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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
24th Apr 2016 20:46

Someone is being stupid

It may be me, because I didn't think anyone would be stupid enough to 'borrow' several times their 'declared earnings', UNLESS they were quite sure it wasn't repayable. If you are given money, and not expected to repay it, then it isn't a loan, it's a gift.

"The fact is it is a repayable loan. This is a fact." 

So give us the rest of the 'facts'. When is it repayable, and how can it be repaid when the borrower has very little 'income'?

Anyway, not my problem, thank goodness. I just hope the UK's taxpayers get justice.

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By gordo
24th Apr 2016 20:54

Agreed ShirleyM, I hope they get justice.

The Courts are the final arbitrators of Justice in this Country.

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By gordo
24th Apr 2016 21:44

"If indeed they have.."

Why don't you take the time to read the case law that I have offered rather than implying or indeed outright claiming that I am feeding you some sort of "pony" which I assume is rhyming slang for crap, rather than keep writing your opinion on something that you don't have the time to research? I am not trying to make up case law.

Dotasscandal.org pointed out to you that Lin Homer told Parliament that HMRC would only issue APN's where there has been a clear judgement in their favour, but HMRC then went on to issue 65,000 APN's including situations where there clearly had not been a judgement in favour of HMRC. But you imply that I and other posters might be misleading you. I know who is doing the misleading, but I do understand that it can be hard to accept that HMRC would act in such a way. We tend to assume that HMRC will act within the law.

I offer you the facts, but you don't have time to read them.

The Courts have ruled that these are loans. What do you mean "That doesn't mean we have to keep recognising them as loans for ever more though." 
Do you mean overrule the Courts?

By the way I think you did quote me, that would be the bit in the quotes box. I didn't mean to imply anything by it, simply that I wrote it in my post as evidenced by the fact that you referred to it.

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By NJ replies
26th Apr 2016 19:40

Reality check

Contractors have borrowed money.

If money has been borrowed on commercial terms then the contractor has a few years to source alternative source of finance.

If money has not been borrowed on commercial terms then contractors are receiving a benefit in kind (should this benefit be taxed?).

If commercial checks are not being made into the affordability of the loans then this would suggest disguised remuneration.

Why would a lender make additional loans to a contractor who is already in significantly in debt and whose assets (net of outstanding loans/borrowings) do not justify the lending.

If the loan is genuine then find an alternative source.

The abuse of the system by some has (potential) consequences for all.

The Government should introduce the legislation as soon as possible with an immediate effect for new loans and use the current proposed date for current loans.  It is unacceptable to create uncertainty and to bully contractors.

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By gordo
28th Apr 2016 06:58

Reality check
Are HMRC trying to collect a tax that doesn't exists right now, by trying to encourage Contractors to settle?

Is that unlawful?

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By DotasScandalDotOrg
28th Apr 2016 14:17

Well, not exactly...

gordo wrote:
Are HMRC trying to collect a tax that doesn't exists right now, by trying to encourage Contractors to settle?

To encourage contractors to settle, HMRC would first have to offer a settlement "opportunity".
As things stand, there is not even a settlement option (by settlement, we understand an arrangement that guarantees finality) for post-2011 arrangements. 

Everyone, please consider the following for a minute, which illustrates the irrationality and Kafkaesque nature of it all:

"I asked HMRC if I could settle my tax affairs and I was sent a letter six months later stating “I am unable to comment on whether a settlement opportunity is available for you, however, I would advise you that the terms may change on a daily basis and it is not guaranteed that we will agree to any settlement with you at this time”. (source here)

Surveys conducted by several contractor organisations indicate that a VERY large proportion of contractors would settle within 3 months if offered acceptable terms (i.e. taking into account the responsibilities of ALL parties involved) ensuring finality.

Such settlement offers have been put forward to HMRC by specialist law firms.

It is HMRC that is stubbornly rejecting settlement offers, despite a vast majority of contractors being desperate to put it all behind them.

The net result is that they are pushing people into a corner and forcing them to take possibly desperate measures. They better not come complaining about it at a later time.

 

 

 

 

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By The Black Knight
28th Apr 2016 14:39

The letters are confusing on all avoidance schemes and yes HMRC do appear to be offering setlement but then with the same breath say they can't just yet.

You have to remember that this is all new to HMRC too and they have a seperate dept for each scheme so if you have several it's difficult to get anywhere.

Why don't you make payments on account then wait for things to settle.

 

Coming back to the outrageous indignation the key matter relating to these schemes is that they were Artifcial in nature. Then we have gone into deep denial about this as we are unable to face the truth.

Trying to convince us that this is some great social injustice that affects us all and we should get powerless professional bodies to take action is total madness.

The professional bodies failed to police their by-laws and their errant members. Had they done so then many people would not be in this mess.

If you want their support perhaps you could sue them directly and then they would defend your position by default.

In anycase you should write a stiff complaint letter to your accountants professional body.

 

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By gordo
28th Apr 2016 20:35

I understand that one may want certainty
Dotasscandaldotorg

I understand that a Contractor may wish to settle in order to put all the hassle behind them. HMRC's intimidation and propoganda can affect ones health, business, marriage, life.

However, the point I was making is that no law or case history exists for HMRC to be asking people to settle. If legally there is no liability...then what exactly are people settling. This may explain HMRC's difficulty.

HMRC do not have any case law other than Boyle (which is very specific). HMRC would like to have a new law in 2019 to retrospectively tax the event which gave rise to a loan, as if it were income now, but currently no such law exists.

The Disguised Remuneration regulations give rise to an PAYE liability payable by the Employer, not the Contractor.

Therefore if HMRC ran a webinar right now, such as they plan to in May, or wrote to an individual, suggesting that individual should 'settle', then HMRC Officers would surely be acting outwith the law. i.e. illegally

Would I make a payment on account as has been suggested recently? Payment on account of what? 

If one has an APN that has not been held over then it is true that payment of the APN is legally due, but this is an Accelerated Payment, it is not payment of any liability and it is not tax, indeed it should be incumbent upon HMRC to hold it on account until such time as litigation is concluded (wishful thinking as the government have already spent it). If payment of the APN has been successfully held over then there is nothing to pay and anyone trying to pressurise an individual into 'settling', by any communication could be acting outwith the law. 

Any officer of HMRC encouraging someone to 'settle', whether that communication be by way of a Webinar, email, letter or other, that Officer of HMRC if acting outwith the law, could find themselves personally liable. I hope someone submits this question in advance of the Webinar.

HMRC can't hardly claim they didn't understand. They have specific teams set up to deal with these Enquiries. (According to the Prime Minister they have been investigating certain schemes since at least June 2012. The failure to bring the matter to litigation is wholly and completely down to HMRC). They know exactly what they are doing in terms of their communications. They have no expertise however in being able to settle loans with overseas trustees and resolve a Contractors outstanding loans. 

I hope you can understand what I am saying.

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Replying to gordo:
By DotasScandalDotOrg
04th May 2016 12:18

Hi Gordo,
Please be assured that I can understand. I know extortion and unlawfulness when I see it.
I was merely conveying the perspective of the (sizeable) faction out there who are ready to give in to the bullying in exchange for finality NOW. Even that is impossible.

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