False.
We are hearing a number of questions from clients and others asking
If the loan is repayable (as those third parties who have acquired loans seem to think) then this makes it a "genuine" loan and as such aside from some provisions dealing with the benefit of loans from employment, it cannot be taxed as income. Is this true?
We have seen this view advanced in a number of instances, ranging from promoters defending their often ongoing arrangements, to loan cleansing schemes offering structures to frustrate loan charge, to JR's also seeking to frustrate the loan charge.
For a couple of key reasons, I do not believe that the loans we see in this space can be regarded as "genuine" and that instead, they are - as tax law presently stands - liable to income tax.
Reason 1 - Rangers. In that instance, it was held that the point at which the money became taxable was when the employee became entitled to it. That employee did not need unfettered ownership of the money, just an entitlement. Lord Hodge thought the the SUBSEQUENT movement of funds to a trust which then made the loan to the employee was equally "real" for legal purposes.
In effect the employee was borrowing his/her own money but that did not detract from the fact that it was taxable income BEFORE it was routed out of the employer (redirected in his words) and reappeared as a loan.
Thus the money was FIRST taxable and SECOND a loan.
Reason 2 - Part 7A.
Whilst this legislation has a number of flaws and holes, the intention behind it is I think clear enough for a Tribunal. The intention is that money passed from employer to employee that represents payment for work done, is to be treated as employment income.
In other words, dressing up a payment by giving it a new title, will not be enough to change its definition.
Many promoters therefore "dressed" the payments not just with a new name but with an accompanying legal document to "prove" that it was not employment income. That document came with a collection of rights of obligations that were designed to make it look as close to a "genuine" loan as possible. Some schemes went further of course and had multiple parties involved.
However the ratio behind Part 7A (and to a great degree section 62 et seq of ITEPA) is that if you work and get paid, it is taxable. We and HMRC may differ as to who is liable of course.
So again, we have a payment being two things at the same time.
It is - for tax purposes - a payment of employment income.
It is also - for contract law purposes - a collection of rights and obligations that may amount to a genuine loan.
To a degree this analysis is supported by the loan charge legislation, even after it has been mauled by the review. That starts with the premise that the payment is within Part 7a and is a disguised form of remuneration. Proving that is was also a genuine loan that may have to be repaid, will not detract from the intent of that legislation.
My fear here is that a combination of loan sharks seeking repayment, JR cases being based on "genuine" loans and a seemingly unstoppable rumour that if the loan is "genuine" it cannot be taxed as income, are creating a dangerous scene in which unrealistic expectations and misplaced hope can flourish.
I'm sorry for being a killjoy but I do not believe that the "genuine loan" route is an answer to the tax liability question.
You might also want to consider the consequences of the loan being "genuine" in terms of your ability to resist repayment?
We are hearing a number of questions from clients and others asking
If the loan is repayable (as those third parties who have acquired loans seem to think) then this makes it a "genuine" loan and as such aside from some provisions dealing with the benefit of loans from employment, it cannot be taxed as income. Is this true?
We have seen this view advanced in a number of instances, ranging from promoters defending their often ongoing arrangements, to loan cleansing schemes offering structures to frustrate loan charge, to JR's also seeking to frustrate the loan charge.
For a couple of key reasons, I do not believe that the loans we see in this space can be regarded as "genuine" and that instead, they are - as tax law presently stands - liable to income tax.
Reason 1 - Rangers. In that instance, it was held that the point at which the money became taxable was when the employee became entitled to it. That employee did not need unfettered ownership of the money, just an entitlement. Lord Hodge thought the the SUBSEQUENT movement of funds to a trust which then made the loan to the employee was equally "real" for legal purposes.
In effect the employee was borrowing his/her own money but that did not detract from the fact that it was taxable income BEFORE it was routed out of the employer (redirected in his words) and reappeared as a loan.
Thus the money was FIRST taxable and SECOND a loan.
Reason 2 - Part 7A.
Whilst this legislation has a number of flaws and holes, the intention behind it is I think clear enough for a Tribunal. The intention is that money passed from employer to employee that represents payment for work done, is to be treated as employment income.
In other words, dressing up a payment by giving it a new title, will not be enough to change its definition.
Many promoters therefore "dressed" the payments not just with a new name but with an accompanying legal document to "prove" that it was not employment income. That document came with a collection of rights of obligations that were designed to make it look as close to a "genuine" loan as possible. Some schemes went further of course and had multiple parties involved.
However the ratio behind Part 7A (and to a great degree section 62 et seq of ITEPA) is that if you work and get paid, it is taxable. We and HMRC may differ as to who is liable of course.
So again, we have a payment being two things at the same time.
It is - for tax purposes - a payment of employment income.
It is also - for contract law purposes - a collection of rights and obligations that may amount to a genuine loan.
To a degree this analysis is supported by the loan charge legislation, even after it has been mauled by the review. That starts with the premise that the payment is within Part 7a and is a disguised form of remuneration. Proving that is was also a genuine loan that may have to be repaid, will not detract from the intent of that legislation.
My fear here is that a combination of loan sharks seeking repayment, JR cases being based on "genuine" loans and a seemingly unstoppable rumour that if the loan is "genuine" it cannot be taxed as income, are creating a dangerous scene in which unrealistic expectations and misplaced hope can flourish.
I'm sorry for being a killjoy but I do not believe that the "genuine loan" route is an answer to the tax liability question.
You might also want to consider the consequences of the loan being "genuine" in terms of your ability to resist repayment?
Comment