikes?

The receipt of a share of net profits is prima facie evidence of being a partner, although it is not conclusive in itself (s 2(3)).

Share of profit from selling bikes?

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to andy.partridge
26th Jun 2018 12:51

Fair point - but the lender never owns the bike.

What would be interesting to know is what happens if there is a loss.

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to lionofludesch
26th Jun 2018 14:14

We have not been told enough to be able to determine the answer to the question (what's new?) but on your point about legal ownership, I put it to you that if I give you money that you invest on the basis that you will repay me when you sell the asset acquired, I at least have a passing interest in what you are buying. If what I get back reflects how much you sell for, that interest is starting to sound like a beneficial one.

If what you use my money for is a trading activity, as here, and if I share in your profits...

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to Tax Dragon
26th Jun 2018 14:31

OP says in the first paragraph that the lender never owns the bike so I can't see how he can own the bike as some kind of partnership asset.

This is a loan. The reward to the lender is a share of profits. That doesn't make him a partner in some fictional or implied partnership.

More information would be nice, as this is a jolly interesting question with an equally interesting debate, but I doubt if any further information could over-ride the stated fact that the lender never owns the bike.

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to lionofludesch
26th Jun 2018 14:35

But does he have an interest in the trade?

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to Tax Dragon
26th Jun 2018 14:42

Qua trade - no.

Could he be sued for the trade's debts ? No.

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to lionofludesch
26th Jun 2018 15:01

I would find that (type of fact) much more persuasive than whether he has legal title over any of the subject matter of the trade. The relationship between the two protagonists is key.

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to Tax Dragon
26th Jun 2018 15:12

On that, we agree.

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26th Jun 2018 15:13

I don't think there is any more information to give you! The arrangement is informal - I am not aware of anything in writing although my client's friend's accountant writes some sort of loan note. The money is paid for the purchase of an individual bike (by the friend - my client does not own it ever) and the loan is secured against this. The bikes are usually turned over fairly rapidly so the loans are typically for less than a year.

The other accountant calls this money a loan so I assume that he is treating the money paid to my client, as interest in his client's accounts.

While not being entirely happy with this I have treated it as loan interest but when another colleague suggested that it could be commission I thought I would put the question out for discussion.

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By DJKL
to roseorgan.fsbdial
26th Jun 2018 15:23

"The money is paid for the purchase of an individual bike (by the friend - my client does not own it ever) and the loan is secured against this."

How are the loans secured against the individual assets? What form /type of instrument is used to grant such a security?

I must admit, being late to this party, I am not sold on the partnership angle within this thread. Banks etc , certainly since 2008, acquired " earn out fees" based on future sell on values re properties over which they held securities and had advanced funds to purchase/develop, said fees did not make them partners in these ventures and in a lot of instances how they behaved towards the other party to the arrangement was certainly not in the spirit of the 1890 Partnership Act!!!!! (In particular former Scottish Banks, you know who you are)

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to roseorgan.fsbdial
26th Jun 2018 15:33

What is the rate of interest on this loan agreement?
What are the agreed repayment dates?
What is the calculated interest?

It doesn' t smell like a loan.

Who cares what the other accountant is calling it, if the other accountant is wrong. Is it important that both parties co-ordinate their accounting policies?

Why are you treating it as something you are not happy with?

What 'interest' does your client get when the bike remains unsold or is sold at a loss?

You seem to have reached a conclusion before asking the questions which is, presumably, for reasons of expediency over accuracy.

Thank you for an interesting question, though.

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to andy.partridge
26th Jun 2018 15:44

If it's not a loan, what is it ?

If you're still claiming that it's a partnership, would you be confident in court in claiming a business debt from the lender ?

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to lionofludesch
26th Jun 2018 16:04

Nobody can be confident in court. It's a lottery where the only winners are the lawyers.

Equally, if you think it is a loan you might want to look at case law and attempts to define 'interest'.

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to lionofludesch
26th Jun 2018 16:47

To be fair, if there is a partnership, the ability to sue follows from that - the existence or otherwise of the partnership does not follow from the ability to sue.

In itself, that could give the lender cause for thought.

On DJKL's point above, banks are different, as they are financial institutions.

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By DJKL
to Tax Dragon
26th Jun 2018 17:35

I would want to see far more indicators of a partnership to really consider joint and several liability to be a significant risk. And I really would be unhappy with the idea that a mechanism for rewarding a financial input could solely be deemed to create a partnership relationship

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to DJKL
26th Jun 2018 17:42

It's not a partnership, DJKL. It's not even joint ownership.

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to andy.partridge
26th Jun 2018 17:51

No rate of interest, no agreed repayment dates, interest is a share of the surplus.

The other accountant is very cagey ( qualified accountant though) .

The bikes are always sold and at a profit.

I don't care what it is, I just want the client to pay the correct tax but I am flummoxed as to how to categorise it.

