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Retrospective tax imposed on contractors’ loans

29th Mar 2016
Tax Writer Taxwriter Ltd
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A proposal to impose a retrospective tax on contractors’ loans has been branded deeply unfair.

Buried within the Budget documents released on 16 March was a technical note on tackling disguised remuneration avoidance schemes. The retrospective tax charge is hidden in chapter 5 paragraph 10 which is titled: “A new charge on outstanding disguised remuneration loans”.

This outlines how income tax and NIC will be imposed on employee loans which are outstanding on 5 April 2019, irrespective of when the loan was advanced to the employee or individual. This means the new tax charge could be imposed on loans which were advanced decades ago.

Disguised remuneration loans come in two common forms:

  • Employee benefit trust (EBTs) loans – used by company owners to extract large balances from their own companies without paying high levels of income tax;
  • Contractor loans - where an individual receives a loan and a small salary from an “employer” which was usually based offshore.

In both cases the loans were repayable but were usually never actually repaid. The employee is taxed on the benefit in kind of receiving an interest free loan, which amounts to 3% to 4% of the loan (depending on the official rate of interest in the tax year), for the duration of the employment.

Schemes involving EBT-type loans have been circulating since the 1980s, and contractor loans have been in common use since 2000. HMRC maintain that these arrangements do not work. However, there must be a considerable chance that they do. Very few of those schemes have been taken to the tax tribunal, and when HMRC have won a case they have generally done so on technicalities concerned with the implementation. New tax rules to stop disguised remuneration were introduced from 9 December 2010 and 6 April 2011 (ITEPA 2003, Part 7A).

Contractor loans have been subject to challenges in the tax tribunals, for example P Boyle v HMRC TC03103, where the contractor lost, although HMRC tend to only take cases to tribunal when they expect to win.

HMRC has offered settlement opportunities for those who took up EBT or contractor loan schemes, which required the individuals to who agreed to pay PAYE and NIC on all the loans they received. HMRC has also issued a spotlight on contractor loan schemes, so no-one can be in any doubt that HMRC doesn’t approve of contractor loans and it’s doing everything in its power to neutralise the schemes that used such loans to avoid tax.

Those who used contractor loans but who haven’t taken up a settlement opportunity are now receiving accelerated payment notices (APN) where their tax return is under enquiry. The APN is often based on estimated figures as HMRC don’t know exactly how much loan was advanced, so are guessing at six times the contractor’s salary.

The issue of an APN forces the taxpayer to pay the tax demanded as the APN can’t be appealed. If the tax is not actually due, the taxpayer has to force HMRC to conclude their enquiry by going to tribunal – which is clogging up the tax tribunal system.

The proposed tax charge will be imposed on an outstanding loan if income tax has not been paid on that loan (even where income tax wasn’t due under the tax law in place when the loan was advanced). The new charge won’t be imposed if the taxpayer has reached a settlement with HMRC, or otherwise paid tax on the loan as if it was salary. 

David Kirk, an expert on employment taxes, said: “HMRC have for a number of years made it plain that they will not tolerate tax avoidance in this area. However, they have often been very slow to act in practice, and this has left people with the feeling that they had dropped their cases. Whilst the Government has every right to change the rules, I do have concerns about four particular things with this proposed tax charge:

  1. “The tax can be raised on historical loans of any age, so it could relate to actions taken over 20 years ago.   
  2. The records relating to historical loans will often be lost and are difficult to reconstruct.
  3. Individuals were often sold the loan schemes by IFAs and accountants, in some cases quite aggressively. There is consumer protection law to assist victims of this sort of miss-selling when it comes to investments; however in this case HMRC seem to be going for the victims instead of the real culprits.
  4. The tax charge should fall on the employer, but it will be transferred to the employee/contractor."

Kirk concludes that many former contractors will be made bankrupt by this new tax charge, or if not made bankrupt will lose their homes.

He also says the charge is deeply unfair as in many cases the tax was not payable under the law that existed when the loan was advanced (pre December 2010), so the taxpayer should win their case if they could get a hearing at the tax tribunal. Under the proposals such taxpayers will have to pay the tax on the outstanding loan even if they do win their case at the tax tribunal.   

David Kirk's book: Employment Status - the Tax Rules is now in its third edition. 

Replies (559)

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By ShirleyM
30th Mar 2016 13:49

So ....

... they can repay the 'loans' to avoid the tax .... or did they believe the loans were not really loans? If so, what did they think they were? A way of artificially avoiding tax that was legally due, perhaps?

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By The Black Knight
30th Mar 2016 13:51

ha you will correct me

I thought that was a rule of thumb :-)

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By Difficulttimes
30th Mar 2016 14:05

Common sense

Firstly, all you HMRC civil servants should get back to work.

 

Secondly, the dividend changes are not retrospective otherwise we would have been told that the changes are now going to be backdated to 2010 so you will need to pay the difference within 90 days.

 

Thirdly, why don't we just let the courts do their job? Let them have the final say if PAYE and/or NIC is due. I think that's what we all want - otherwise why do we have a judicial system at all? We might as well say a few hundred million quid to help with the deficit and close them all if everything is going to be made retrospectively.  This has the feeling of a Zimbabwean election or awarding of the 2018 World Cup.

