Contractors' Questions: What if I face a Section 9A tax investigation?
Contractor’s Question: I'm signed up to an EBT managed by company ‘X’ and get paid most of my salary as a 'loan' by a management trust. It’s been running for three years now with no trouble from HM Revenue & Customs, but a week ago I received a notification from them that I would be investigated under Section 9A. In response, company X has offered to provide me with legal assistance should matters escalate.
My question is a simple one: are such schemes now illegal in the UK? If so, when was the legislation passed and is it retroactive?
Expert’s Answer: You ask whether arrangements involving EBTs and loans are illegal within the UK.
The simple answer is that they are not illegal and while there has been retrospective legislation in another area (although HMRC deny this, saying that it was just clarification of the existing law), there is no recent relevant change in statute affecting EBTs.
That should not be the end of your concerns however. The real issue is your implied acceptance that you have had “salary” from the trust in the form of a “loan.” This is fatal, as the taxman would have little difficulty in persuading a tribunal judge that the loan was an emolument from an employment in those circumstances.
The key question you might have asked, therefore, is ‘If details of the loans are entered onto a tax return will they be accepted as not being an emolument from employment?’ At the moment, the answer to that is no, as the taxman will say that they are taxable. The scheme provider will probably say that they are not taxable, based on some counsel’s opinion. These issues are complex and will only be answered in the tribunal chamber when test cases are concluded.
With such issues, HMRC will rely on substance over form, meaning they will look through transactions to establish what really happened; if an individual has had ‘salary’ through a payment from a trust that will be taxable.
Any contractor currently considering such a scheme should carry out strict due diligence on the proposed arrangement and save an appropriate proportion of his ‘loan’ to pay any tax arising if the planning fails.
As for people who have been notified of an HMRC investigation, they should strongly consider taking expert advice.
The expert was John Green, an adviser at Cobham Murphy, a chartered accountancy firm specialising in tax investigations.