Loans from EBTs and other Trusts

[Emigre]

Welcome to the Loans thread.

To date loan arrangements have been discussed in many threads on CUK, regularly appearing in the BN66 thread diluting that thread and losing the concentration of information to those associated only with loans and not with S58 FA2008. Its time that loans had its own thread.

As Donkey has done on the BN66 site, I will try and maintain a summary of events on the opening post since I suspect the subject may well drag on for a few years given HMRC's history of inactivity.

Lets have some rules. Its not a loan scheme, its a legimate tax planning arrangement that may result in the avoidance of tax and until proved otherwise or Hector otherwise gets the Tardis out of mothballs it is legal.

History

Loans appear to have started some time prior to 2005. One participant had an enquiry letter in 2008 but has heard nothing since.

Volume of loan arrangements probably took off following BN66 on 12th March 2008.

The number of enquiry letters (S9A TMA 1970) enquiry letters issued also appears to be on the increase. The first Montpelier loan plan enquiry was issued we believe in September 2010 with increasing numbers in December 2010 and January 2011. Some enquiry letters appear to request increased amounts of detail.

[pastalista]

Welcome to the Loans thread.

To date loan arrangements have been discussed in many threads on CUK, regularly appearing in the BN66 thread diluting that thread and losing the concentration of information to those associated only with loans and not with S58 FA2008. Its time that loans had its own thread.

As Donkey has done on the BN66 site, I will try and maintain a summary of events on the opening post since I suspect the subject may well drag on for a few years given HMRC's history of inactivity.

Lets have some rules. Its not a loan scheme, its a legimate tax planning arrangement that may result in the avoidance of tax and until proved otherwise or Hector otherwise gets the Tardis out of mothballs it is legal.

History

Loans appear to have started some time prior to 2005. One participant had an enquiry letter in 2008 but has heard nothing since.

Volume of loan arrangements probably took off following BN66 on 12th March 2008.

The number of enquiry letters (S9A TMA 1970) enquiry letters issued also appears to be on the increase. The first Montpelier loan plan enquiry was issued we believe in September 2010 with increasing numbers in December 2010 and January 2011. Some enquiry letters appear to request increased amounts of detail.

Obviously as we now all know, EBT are no longer viable as a tax mitigation strategy with effect from 9th December 2010.

The announcement, made to allow Hector to use anti-forestalling (the legislation only comes onto the books in April 2011 but because they announced it on 09/12/2010, it is deemed to be effective from that date) mechanisms means that any money drawn down from and EBT or "other" trusts for the benefit of employees from 09/12/2010 will be treated as income with full PAYE liabilities.

Many scheme operators were left floundering by this announcement and are currently swelling the coffers of learned QC across the land seeking approval for their "new" schemes.

There appear to be two schools of thought on this (there maybe more but 2 is all I can find). First approach is to change the status of members of the scheme from employees to sole traders, thus presumably meaning that the trust that is created for the benefit of members is now not for the benefit of "employees". The second approach seems to be to use remuneration trusts which are not "employee" benefit trusts at all but really an inheritance tax mitigation strategy.

Unlike EBT which are considered "tax avoidance" strategies reportable to Hector, remuneration trusts are not. They are not reportable to Hector under tax avoidance rules and the money in them does not need to be declared.

Sounds lovely but the announcement on 09/12 speaks of a very broad church. Until the actual legislation is seen in April, I personally think (as do a couple of tax specialists to whom I have spoken) that there is a significant risk attached to using a remuneration trust vehicle in this way (earnings from a contract being paid into one). It may be that in April the legislation does not cover remuneration trusts at all and it will be an option but it will be very surprising if it doesn't.

Hector is covering as many bases as possible by stating that organisations involved in the process would only be able to circumvent the legislation “(if the loan or payment) is not connected (directly or indirectly) with, an arrangement which has a tax avoidance purpose”. This would seem then to go wider than EBT and cover any arrangement such as a remuneration trust.

I reiterate, there will only be any certainty once the actual legislation is made public in April.

In the immortal words of the Sarge from Hill Street Blues, "hey, let's be careful out there".

Good luck all.

Pastalista

[prozak]

Good points of discussion.

I don't think HMRC see remuneration trusts differently?

Trusts for particular purposes: employment related trusts - general employee benefit trusts

The legislation isn't through yet.

I think there is a real risk of being nabbed by HMRC for those that have jumped from an EBT provider to "ta da" magically becoming self-employed.

I know HMRC do analytics on their data. I know they have the capabilty to have all data on-line and available for analysis. I think it is a pretty simple query to:

select all individuals
from people tables
where any employer in (avoidance scheme, ebt, trust scheme etc)
and new status = self employed.


