Contractors' Questions: Do I include EBT 'loans' on my tax return?
Contractor’s Question: A tax issue has arisen from my previous employment. I was employed by ‘N.E Name Consultants Ltd’ between 2012 and 2015 where I was on an Employee Benefit Trust scheme.
This is where I received a small basic salary and the remainder was paid to me via a loan. I have all the evidence that proves it is a disclosed strategy and as such I cannot be penalised by HMRC.
But I have since been sent tax return forms by HMRC and I have filled in my basic salary. I am unsure whether I need to fill in the section ‘Tips and other payments not on your P60’ because of the loan payment I received. I'm not sure if this is taxable or not. Please advise.
Expert’s Answer: Your query centres on whether you should include the ‘loans’ that you received from the trust in your tax returns.
The first thing that you need to think about is that our tax system is self-assessment and the obligation is to submit a tax return if you have any liability. This requires no input from HM Revenue & Customs but in your case they have issued tax returns to you, which means they have taken positive action to force returns from you. They only do this for one reason; which is they have information that potentially you have outstanding tax liabilities.
But you are quite correct, in that if you supply the DOTAS registration number then you can’t be penalised under the Disclosure regulations. However, you are still exposed to penalties in respect of any inaccuracies in your tax returns when submitted and the statutory penalties for late returns can still apply if you have any liabilities.
The issue then is to ensure that there are no inaccuracies and the fundamental point is whether the ‘loans’ are taxable. It is highly likely that HMRC have sent tax returns to you because they are aware of the loans and believe them to be taxable. If the loan comes by virtue of your employment, any benefit-in-kind has to be included on your tax return and you are obliged to include sufficient information for the tax inspector to be able to accurately assess any liability. You should include details -- in the white space -- of the loan balances and any terms that apply.
Bear in mind, the fundamental issue for HMRC will be whether the loans are in fact loans or alternatively remuneration. So to directly address your question as to whether the loans are taxable, the straightest answer is that if they are loans, any benefit-in-kind will be taxable -- but if the substance is that they were not loans but remuneration, then the full amount will be taxable subject to any deductions for sums expended wholly and necessarily in the course of your trade. You may therefore need to take advice about whether the ‘loans’ are in fact remuneration or not.
The expert was John Green, an adviser for Cobham Murphy, a tax investigations specialist for young and growing companies.