Putting everything aside, tens of thousands of people across this country will be made bankrupt, could lose their homes and/or split their families if this comes in. That is the true cost of this and it doesn't matter how much of an anti-avoider you are would you want that to happen to your fellow countrymen and women? It's a sad state of affairs.

 

 

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By The Black Knight
30th Mar 2016 17:01

who did this

Difficulttimes wrote:

Firstly, all you HMRC civil servants should get back to work.

 

Secondly, the dividend changes are not retrospective otherwise we would have been told that the changes are now going to be backdated to 2010 so you will need to pay the difference within 90 days.

 

Thirdly, why don't we just let the courts do their job? Let them have the final say if PAYE and/or NIC is due. I think that's what we all want - otherwise why do we have a judicial system at all? We might as well say a few hundred million quid to help with the deficit and close them all if everything is going to be made retrospectively.  This has the feeling of a Zimbabwean election or awarding of the 2018 World Cup.

Putting everything aside, tens of thousands of people across this country will be made bankrupt, could lose their homes and/or split their families if this comes in. That is the true cost of this and it doesn't matter how much of an anti-avoider you are would you want that to happen to your fellow countrymen and women? It's a sad state of affairs.

 

 

These cases are going through the courts at great expense and we all get to read how micky mouse they were.

yes these tax payers who thought they were getting advice were instead sold a pile of tripe for a lot of money

the advisers had never heard of the values of the accountancy profession that were there to protect the punter, Objectivity, Integrity and independence.

true professional bodies have done nothing to discipline their members for clear breaches of regulations

true HMRC/ the government allowed this to continue for so long

The blame must lie with those who gave this appalling advice surely. They have bought the profession into disrepute

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By Difficulttimes
30th Mar 2016 17:32

Can you name a scheme that has actually lost to HMRC?

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By The Black Knight
30th Mar 2016 15:57

just

Just pay divs to an offshore company and then lend it back

Liberian company

 

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By NJ replies
30th Mar 2016 16:43

Not retrospective

The main problem here appears to be the use of the word 'loan'.  To most people this suggests that the money will need to be paid back and so is not remuneration.

The Budget is recognising the 'loans' as the remuneration that they undoubtedly are, whilst not charging the 'borrowers' for the benefit in kind they have already received.  Surely users of this scheme are being treated more than fairly.

 

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By Andy Davis
30th Mar 2016 17:11

Fair!!

 

Whether you agree with it or not, UK tax law has historically made loans of this nature legal. You only need to look at the case law in this area to prove the point.

Irrelevant of your moral standpoint, or if you believe the arrangements are artificial, individuals have historically entered such arrangements based on tax rulings made in favour of similar arrangements, and a proven interpretation of the legislation.

Change the rules going forward? Yes, but don't change the rules to penalise those who acted within the rules at the time the transaction was undertaken - whether you think they deserve it or not. it is simply unfair, and more underhand and immoral an act as a tax authority than the people being penalised retrospectively for their actions.

The majority of well implimented structures are legal, and work within the rules at the time of implimentation. HMRC knows it, despite the drivel and scaremongering they peddle.

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By Justin Bryant
30th Mar 2016 17:50

What's interesting is that

The judges are strangely a little more lenient in interpreting tax laws in negligence cases where the adviser has not suggested a legitimate tax avoidance scheme to their client or has suggested one that is not quite good enough (as recently in Mehjoo and whether Part 7 ITEPA required a benefit). Some other recent cases are here: http://www.bailii.org/ew/cases/EWHC/Ch/2015/12.html http://www.bailii.org/ew/cases/EWHC/Ch/2016/664.html#para66 Thus, advisers (apart from the obvious bad apples we all know) are actually blameless here for suggesting such planning (with health warnings as appropriate), since otherwise they could potentially be sued for negligence. Some other balanced comments are here: http://www.taxation.co.uk/taxation/Articles/2016/03/29/334535/lifting-di...

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By djn24
31st Mar 2016 08:31

As if...

Justin Bryant wrote:

The judges are strangely a little more lenient in interpreting tax laws in negligence cases where the adviser has not suggested a legitimate tax avoidance scheme to their client or has suggested one that is not quite good enough (as recently in Mehjoo and whether Part 7 ITEPA required a benefit). Some other recent cases are here: http://www.bailii.org/ew/cases/EWHC/Ch/2015/12.html http://www.bailii.org/ew/cases/EWHC/Ch/2016/664.html#para66 Thus, advisers (apart from the obvious bad apples we all know) are actually blameless here for suggesting such planning (with health warnings as appropriate), since otherwise they could potentially be sued for negligence. Some other balanced comments are here: http://www.taxation.co.uk/taxation/Articles/2016/03/29/334535/lifting-di...

The promoters of the schemes gave us this line when they tried to sign us up- 'If you don't mention these tax avoidance schemes to clients then they could sue you for negligence.'  Hmmmm......if a practice doesn't agree with tax avoidance schemes and the letter of engagement does not mention the fact that we will look at the schemes then I would be amazed if the client would get anywhere with that one!

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By ShirleyM
31st Mar 2016 08:52

Promoters

We have promoters posting here trying to defend tax avoidance schemes in general, regardless of their merit.