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to roseorgan.fsbdial
26th Jun 2018 18:24

roseorgan.fsbdial wrote:

I don't care what it is, I just want the client to pay the correct tax but I am flummoxed as to how to categorise it.

If you want to get his tax right, you have to care. What type of income it is is crucial to the answer.

You have a split of opinion. It's either trading income or it's interest. Go with who you think presents the more convincing argument.

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to lionofludesch
26th Jun 2018 22:05

To clarify, I don't have an opinion on whether there is or is not a partnership. The facts presented are not conclusive either way; the facts presented are not inconsistent with either conclusion. We know that the OP has access to further facts (e.g. there is some sort of paperwork that describes the arrangement). The OP should investigate further.

We also know that the client buys and sells bikes. We've ignored that; it could be relevant.

I place little weight on the legal title of the bikes. If the bikes were bought with partnership money introduced by the client, they were partnership assets.

When I say that, I am not asserting the existence of a partnership.

One thing I would be fairly comfortable about is that the receipts do not sound like commission. If there is commission here, it's being paid to the other guy (by a motorcycle trader), not received from him.

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26th Jun 2018 15:54

The next question, of course, is - can the lender use his £1000 savings allowance against this income ?

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to lionofludesch
26th Jun 2018 17:54

I haven't allowed him that (hedging my bets I suppose). I am concerned over whether he should be paying class 4 NI .

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to roseorgan.fsbdial
27th Jun 2018 15:31

roseorgan.fsbdial wrote:

I haven't allowed him that (hedging my bets I suppose). I am concerned over whether he should be paying class 4 NI .

If you think it's trading in some kind of partnership, yes.

If you think it's interest, no. And you should claim the savings allowance.

Not paying NIC and not claiming the savings allowance makes no sense. It just advertises your doubts.

Choose one or the other.

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to lionofludesch
27th Jun 2018 16:24

I don't want to blow your mind, Lion, but it could be that there is not partnership but even so the return is not interest. It's surely wrong to argue that the income must be interest just because there isn't a partnership. (Again, in saying that I am not saying there is no partnership.)

Interest is a return on money lent. What is being received here is a share of the profit on sale of motorbikes.

I know Andy has already made that point, but you seem to be studiously ignoring it.

See further SAIM2030 and SAIM2060, among others.

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to Tax Dragon
27th Jun 2018 16:36

Tax Dragon wrote:

Interest is a return on money lent.

Absolutely.

And it doesn't have to be a percentage.

Now you're sucking diesel.

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By DJKL
to Tax Dragon
27th Jun 2018 16:40

But there is implicit money lent- the funds to buy the bikes. And the O/P does describe there is some paperwork, they even mention security though do not update us re what this might be/how it might be structured, so there is evidence there is a loan.

What is lacking, but may not be crucial, is a time relationship between the advance of the funds and the quantum of return, re the cases referenced at SAIM2060 such a requirement is not mentioned.

A proper piece of documentation would determine if there was a debt, whilst in normal course repayment is only tripped on bike sale if executed at arms length, with professional input the terms would likely cover repayment requirement re death, bankruptcy etc, the "possible loan" would likely have more of an "actual loan" appearance.

So, given sparse information provided I would speculate it most possibly is a loan but if we had more detail it might well be something else.

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By DJKL
27th Jun 2018 16:55

As a sideways point, se CFM42060, interest as defined by HMRC re disguised interest rules etc re CT (I know not on point, here we have individuals, but time value is mentioned)

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm42060

"Basic definition of interest (subsection (a))
The return must fit within a basic definition of interest. This basic definition of the meaning of interest is drawn from a number of the indicia commonly cited in cases on the meaning of interest (e.g. Euro Hotel (Belgravia) Limited 51TC293 and Bennett v Ogston 15TC374) (CFM33030). This captures the familiar concepts that the return must be:

by reference to an amount of money. This means HMRC will be looking for an investment of some sort (or an entitlement to payment of something akin to a debt) in order for the legislation to apply; and
calculated by reference to the time value of money."

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27th Jun 2018 17:15

https://www.out-law.com/topics/tax/corporate-tax-/tax-treatment-of-shari...

Scroll down to "Mudarabah". If this doesn't entirely fit the situation, I don't know what does.

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to lionofludesch
27th Jun 2018 17:29

An amusing sleight of hand. Well done. Now if only the OP had mentioned it in their question it might have been worth a read.

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to andy.partridge
27th Jun 2018 17:41

What ? Mentioned the answer to her question in the question ? Why would she ask the question ?

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to lionofludesch
27th Jun 2018 18:39

lionofludesch wrote:

Scroll down to "Mudarabah". If this doesn't entirely fit the situation, I don't know what does.


Did you even read that paragraph? If you make an investment WITH A FINANCIAL INSTITUTION and receive something that smells like interest to human, nondivine noses then part 10A might apply. If so, you are taxed as if you had actually received interest.

