New Finance Bill 2017-18

[Iliketax]

Iliketax,

Do we have to pay 45% for all years aggregated loan amount in one go? Or does the bill allow each year's PAYE allowance for every year I was in a scheme?

Thanks

The April 2019 loan charge legislation just treats your outstanding loan as an extra dollop of income. It's added to your other income like a bonus. So if you have £15,000 of income and a £200,000 outstanding loan then your total income is £215,000 for 2018/19. So you lose your personal allowance, pay tax at marginal rates (so in this example, some at 20%, some at 40% and some at 45%).

A settlement is different. Then each loan is aggregated separately with your income in the year in which the loan is made.

[starstruck]

Hi ILikeTax,

Regarding the transfer of PAYE from employer to employee. I'm still confused. I thought there was no legislation that allowed the transfer of PAYE from employer to employee - it was talked about for ages here - there was going to be a consultation bla bla blah ... Then budget then appeared with stuff about the transfer of PAYE from offshore employers. So what's the deal for transfer from onshore employers to employees?

[ChimpMaster]

The April 2019 loan charge legislation just treats your outstanding loan as an extra dollop of income. It's added to your other income like a bonus. So if you have £15,000 of income and a £200,000 outstanding loan then your total income is £215,000 for 2018/19. So you lose your personal allowance, pay tax at marginal rates (so in this example, some at 20%, some at 40% and some at 45%).

A settlement is different. Then each loan is aggregated separately with your income in the year in which the loan is made.

So in the case where all years are closed (i.e. no interest is due) and < 2011, it should be quite easy to calculate whether it is better to settle under CLSO2 or pay the Loan Charge?

The 2 big factors here are the 45% higher tax rate and the removal of personal allowance (introduced in April 2010).

Sounds to me like CLSO2 will produce the lower tax bill probably by around 10%, at a very approximate calculation.

Plus of course IHT - which it looks like will be due in both CLSO2 and Loan Charge.

[Iliketax]

Hi ILikeTax,

Regarding the transfer of PAYE from employer to employee. I'm still confused. I thought there was no legislation that allowed the transfer of PAYE from employer to employee - it was talked about for ages here - there was going to be a consultation bla bla blah ... Then budget then appeared with stuff about the transfer of PAYE from offshore employers. So what's the deal for transfer from onshore employers to employees?

I've had a go explaining it earlier. But let's pretend that the scenario is different. I'm sure people will criticise me for confusing things further but it is supposed to be an analogy. Nothing more.

Scenario 1

In the good old days there was withholding tax on bank interest. So imagine you were lucky enough to get £100,000 of bank interest. The bank would withhold interest at 20% and so you would receive £80,000 net as £20,000 of tax had been withheld at source. When you do your tax return you put £100,000 of interest on it. If you are a 45% taxpayer your tax liability is £45,000. But as the bank has withheld £20,000 then you have to pay a further £25,000 to HMRC. In this example, there is no liability transfer from the bank to you. It's your liability in the first place but the withholding tax reduces how much cash you have to pay to HMRC with your tax return.

This is the situation where the employer is still around. Instead of interest, you get an employment income tax charge on your outstanding loan. Your tax liability is £45,000. The employer has to withhold PAYE. If you are a highly paid employee still on payroll, the PAYE will be £45,000 and so you have nothing to pay to HMRC with the tax return (obviously, the employer may be interested in getting the PAYE (and NIC) it had paid to HMRC on your behalf back from you). Now this may be very unusual in the contractor world, but it is not in the non-contractor world. And there are lots of employees with loans in the non-contractor world.

If you have left employment then the employer will use a 0T tax code. That means that the PAYE that they withhold on £100,000 will be less than £45,000 (I can't be bothered to work it out, so let's pretend it is £44,000). This means that you will have a £45,000 tax liability but as £44,000 has been withheld through the PAYE system you only have to pay £1,000 through your tax return.

Scenario 2

Now imagine you signed a certificate to say that you were not a taxpayer and so the bank should pay interest to you gross. So they don't withhold. You get £100,000 of cash. You put £100,000 on your tax return. You have a tax liability of £45,000 and as the bank has not withheld, you have to pay £45,000 with your tax return.

This is the same as the employer being dissolved. So back to the April 2019 loan charge. You put £100,000 of employment income on your tax return (no change), have a tax liability of £45,000 (no change), have £0 withheld through PAYE and so have to pay £45,000 through your tax return.

HMRC has not changed its view on this. This is what it said in the August 2016 consultation as to what it expected. There is no need to change any legislation to achieve this. And this is what the December 2017 technical note says.

Scenario 3

So stretching my analogy a bit further. Imagine that if your bank was an offshore bank then it has no obligation to withhold interest. So the position is the same as if the bank had not withheld tax on the interest and you would have to pay the £45,000 tax with you tax return. Now this is where I pretend a bit. Imagine that there was a rule that said if you used an ATM at a UK bank then the UK bank would have to withhold the interest. There is not such a rule, but let's pretend. That rule could be easy to operate if the UK bank new what interest was being paid by the offshore bank and had an agreement with the offshore bank to get the cash that it has to pay back. But it could work really badly if the UK bank had no clue that you even had an offshore bank account.

So back to employment income tax, s689 is the equivalent of requiring the UK to withhold interest. It was originally designed to deal with situations like an employee of a US company coming to the UK and doing work in the UK subsidiary's offices on the UK company's clients. The individual is still employed by the US company but the UK subsidiary has to operate PAYE on what the US company pays the individual. They are all in the same group so while its a bit of hassle, it is possible for this rule to operate in a sensible way. This rule would only apply though if the US employer did not withhold. If they did, the UK company would not need to.