I am very pleased to see that the majority of posters appear to abhor such artificial schemes. It gives me hope.

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By The Black Knight
31st Mar 2016 10:41

Ha! LOL

these promotors will interpret anything in their favour

Majoo didn't say if you dont use a scheme you will be sued it said if you pick the wrong one you will be sued. We had that stupid and offensive marketing letter from a low grade firm too.

the other case appears not to have been a scheme but just negligent advice or non advice

Not a clue.

We did not engage in such behaviour not because we thought avoidance was wrong but we believed that these schemes would not work. The promotors were unable and uncomfortable in answering questions such as Ramsay and substance over form

If you want a giggle read the tribunal cases on Icebreaker 1, Eclipse and Acornwood and Hawksbridge 2014 UKFTT 416 (TC)

It never gets to Ramsay unfortunately for the investors but fails on basic reliefs

Retrospective???

Do people think the removal of an indexation allowance was retrospective taxation too?

The new dividend tax is retrospective on undistributed reserves is it not?

 

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By ShirleyM
31st Mar 2016 15:16

So you say it isn't dishonest or artificial?

1. Most contractor loan arrangements are properly and truthfully reported via P11d's .

So the punters really do give up genuine pay in exchange for a loan? Really??????

And are you telling me the 'loans' are real loans and are repayable? Pull the other one. I bet the fact that the loans are NOT repayable are not disclosed to HMRC! 

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By Andy Davis
31st Mar 2016 15:27

Dishonest or atificial

 

Real loans. The courts have decided again and again that they are, not me.

Not sure what you want me to pull, but I'm game!

No come back on the dividend point then.................................

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By The Black Knight
31st Mar 2016 16:28

ok

Andy Davis wrote:

 

Real loans. The courts have decided again and again that they are, not me.

Not sure what you want me to pull, but I'm game!

No come back on the dividend point then.................................

 

If you get the dividends wrong, which most do, then that idea does not work either. There are recognised penalties when HMRC knock on the door. Unfortunately HMRC, are blissfully unaware how much tax they could collect in this area. And how easy it would be.

Monthly dividends that replaced the bonus scheme were held not to be dividends I recall. (that was never going to work either) PA holdings

Directors loans are often not recorded on the corporation tax return or the P11D and we have seen them hidden as a bank account and even disappeared in creditors. Evasion

Dividends are paid to shareholders and Salary to directors. That is how a company works. It is not contrived and not really avoidance either.

If the salary has been reduced then the revenue can attack this too.

the fact that HMRC are lazy is a seperate argument however.

It is not really the same as receiving your monthly pay check as a loan, Do you think a contractor that enterered into a --- scheme for example would work for nothing and repay the loan. If so I should do this with my employees -  Substance over form? This has happened on a wider scale than the one man limited company too.

Sorry but I do think there is a distinction.

When do you think we will be able to read the ins and outs of the Jimmy Carr scheme? Or is this legislation because HMRC fear that that scheme worked?

 

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By Andy Davis
31st Mar 2016 16:40

OK

The K2 structure is under enquiry along with a number of similar arrangements.

AS HMRC get further into the enquiries I genuinely believe they have a fear that the better implemented arrangements do work.

This has caused them to introduce behaviour management for taxpayers who are part of such arrangements, along with the creative use of statistics to back up their success in this area as a means to discourage use of these arrangements in future,and pressure individuals to settle.

I think the introduction of this new legislation is a clear sign that they fear the worst.

To my mind I have no issue if they want to change the rules - can't believe it has taken this long to figure it out (And in reality someone will come up with a way around whatever gets into the final legislation).

What is fundamentally wrong is that these changes will catch people who undertook these transactions in the past based on proven case law, and a sound interpretation of the legislation at the time - however distasteful some may find that.

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By justsotax
31st Mar 2016 15:40

wow andy....

next you will be suggesting that taking a lower paid job when faced wit  choice is tax evasion....

 

so do any of these loans get repaid....I mean any?

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By Andy Davis
31st Mar 2016 15:51

wow Andy

 

Taking a lower paid job is career choice,and I'm not suggesting anything I have said is tax evasion, completely the opposite.

And I have come across a loan being repaid.

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By ShirleyM
31st Mar 2016 15:41

Dividends are dividends

... not dividends dressed up as loan, or vice versa.

The court agrees they are real loans? They may be real loans in basis, but they will never become repayable. That is the artificiality of the scheme.

Naturally, the scheme promoters have to be dishonest and tell the court they could be repayable (while telling the punters they will never be repayable), else the whole thing goes up in smoke.

Of course, common sense tells me that the promoters wouldn't get any punters (or their fees) if the punters were not assured that the loans would never be repayable. Who would give up genuine pay for a loan that has to be repaid? The tax avoiders wouldn't, that's for sure!

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By Andy Davis
31st Mar 2016 15:55

Dividends are dividends.... or are they?

 

Wow, are you suggesting that a Barrister would deliberately lie to the Court in tribunal?

And a salary dressed up as a dividend is tax avoidance (by your definition).......................... Still no answer on that one?

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By The Black Knight
31st Mar 2016 16:47

God forbid

Andy Davis wrote:

 

Wow, are you suggesting that a Barrister would deliberately lie to the Court in tribunal?

