An IT contractor should pay tax on loans from employers because the money was “in substance and reality” income from employment, a first-tier tax tribunal has ruled.
In Philip Boyle versus the commissioners for HMRC, TC03103, Boyle argued that his contractor loan scheme worked and the money he received was not taxable.
Boyle also argued that if he had received income from his employment, it should have been taxed under PAYE by the offshore company and that he should not have to pay.
The tribunal rejected both arguments.
Tribunal judge J C Gort said the tribunal partly based its decision on parliament’s intention that income tax should be paid on anything that is in “substance and reality” employment income.
“We find that the monies which were ostensibly paid over to Mr Boyle as loans were in substance and reality income from his employment, bearing in mind in particular that Mr Boyle had no need for a loan, there was an entirely artificial exchange rate; the reality is that there was no borrowing by Mr Boyle and he never believed that the 'loans' were other than a means 20 of receiving his income without suffering tax on that income.”
HMRC has been challenging schemes where the promoters of the scheme sell the employment loans via an offshore company. The employees get a small salary and most of their income from a “loan” from their employer or intermediary on which, if all goes according to plan, they don’t pay tax.
The Boyle tribunal ruling is another sign that offshore employee loan schemes don’t work.