In the contractor world, s689 would work the same way. So the NHS trust gets the benefit of a nurse's services but the nurse has an offshore employer and so the NHS trust has to withhold PAYE. That would have been horrible. So in practice the offshore company would have withheld PAYE on wages and that means that the NHS trust would not have to withhold (as you only need to withhold once).

With the April 2019 loan charge and an offshore employer (which has now been dissolved) the NHS trust would still be responsible for the PAYE on the April 2019 loan charge. Now my experience is that the end users (in my example, the NHS trust) did not know about the loans being made. Webberg says has a different view. He probably has more experience than me (but that does not invalidate my experience working with large, household names). The government decided that it was not appropriate for the end user (in my example, the NHS trust) to pay PAYE on the April 2019 loan charge and then have to get it back from the contractor. So the Finance Bill contains legislation to stop that. Now, based on my personal experience, I would say that is fair. But whether it is fair or not, that is what the government has done (or will do if Parliament agrees).

Just for completeness, if there is an onshore employer then s689 is not needed because the UK employer would have to withhold. So it does not apply where the employer is UK resident. And as such, there is no need for the Finance Bill to stop it working.

[Iliketax]

So in the case where all years are closed (i.e. no interest is due) and < 2011, it should be quite easy to calculate whether it is better to settle under CLSO2 or pay the Loan Charge?

The 2 big factors here are the 45% higher tax rate and the removal of personal allowance (introduced in April 2010).

Don't forget other factors such as (i) the ability to control what other income you have in 2018/19, (ii) the ability to make pension contributions in 2018/19 from carry forward unused annual allowances, (iii) (if you have a big loan outstanding) the tapering of your 2018/19 pensions annual allowance to £10,000, (iv) impact on child benefit, etc.

Sounds to me like CLSO2 will produce the lower tax bill probably by around 10%, at a very approximate calculation.

You may be right (40% v 45%, etc) but I haven't done the calculations.

Plus of course IHT - which it looks like will be due in both CLSO2 and Loan Charge.

The April 2019 loan charge has nothing to do with IHT. So it might not rear its ugly head in April 2019 (but as you have to give HMRC lots of information, I could imagine them using that as a trigger to ask the question).

[jbryce]

The April 2019 loan charge has nothing to do with IHT. So it might not rear its ugly head in April 2019 (but as you have to give HMRC lots of information, I could imagine them using that as a trigger to ask the question).

Which is a further farce. Without the trust deeds, HMRC can't make a call on IHT but they will try and make it anyway.

If they don't get their way, then HMRC will no doubt get HMG to pass some clarifying legislation.

[jbryce]

I've had a go explaining it earlier. But let's pretend that the scenario is different. I'm sure people will criticise me for confusing things further but it is supposed to be an analogy. Nothing more.

Scenario 1

Scenario 2

Scenario 3

I'm quite surprised by all of this - your line of argument works, but only to a point. Your first two scenarios ignore the point that, in many cases, the UK based employers ran PAYE, were aware of the tax situation and supplied assurances that all PAYE was being paid.

Do you think you can rework your examples to reflect contractors and EBTs?

[starstruck]

Scenario 2

This is the same as the employer being dissolved. So back to the April 2019 loan charge. You put £100,000 of employment income on your tax return (no change), have a tax liability of £45,000 (no change), have £0 withheld through PAYE and so have to pay £45,000 through your tax return.

HMRC has not changed its view on this. This is what it said in the August 2016 consultation as to what it expected. There is no need to change any legislation to achieve this. And this is what the December 2017 technical note says.

Hang on this makes no sense ... people have been talking for ages about awaiting to see how HMRC intend to transfer PAYE from employer to employee .... you said here https://forums.contractoruk.com/hmrc...ml#post2497576

"5. Proposals on how the tax and NICs from a DR employment income charge will be collected from the appropriate person are not included in this technical update. There will be a technical consultation on the detail of those changes later in 2017.
That consultation has not happened yet and there are no draft PAYE regulations."

And here https://forums.contractoruk.com/hmrc...ml#post2498334

"It is still a guess if the employer is no longer around because of the promised consultation."

And yet now you are saying there is no need to change any legislation - that the transfer rules have always been there - no consultation needed?! How do you know this now but didn't a month ago?

[DeadDOTAS]

Think I'll start building my own wooden box over the Xmas period.
Also will keep some canisters of petrol handy to make sure the house is proper destroyed.

Meanwhile, may as well spend the remaining cash on prostitutes, gambling and some booze!
This will all end very suddenly and in tears, for HMRC.

Merry Xmas!

[webberg]

I'm quite surprised by all of this - your line of argument works, but only to a point. Your first two scenarios ignore the point that, in many cases, the UK based employers ran PAYE, were aware of the tax situation and supplied assurances that all PAYE was being paid.

Do you think you can rework your examples to reflect contractors and EBTs?

I think, to be fair to Iliketax that his analogy would be stretched to breaking point if he started to say things like the bank was offshore but had a UK branch and the interest was a cost of the branch.

My own reading of this (subject to seeing our barrister chum tomorrow), is that the sort of definition used for an "offshore employer" is vague and certain to lead to problems.

Many of the IOM based employers had UK PAYE references and in some instances UK presence.

That leads us to the second part of the judgement in Boyle where the liability was considered to be that of the employer but as that employer was not of "substance", then they could not be obliged to pay. That's a quite extraordinary decision. There is no bright line threshold in the PAYE regs about employers of substance or not. I've tried hard to understand why this piece of the decision was never challenged but have failed.

And Iliketax is correct, our files are littered with instructions from end user clients to contactors to use scheme so and so, via agent so and so. They knew exactly what was going on.