And a salary dressed up as a dividend is tax avoidance (by your definition).......................... Still no answer on that one?

God forbid no!

Have you never been in a divorce court

it's the ex wifes solicitor that feeds the barister with the falsehoods and he presses on blindly accepting that pigs fly in good faith.

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By Andy Davis
31st Mar 2016 16:54

God Forbid

The Black Knight wrote:

Andy Davis wrote:

 

Wow, are you suggesting that a Barrister would deliberately lie to the Court in tribunal?

And a salary dressed up as a dividend is tax avoidance (by your definition).......................... Still no answer on that one?

God forbid no!

Have you never been in a divorce court

it's the ex wifes solicitor that feeds the barister with the falsehoods and he presses on blindly accepting that pigs fly in good faith.

 

Fortunately not - but it sounds like you may have been!

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By Wiganer Elaine
31st Mar 2016 15:58

If the "loans" are "real"

If the "loans" are in fact real loans then how can you claim an injustice is occurring just because you have to pay them back?

If they aren't "real" then the tax is due; if they are real, the loanees should expect to have to repay them at some point.

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By Vaughan Blake1
31st Mar 2016 15:59

Andy, a question

If these were loans, how/when did the contractors intend to repay them?

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By ShirleyM
31st Mar 2016 16:25

lol

You want me to believe that Barristers are always open, honest and truthful????? Is it honest to conceal facts, even if those facts are relevant and could determine the outcome?

The BIG difference is that a low salary/dividend combination is available to ALL director/shareholders. They don't have to 'pretend' that the dividends are to replace remuneration . They don't pretend the dividends are loans that will never be repaid.

Come to think of it, if director/shareholders did take a loan instead of pay, they would pay s455 & possibly BIK tax on a loan and still have to repay the loan eventually. That would be fair treatment for the 'loan' tax avoidance punters too.

EDIT: Dividends come out of post-tax profits. Tax is paid on those profits.

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By Andy Davis
31st Mar 2016 16:26

OMG

Just because everyone does it doesn't mean it's not avoidance.

I'm sure we all break the speed limit from time to time. All that means is that we have all broken the law!

You really are missing my point here. Cutting through your distaste of this area of planning, what you are saying that using a loan arrangement to reduce your tax liability is a use of tax legislation to gain a tax advantage that was never intended by Parliament.

Swapping your salary for a dividend does exactly the same thing.

By that definition, you can do both or none. Simple. It's a pretty basic concept - well it is from where I sit. I go back to my original post - Lord Tomlin was right and he still is.

 

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By ShirleyM
31st Mar 2016 16:55

I disagree

The loan arrangement of tax avoidance is artificial and is not a loan in the true sense, as it is non-repayable, therefore it isn't a 'loan'.

A dividend is still a dividend, and is reported as what it is, ie. a dividend.

It isn't salary disguised as dividends (shareholders are not entitled to a salary), unlike salary that is disguised as a 'loan' for no real purpose other than tax 'avoidance'.

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By Andy Davis
31st Mar 2016 17:11

You disagree

Still missing the point.

Don't think I can spell it out in any simpler way..................... I'll give it one last go

HMRC see the  low salary/dividend trick as avoidance even if you do not. They know it works, and there is no way they can legislate against it.

Answer - tax it to make it less attractive (and dress it up to the general public as a tax giveaway)

             - Sit and have a good giggle around the cabinet table about how clever you are to have raised a huge amount of additional revenue without anyone noticing.

               - Go for a large lunch at a posh restaurant and claim it back on your expenses

Problem solved - sort of.

 

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By justsotax
31st Mar 2016 17:07

of course you can

arrange your affairs in the most tax efficient way you can....

 

The issue is the definition of 'loan'...presumably backed up by the fact that the trust is inevitably offshore....there is no intention to repay the loan....and if it is (on occasion as you suggest) then there seems little reason to pay £000's to follow this scheme as there is no benefit. 

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By Andy Davis
31st Mar 2016 17:24

Of course you can

justsotax wrote:

arrange your affairs in the most tax efficient way you can....

 

The issue is the definition of 'loan'...presumably backed up by the fact that the trust is inevitably offshore....there is no intention to repay the loan....and if it is (on occasion as you suggest) then there seems little reason to pay £000's to follow this scheme as there is no benefit. 

I don't care  if anyone thinks it's a real loan

I don't care if anyone thinks it will never be repaid

I don't care about a lot of things really.

I do care about people retrospectively moving he goal posts to their advantage because people legally took advantage of badly written legislation. If HMRC did not like the rules 10 years ago, or 5 years ago, or last year, they should have changed the rules then.

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By ShirleyM
31st Mar 2016 17:20

Spell it out all you like

You haven't convinced me it is a genuine repayable loan, or anything other than avoidance/evasion of tax using dishonest/artificial means.

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By Andy Davis
31st Mar 2016 17:32

Still spelling it out

I'm not trying to convince you about the validity of the loan or otherwise.

I'm trying to demonstrate to you, and get you to accept that many accountants advise their clients to do things that they do not perceive as tax avoidance, but by their own measure would be defined as such - paying a dividend instead of a salary for example.