(excuse my very dumbed down psudo SQL code )


Result --> Investigate these people.

I'd also add... Are you sure that the planning is perfect given the rushed nature of getting it in place?

[prozak]

shouldn't you try and get someone to make this sticky?

[pastalista]

Good points of discussion.

I don't think HMRC see remuneration trusts differently?

Trusts for particular purposes: employment related trusts - general employee benefit trusts

The legislation isn't through yet.

I think there is a real risk of being nabbed by HMRC for those that have jumped from an EBT provider to "ta da" magically becoming self-employed.

I know HMRC do analytics on their data. I know they have the capabilty to have all data on-line and available for analysis. I think it is a pretty simple query to:

select all individuals
from people tables
where any employer in (avoidance scheme, ebt, trust scheme etc)
and new status = self employed.


(excuse my very dumbed down psudo SQL code )


Result --> Investigate these people.

I'd also add... Are you sure that the planning is perfect given the rushed nature of getting it in place?

I'd hire you as an SQL coder!

I don't doubt that you are correct in your assessment that Hector will investigate most of the schemes and people in them to see what they did next.

I would certainly move to either a limited company or to an acceptable umbrella at least until April 2011 when the legislation is published. If at that point the legislation doesn't include some form of trust (although it is hard to see why it wouldn't include them all) then no doubt there will be some new offerings from some providers.

It is however very difficult to see how any scheme will be viable going forward as to all intents and purposes Hector has moved avoidance and evasion a fag paper's width away from being the same thing.

There used to be a popularly held view that for every loophole Hector closed, 10 new ones would open up. Given the paragraph above I somehow doubt that that still applies.

Perhaps avoidance is now the preserve of the super-rich.

Oh - I forgot about Wikileaks.

Perhaps avoidance is now a thing of the past?

Who would have thought that would have happened under a Tory government? Even one in coalition with the Miserable Demigods.

Pastalista

[Tax_shouldnt_be_taxing]

Perhaps given that under Labour the "tax manual" runs to over 10,000 pages and that it seems that most people don't actually understand it (not even HMRC given the need for any form of retrospective legislation), it would be far more pragmatic and offer the certainty to the tax system that the CIOT and others rightly state is needed to simply legislate that any declared monies on a SAR that raise concerns for HMRC are dealt with prospectively at the first opportunity and that anything that is covert is liable for retro (evasion). So you have a binary situation. Be transparent and if not accepted on the grey grounds of "unnacceptable" then use legislation prospectively to deal with it there and then and use simple cover all language. For anything that goes in the dark that then comes to light and is deemed "unnacceptable" the retro is more reasonable since HMRC didn't know because you never told them.

Whilst it might seem that perceived revenue losses in the past are written off, the reality is that in the future, the claimed Tax Gap will be reduced due to a simple application of simple legislation.

This is a fundamental problem of the current tax system Or HMRC could propose a flat tax rate. That seems to be fair. And indeed there are those who claim that this system which might generate less tax means that Government uses this more wisely.

Either way, EBT's the proposed April legislation, how HMRC look at EBT's and the like simply uses more HMRC resources to spend time on "fixing leaks" rather than building a sturdy ship. Why not give up the past and devote efforts to creating a simple, pragmatic, fair and belanced tax system that reaps rewards in the future rather than trying to rectify the failings of the past. Man went to the Moon in the 1960's but our tax system is living in cloud kuckoo land long before it had any way to get there. Yep, Tardis (again...)

[malvolio]

TO be fair, that is what the OTS is intended to be looking at: maybe not a flat tax system, but certainly a more straightforward one. But I'm not holding my breath for any quick results...

[Emigre]

I'd hire you as an SQL coder!

I don't doubt that you are correct in your assessment that Hector will investigate most of the schemes and people in them to see what they did next.

I would certainly move to either a limited company or to an acceptable umbrella at least until April 2011 when the legislation is published. If at that point the legislation doesn't include some form of trust (although it is hard to see why it wouldn't include them all) then no doubt there will be some new offerings from some providers.

It is however very difficult to see how any scheme will be viable going forward as to all intents and purposes Hector has moved avoidance and evasion a fag paper's width away from being the same thing.

There used to be a popularly held view that for every loophole Hector closed, 10 new ones would open up. Given the paragraph above I somehow doubt that that still applies.

Perhaps avoidance is now the preserve of the super-rich.

Oh - I forgot about Wikileaks.

Perhaps avoidance is now a thing of the past?

Who would have thought that would have happened under a Tory government? Even one in coalition with the Miserable Demigods.