If what you receive is actually interest, then you don't need any of that deeming stuff.

What you're arguing is that this is really interest but is also Sharia compliant. At the risk of starting a theological argument, that cannot be right.

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to Tax Dragon
27th Jun 2018 18:45

The alternative finance rules are there to treat Islamic finance on the same footing as other types of finance. They are not restricted to Muslims.

It's a return on an investment. It stinks of interest.

But if you want to contend that a bloke who owns no assets, has no control over the bank account and can't contract for the business is a partner, good luck with that.

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to lionofludesch
27th Jun 2018 19:22

You’ve stopped reading the answers, haven’t you? Tax Dragon hasn’t said it’s a partnership.

All returns on an investment stink of interest? Er, I don’t think so.

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to lionofludesch
27th Jun 2018 19:27

What restriction are you talking about?

More precisely, what is the "it" that is not restricted?

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to Tax Dragon
27th Jun 2018 19:36

Stupid question Dragon1. The alternative finance rules are not restricted.

I know, Dragon2, but the deeming rules that treat the financial returns from alternative finance as interest (because of course those returns cannot actually be interest) are restricted.

Ah.

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to Tax Dragon
27th Jun 2018 22:26

If you're suggesting that rules brought in to ensure parity of treatment lead to Muslims and non-Muslims being treated differently, I have to say that that paradox would be at the heart of any presentation I made to HMRC.

I'm reduced to repeating myself so, unless you've anything new to add .......

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to lionofludesch
27th Jun 2018 22:49

I am making no such suggestion. Now you are finally talking about the tax rules though, perhaps you could give me the section number and I will show you exactly what I do mean.

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to lionofludesch
28th Jun 2018 06:48

Hey I'm feeling in a good mood (put it down to Schadenfreude - I did enjoy that second goal) - I've already referred you to them a few times but the tax rules for alternative finance arrangements are in ITA 2007 Pt 10A.

You can read the whole part (not a single reference to Islam, you're right - that would be quite shocking), but I suggest you'll get the drift quite quickly from the first sentence in the introduction (s564A).

The part is to enable the financial returns from these arrangements to be taxed for some purposes as interest. I would assume that those purposes include the savings allowance, but haven't checked.

My point is that you would not need these rules if the returns were interest. Interest is taxed as interest unless something stops that. Stuff that isn't interest is taxed as interest only if something provides for that. With alternative finance, that something is Pt10A.

Part 10A would not be needed if alternative finance arrangements gave rise to returns of interest. Think about that.

Yet you have argued that, in the OP's scenario, the return must be interest, precisely because it's from alternative finance arrangements.

You need to check your own understanding of Sharia finance.

Reply edited overnight for decency - I must have been in too good a mood when I posted!

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to Tax Dragon
28th Jun 2018 13:01

Tax Dragon wrote:

Hey I'm feeling in a good mood (put it down to Schadenfreude - I did enjoy that second goal) - I've already referred you to them a few times but the tax rules for alternative finance arrangements are in ITA 2007 Pt 10A.

OK - let's not beat around the bush. You've posted a lot about what it isn't, which is no use to the OP.

Be bold - say what it is.

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to lionofludesch
28th Jun 2018 13:43

If the questions raised in DJKL’s posts at 15:23 on Tuesday and 16:40 yesterday can be answered, we might have a shout at that. (By and large I agree with his comments above – except where he references dealings with banks, a meaningless analogy, as those dealings are exactly what Pt10A is aimed at.) Plus I wouldn’t mind a chat with the client – find out who started this business arrangement and why. What is the timescale between the purchase and sale of a bike, what happens in between, what is the relationship with the existing business, and so forth. And sight of the documentation.

I haven’t said (and won’t say, without more info) whether it is or is not interest (or taxable as interest, if it isn’t actually interest – could be deeply discounted securities for all we know, no numbers have been provided). Just as I haven’t said (and won’t say) whether there is or is not a partnership, or indeed a(n extension to an existing) sole trade with the “borrower” really being an agent. Or something else (but probably not commission).

In short, what I won’t do is leap to conclusions based on plaited sawdust, as you seem to have done. Had you not pointed out the similarities with arrangements that we know do not produce interest, I would have shut up much earlier. Your initial line of reasoning was doomed by your very first post – and the more you showed similarities with alternative finance, the more it was doomed. I regret that it has taken so long for me to get that through to you, as that has been a complete distraction to the real issues – a few of which I have repeated in this reply. Happily you seem to have abandoned your second line of argument – that it must either be interest or partnership income – much more quickly, as that was just as daft.

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to Tax Dragon
28th Jun 2018 15:05

So, to summarise, you don't know.

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to lionofludesch
28th Jun 2018 15:21

Correct. But then I never claimed to. My only role here has been to help you better to understand Sharia finance (not that that was relevant to the OP, but you wanted to talk about it).

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