And that HMRC certainly see it that way.

If you haven't got that yet then I give up.

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By ShirleyM
31st Mar 2016 17:33

Maybe ....

.... HMRC believed what they were told, ie. that the loans were loans and would be repaid. :)

If HMRC did not like the rules 10 years ago, or 5 years ago, or last year, they should have changed the rules then.

Maybe, if the loans had been repaid in those 10 years, this legislation would never had arisen?

Anyway, this new legislation should reduce the loss of tax and the massive legal fees and court costs that these avoidance schemes cost the country.

I also agree with the poster that said HMRC should be targeting the promoters and instigators, rather than the punters.

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By Justin Bryant
31st Mar 2016 18:10

If you read

This case, you'll see it's actually more than 20 years ago:

http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKFTT/TC/2012/TC02235.html&query=BOYER&method=boolean

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By NJ replies
31st Mar 2016 21:03

Remuneration or loans

Remuneration goes through the tax system and tax is charged appropriately e.g. on a salary or a dividend.

The loan is not remuneration and is a liability of the employee so is not (yet) deemed as remuneration and has not been taxed.

The change is to recognise that these loans are disguised remuneration and should be taxed as such. This would be retrospective if the tax was due based on when the loans were taken out and interest/penalties applied.  The change is not retrospective and can only be seen as such if the employee never intended to repay the loans.

I suppose the next suggestion will be that the loans should be written off and offset against corporation tax whilst the employee pretends the loan never existed.  Hopefully HMRC will be wise to this.

 

 

 

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By NJ replies
31st Mar 2016 21:11

Remuneration or loan

Remuneration goes through the tax system and tax is charged appropriately e.g. on a salary or a dividend.

The loan is not remuneration and is a liability of the employee so is not (yet) deemed as remuneration and has not been taxed.

The change is to recognise that these loans are disguised remuneration and should be taxed as such. This would be retrospective if the tax was due based on when the loans were taken out and interest/penalties applied.  The change is not retrospective and can only be seen as such if there was never any intention to repay the loan.

I suppose the next suggestion will be that the loans should be written off in the company and offset against corporation tax whilst the employee pretends the loan never existed. Hopefully HMRC will be wise to this.

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By gordo
31st Mar 2016 21:24

retro-active

I do feel that it would be closer to the mark to compare it to say: dividends which you had quite rightly advised the client to take, as opposed to a higher salary or employment bonus, are now to be taxed at 7.5%, but this is to apply to all dividends declared in the last 15 years.This despite the fact that what you advised the client was perfectly legal at the time you advised it, as confirmed by the Courts where appropriate

If you prefer, perhaps we just apply that to all dividends that had been declared, but not actually paid (as opposed to crediting a loan account), but hey, you have until 2019 to physically pay all those dividends. Surely not a problem, just pay them. However if you don't, or can't, perhaps because movements in the Economy mean that circumstances have changed, then you will suffer a tax charge. Oh and incidentally, this is a stand alone charge so you will get no relief for the tax paid under self-assessment to the extent that you were a higher rate taxpayer.

This legislation (not the investment returns element referred to by cfield), is retro-active and as such cuts across all principles of UK law and makes the judiciary redundant. It means that the judiciary are no longer the independent (from the Government) voice of reason that we can rely upon to resolve any dispute. Every tax case brought to conclusion before now is irrelevant, because HMRC and the Treasury can make a new rule and effectively back date the impact. This cannot be allowed to happen.

Regardless of how you feel about the motives of the individual taxpayers, we cannot set aside the law and I believe that the Institutes need to consider their response to these proposals. According to yesterdays Webinar HMRC see this as a done deal and the consultation to come is (in their minds) not about whether it will happen, it is apparently a technical consultation about how the rules will work. HMRC are trying to cloud all of this by playing on morality and employing behavioural psychologists to apply pressure and influence people, instead of working within the law and accepting the judiciary as the ultimate judge.

If HMRC want to change the law to outlaw such loans then do it from this day forward. No issues with that, but do not apply it to cases you have already lost in Court where the judge has told you that you are wrong. Perhaps we should ask ourselves why they haven't done that? Now that's an interesting question. Why, if they say it is so rife, do they not propose a new law that says any NEW loans from this day forward...and thereby stop the practice. They haven't done that.

 

 

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By NJ replies
01st Apr 2016 12:17

Retro-active?

I am quite happy to agree with the fact that the loans are loans.  That is the point, the contractor has received the money, and owes this money back to the company.  If he had received remuneration, he/she would have been taxed.

The budget is recognising that this arrangement is a sham and allowing companies/contractors time to rectify the arrangement i.e. tax the loan as disguised remuneration or settle the loan.

The fact is that the majority of these loans are in place to prevent a tax point occurring.  The budget is setting a long stop date for this tax point if, and only if, the loan is still outstanding.

This is not the same as dividends or salary, where remuneration has passed to the contractor and (hopefully) taxed accordingly.

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By gordonberry
01st Apr 2016 12:47

Salary or Dividend?