Pastalista

We all know that Hector would like to close the gap between tax avoidance and tax evasion, but the fact remains that one is legal and the other isn't. I think it was an ex Labour leader who once said: "The difference between tax avoidance and tax evasion is the thickness of a prison wall". That is still true today except that we now constantly hear of "fraudulent tax avoidance", "illegal tax avoidance", "unacceptable tax avoidance". These expressions are now trotted out on a regular basis but they are not defined anywhere in the statute books and are therefore used to assuage the Court of Public Opinion, something else that doesn't actually exist.

One look at the fees that promoters of these schemes make will tell you that just as soon as one is closed down you will be invited to join a new one. That is the nature of the beast.

Ten years or so ago when IR35 was introduced, a large number of people become uncertain about their tax status and therefore potential liability. These people looked elsewhere, not directly to reduce their tax as Hector would try and persuade people, but to bring more certainty to their circumstances. I joined a DTA scheme, which I was confident gave me a higher level of certainty of the outcome. Following S58 FA2008 I started taking loans.

My point here is that I, like many others, was looking for a fair and certain basis of taxation. I was ok about the levels of tax paid through my PSC. I ended up paying less. If there had been certainty about our tax status throughout that period I'm sure most of us would not be where we are now. In fact I'm not sure that the Offshore Tax planners would even have marketed these schemes to contractors.

Its time Govt accepted that the large part of this situation as actually of their own making. Contractors are not the same as employees and never will be. I've been contracting for 20 years and I'm still waiting for my first paid holiday, pension contribution, health plan, bonus, staff appraisal.....ah now I remember why I became a contractor.

[Fred Bloggs]

And while we're on the subject, there is no such thing in law as a PSC either.

[pastalista]

We all know that Hector would like to close the gap between tax avoidance and tax evasion, but the fact remains that one is legal and the other isn't. I think it was an ex Labour leader who once said: "The difference between tax avoidance and tax evasion is the thickness of a prison wall". That is still true today except that we now constantly hear of "fraudulent tax avoidance", "illegal tax avoidance", "unacceptable tax avoidance". These expressions are now trotted out on a regular basis but they are not defined anywhere in the statute books and are therefore used to assuage the Court of Public Opinion, something else that doesn't actually exist.

One look at the fees that promoters of these schemes make will tell you that just as soon as one is closed down you will be invited to join a new one. That is the nature of the beast.

Ten years or so ago when IR35 was introduced, a large number of people become uncertain about their tax status and therefore potential liability. These people looked elsewhere, not directly to reduce their tax as Hector would try and persuade people, but to bring more certainty to their circumstances. I joined a DTA scheme, which I was confident gave me a higher level of certainty of the outcome. Following S58 FA2008 I started taking loans.

My point here is that I, like many others, was looking for a fair and certain basis of taxation. I was ok about the levels of tax paid through my PSC. I ended up paying less. If there had been certainty about our tax status throughout that period I'm sure most of us would not be where we are now. In fact I'm not sure that the Offshore Tax planners would even have marketed these schemes to contractors.

Its time Govt accepted that the large part of this situation as actually of their own making. Contractors are not the same as employees and never will be. I've been contracting for 20 years and I'm still waiting for my first paid holiday, pension contribution, health plan, bonus, staff appraisal.....ah now I remember why I became a contractor.

Of course you are hitting the nail on the head here. Whether or not avoidance is legal or otherwise is fast becoming a moot point. Hector constantly refers to "aggressive avoidance", the implication being that this is "illegal". Of course it isn't, but that doesn't stop them pursuing people under this banner.

The implication of the April 2011 legislation is, presumably, that up until the 09/12/2010, EBT was legal and "tax efficient" as a vehicle? Unless of course Hector goes down the BN66 "the legislation was always there but you just didn't read it properly" route. Once again, the Government leaves huge numbers of people uncertain about their position, with the possibility of a ruinously expensive investigation hanging over their heads.

Simplification is the way to go. Incentivising people works. Make it a flat rate and everybody will know exactly where they are. The flat rate VAT scheme is proof positive that a) they can do it when they want to and b) that simplest is almost always the best. Make it a flat rate of tax payable as a sole trader (no need to operate as limited as a contractor any more if it is this simple) with a reasonable expenses regime (accepting the "wholly and exclusively for the use of the business" approach) and make this the only acceptable way of contracting and I think more or less everybody would be happy. The caveats of course would be a) a reasonable rate of taxation (say, 22%), b) an agreement about fixing the rate of tax of a 3 year period (to allow the switch to happen properly), c) an agreement about a maximum / minimum rate for this particular type of tax and d) the expenses policy set in stone.

The 22% would be an incentive to operate as a contractor (see the long list of things we don't get above), but it would collect a sizeable amount of taxation from a growing and vital section of the workforce. We all know that Labour don't like folks like us but the Tories are supposed to understand.

Without certainty we have chaos.

Pastalista