If a one man/woman Director, who happened to also be the only shareholder, came to you and said that they had won a new Contract and their Turnover was increasing, therefore they wanted to increase their own personal Net position from the Company, what would your advice be, salary or dividend?  Would you at least explain their option and the consequences of each and allow them to make their own informed choice?  What if the client chose Dividend and a few years later HMRC decided they wanted PAYE on all historic dividends (and this is a new stand alone charge so no relief for income tax already paid), how would you feel?

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By justsotax
01st Apr 2016 14:07

it really comes down to

the fact that the loan will never be repaid...that's it...if it was going to be repaid I would suggest that said contractors would not spend £000s on the 'advice' but instead plump for good old dividends/low salary.

 

The hypothetical nonsense being suggested is just that....nonsense. 

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By Anonymous68
01st Apr 2016 15:27

The Reality

I've read several comments above that display a holier-than-thou sanctimony without proper consideration of what is actually being proposed in this new legislation.

I was a member of one of these schemes for five years. It seemed at the time an appropriate vehicle for my own set up. Mine is a joint husband/wife set up - my wife is a researcher and I am consultant/writer. One of the first things we were advised to do when faced with this pretty dire law was to do a comparison of our tax position had we been full time employees (which it seems is where HRMC want everyone to be) and the actual position. This would take into account the fact that HMRC received sizeable VAT contributions on account on my position which as an employee they would not have, that any expenses (pension, medical etc) were deducted, and my wife and I would both be using our tax allowance.

Based on this comparison, we probably paid around £2K pa less than a comparable permanent position would have paid. HMRC's new rule disregards all of this and insists on tax on the entire loan, coming in around £15K pa. So this is far from 'the fair treatment' that the HMRC media machine is propagating. This is targeted tax assault on a small cohort of the population that have neither the reputation nor the legal protections of other professions.

Most of us took these schemes out in good faith (at the time I thought no different to self employed advisors/mps writing everything to expenses or multinationals diverting profits off shore). My scheme even rolled QC out to tell me face to face that 'it was perfectly legal'

So far from wanting to 'avoid tax' all we want is fair treatment. HMRC have shown no interest in this and simply want to extract as much as they can (which is in direct contravention of the government's own GAAR wording). So to all those contributors stating that we are just getting what we deserve, please do some research first.

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By cfield
01st Apr 2016 16:04

QC = Quite a Con

Anonymous68 wrote:

I was a member of one of these schemes for five years. It seemed at the time an appropriate vehicle for my own set up. Mine is a joint husband/wife set up - my wife is a researcher and I am consultant/writer. One of the first things we were advised to do when faced with this pretty dire law was to do a comparison of our tax position had we been full time employees (which it seems is where HRMC want everyone to be) and the actual position.

What you should have compared it to was not an employee earning a salary but a limited company contractor outside IR35. If IR35 was a problem, there were certain things you could have done to manage the risk, or if it was unavoidable, bite the bullet and pay tax as the disguised employee you would clearly then have been.

Yes, that would have meant forking out employer NI too, but then you should have tried to negotiate an increase in your fee to cover it (plus holiday pay and anything else the client was saving by making you use a company). If they would have refused, then perhaps that was the going rate for your services. That may sound a bit harsh but ultimately all labour costs are net of payroll taxes and other employment costs. That is an economic reality that is only immediately obvious when you work off-payroll.

Your £2k per annum difference in the tax bills obviously includes the VAT you were paying as a non-employee otherwise it wouldn't be so low. VAT is payable by the client, not you. All you do is pass it on to HMRC, so VAT doesn't come into it and should be ignored. Oh, by the way, did your trusted advisor mention the flat rate scheme? You could well have saved about £4k a year on that. No? Should have seen an accountant!

A bit like closing the stable door after the horse has bolted, but if ever you see a scheme with a QC stamp of approval, run a mile. Proper tax planning doesn't need a QC to approve it. They wouldn't anyway as there's no money in it. You say that your QC told you face to face that it was perfectly legal. Did he guarantee it? Are you still in touch with him? Why not go round there and ask for your money back? See what he says. But no doubt he was on his toes years ago.

In fact, why not name him and shame him. Not that these people have any shame. As I understand it, most of these dodgy schemes were approved by one particular QC. It will be interesting to see if it was the same person.

 

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By Anonymous68
01st Apr 2016 16:17

Indeed in hindsight, I would have done exactly as you say.

But this isn't about what I should or shouldn't have done, it's about correcting my position in a fair manner moving forward - which this law patently isn't allowing. My point is that I'm willing to say 'hands-up, I messed up, I made a bad judgement'. But I didn't break a law and I didn't wittingly try to avoid tax. I simply believed, perhaps naively, that this was a different way to achieve the same outcome as a limited company. IR35 was far from the straightforward and clear law that you seem to intimate.

Right now all most of us want is to a position whereby if HMRC retrospectively insists on a different interpretation of the law, that we can retrospectively re-order our tax affairs.

But all the same, thanks for the advice on what I should have done.

 

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By The Black Knight
04th Apr 2016 11:12

mmm

Anonymous68 wrote:

I've read several comments above that display a holier-than-thou sanctimony without proper consideration of what is actually being proposed in this new legislation.

I was a member of one of these schemes for five years. It seemed at the time an appropriate vehicle for my own set up. Mine is a joint husband/wife set up - my wife is a researcher and I am consultant/writer. One of the first things we were advised to do when faced with this pretty dire law was to do a comparison of our tax position had we been full time employees (which it seems is where HRMC want everyone to be) and the actual position. This would take into account the fact that HMRC received sizeable VAT contributions on account on my position which as an employee they would not have, that any expenses (pension, medical etc) were deducted, and my wife and I would both be using our tax allowance.

Based on this comparison, we probably paid around £2K pa less than a comparable permanent position would have paid. HMRC's new rule disregards all of this and insists on tax on the entire loan, coming in around £15K pa. So this is far from 'the fair treatment' that the HMRC media machine is propagating. This is targeted tax assault on a small cohort of the population that have neither the reputation nor the legal protections of other professions.

Most of us took these schemes out in good faith (at the time I thought no different to self employed advisors/mps writing everything to expenses or multinationals diverting profits off shore). My scheme even rolled QC out to tell me face to face that 'it was perfectly legal'

So far from wanting to 'avoid tax' all we want is fair treatment. HMRC have shown no interest in this and simply want to extract as much as they can (which is in direct contravention of the government's own GAAR wording). So to all those contributors stating that we are just getting what we deserve, please do some research first.

Presumably you thought you were caught by IR 35 and faced with this problem you didn't restructue how you did your work but fell prey to slick salesman that said he knew better.

If you were really an employee then you should have been subject to PAYE.  ir35 was to prevent the abuse of employees using companies to escape tax and NI

Did you really think that Mr dodgy could wave a magic wand? I assume that you refused to use any public services in return for paying far less tax than other employees.

 

What to do now?

Complain to the professional body of the accountant

obtain the Insurance details of your accountant and write to them. These have to be provided.

request details of the commissions recieved by your accountant, we are not allowed to do work on commission, these rules are to protect you not us.

the commissions should have been accounted (paid) to you. If they were not you received some very expensive advice and have a claim for damages

find other victims and appoint your own liquidator and go for the directors of the scheme personally.

 

 

 

 

 

 

 

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By ShirleyM
01st Apr 2016 15:51

That's one side - here is the other

Your employment within your own company is no different to that when in employment for another company. The VAT on the sale of your efforts would still be paid to HMRC, benefits would still be taxable, etc..in other words no gain of VAT or income tax from you having your own company. if you didn't make use of your personal allowances that is hardly the governments fault. More bad advice from your advisor, possibly!

You had the added bonus of being able to manage the extraction of profits to suit your personal requirements, which you wouldn't get if employed by another company.

QC's .... money talks. There is always a QC who will look at the favourable parts of a contract and ignore the less favourable parts. One particular QC springs to mind as being willing to confirm any avoidance scheme is legal, even when all his colleagues disagree.

I am sorry you met someone who didn't advise you of the risks, but there are always risks with tax avoidance schemes. Sue him!

The word 'loan' should in itself have raised an alarm. The definition of a loan is something that is repaid, with interest. I am sure the advisor told you that the loan was not repayable. Doesn't that give a different meaning to the word 'loan'?

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By Anonymous68
01st Apr 2016 16:03

The Other (Corrected)


Perhaps you misread my original posting - the comparison was between permanent employment (on which no VAT is levied, or paid) and the loan scheme.

With regards to extraction of profits, again this in incorrect. Most schemes were set up in such a way that loans were distributed at the trustees behest - causing some difficult cashflow issues.

And yes.....you're absolutely right there are always risks with tax mitigation schemes - but wouldn't you say that to someone setting up a limited company, or a self employed advisor using large amounts of expenses, or a doctors practice etc etc etc.

And if this is eventually classed as tax avoidance scheme that failed the HMRC tests, then all we really want for the GAAR guidelines to apply:

'GAAR operates to counteract the abusive tax advantage which he/she is trying to achieve. The counteraction that the GAAR permits will be a tax adjustment which is just and reasonable in all the circumstances. The appropriate tax adjustment is not necessarily the one that raises the most tax'.

 

 

 

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By justsotax
01st Apr 2016 16:55

I am intrigued as

to what you felt was the fair amount of tax to pay, or just simply as a % of income what tax you actually paid (VAT is a red herring - it's like a business saying they pay loads in PAYE).

 

I have some sympathy for people in these schemes a I am sure the 'sales pitch' is compelling but when you consider your income after allowable expenses and the comparative tax...it must ring alarm bells.  Or maybe its the fact that a QC advised it was 'safe a houses' should have alerted you that something wasn't quite right.

 

  

 

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By Anonymous68
01st Apr 2016 17:23

A fair amount is probably the

A fair amount is probably the equivalent amount I would have paid as a limited company, which is somewhere in the region of 21-22%.  Certainly my take home from the scheme was less than my take home from a comparable limited company.

I certainly don't see VAT as a red herring - my rate negotiations with the end client made it quite clear that they saw VAT as part of my cost - especially as an insurance company they had very little in the way of VATable sales to offset the VAT.

As for the QC - to anyone who is not in the legal or accounting profession a QC is seen as the paragon of trustworthiness (after all they have the law on their side). How wrong could we have been.

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By gordo
01st Apr 2016 22:03

Are we all being played?

The 'Any Answers' section of this website is rife with questions and advice on the most 'beneficial' strategy on dividends, salary, NIC levels, employment allowance, etc. By 'beneficial' I don't mean that many are asking how to maximise the tax take for the Treasury.

Tax planning, tax avoidance, tax mitigation...however you want to describe it and of course it is perfectly in order to resist HMRC from putting the largest shovel in one's stores. So long as it is within the law.

Interesting that many are happy to give their opinions (not fact) on how the law should have worked and then back HMRC in their wish to dispense with tradition and rules and propose a law sometime in the future, which impacts upon planning undertaken many years ago within the law that existed at that time. Interesting that many seem to know better than the QC's. However, HMRC do not make the law. They may propose something, but it's Parliament that creates the law and seeks Royal assent.

I find it intriguing that HMRC have positioned this 3 years hence and then work on getting Accountants to influence clients to throw in the towel, despite the fact that there is no such law as things stand, further, we don't know what the law might be if it arrives and therefore what settlement would amount to. The idea that the 3 year period is to allow loans to be repaid is misleading and does not explain why the Government did not act to stop any new loans being created from the date of the budget.

 

I also find it intriguing that HMRC think it better to employ, no that's wrong, not employ but contract the services of behavioural psychologists to influence peoples behaviour, rather than work within the law. Any behavioural psychologist would know that one way to create stress is to remove any feeling of certainty and create an atmosphere of uncertainty.

Check Companies House for Behavioural Insights Ltd. A company apparently part owned by the Treasury and part by individuals...and part by an EBT!. This company achieved Turnover of £4.8 million and profit of £1,4 million in it's first period of trading. Impressive for a start-up. Who are/is its main customer(s)?

(https://www.gov.uk/government/organisations/behavioural-insights-team)

Imagine for a moment, now I am not saying this is true, but just imagine that I could convince everyone to give in and settle between now and 2019 under threat of what the law might be one day....then I wouldn't actually need the law to be passed.

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By The Black Knight
04th Apr 2016 10:44

how I see it

gordo wrote:

The 'Any Answers' section of this website is rife with questions and advice on the most 'beneficial' strategy on dividends, salary, NIC levels, employment allowance, etc. By 'beneficial' I don't mean that many are asking how to maximise the tax take for the Treasury.

Tax planning, tax avoidance, tax mitigation...however you want to describe it and of course it is perfectly in order to resist HMRC from putting the largest shovel in one's stores. So long as it is within the law.

Interesting that many are happy to give their opinions (not fact) on how the law should have worked and then back HMRC in their wish to dispense with tradition and rules and propose a law sometime in the future, which impacts upon planning undertaken many years ago within the law that existed at that time. Interesting that many seem to know better than the QC's. However, HMRC do not make the law. They may propose something, but it's Parliament that creates the law and seeks Royal assent.

I find it intriguing that HMRC have positioned this 3 years hence and then work on getting Accountants to influence clients to throw in the towel, despite the fact that there is no such law as things stand, further, we don't know what the law might be if it arrives and therefore what settlement would amount to. The idea that the 3 year period is to allow loans to be repaid is misleading and does not explain why the Government did not act to stop any new loans being created from the date of the budget.

 

I also find it intriguing that HMRC think it better to employ, no that's wrong, not employ but contract the services of behavioural psychologists to influence peoples behaviour, rather than work within the law. Any behavioural psychologist would know that one way to create stress is to remove any feeling of certainty and create an atmosphere of uncertainty.

Check Companies House for Behavioural Insights Ltd. A company apparently part owned by the Treasury and part by individuals...and part by an EBT!. This company achieved Turnover of £4.8 million and profit of £1,4 million in it's first period of trading. Impressive for a start-up. Who are/is its main customer(s)?

(https://www.gov.uk/government/organisations/behavioural-insights-team)

Imagine for a moment, now I am not saying this is true, but just imagine that I could convince everyone to give in and settle between now and 2019 under threat of what the law might be one day....then I wouldn't actually need the law to be passed.

 

Yes we are being played

HMRC have behavioural problems

ethics and professional behaviour flew out the window with prudence's virginity

the Scheme promoters sold a pile of do do

The clients are the victims but they say you cannot con an honest man

HMRC should have had more faith in the tribunals to start with as they have performed.

 

What would be good

1 The victims to put in a claim to the liquidator of these scheme providers turn up at the creditors meeting, appoint their own liquidator and form a creditors committee and persue a claim for the recovery of their losses under s.213 IA 1986

2, Demand that they are repaid the commisions from their accountants as they should have had these anyway

3, If they paid their commissions to their accountants for advice then sue for the bad advice.

4, stop listening to sharky salesmen and get proper advice

5, HMRC to play fair and abide by their own rules

6, The professional bodies to weed out their unethical and sharky members that have been bringing the profession into disrepute.

If you sell something that you know does not work for a lot of money what would you call that?

Bearing in mind these were experts and and a QC none the less had looked at the scheme so they must have been aware.

I think these scheme promoters were fully aware these did not work and were only a cash flow excercise. Their fall back was the Ramsay principle.

Then they got a shock that Ramsay cannot be used as a get out of jail free card.

as for a loan scheme and restrospective law if you defer a tax payment then be aware that laws change in the future. Doh !

 

 

 

 

 

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