If a loan is a "loan" it cannot be taxable - true or false? If a loan is a "loan" it cannot be taxable - true or false?
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  1. #1

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    Default If a loan is a "loan" it cannot be taxable - true or false?

    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?
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  2. #2

    Fingers like lightning


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    1) Does Part 7A (the DR rules) only apply from Dec 2010 onwards?

    2) If so, does it only apply to employees (individuals under an actual contract of employment). Not self-employed sole traders?

  3. #3

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    Quote Originally Posted by DealorNoDeal View Post
    1) Does Part 7A (the DR rules) only apply from Dec 2010 onwards? Certainly the legislation dates from then. HMRC claim - without evidence - that the rules are just a reflection of "what was always the case". That is a claim that I suspect a Tribunal would struggle with. Arguably of course the legislation called in aid of Rangers, section 62 ITEPA et seq, pre dates Part 7A and if liability arises by virtue of that section, then all years of all schemes are in scope.

    2) If so, does it only apply to employees (individuals under an actual contract of employment). Not self-employed sole traders?
    The question of employment and self employment is too long to answer here.

    Basically the decision as to whether you were self employed - or not - will be based on the facts of the situation you were in.

    You cannot "chose" to be one or the other. HMRC cannot "chose" to make you one or the other. HMRC's default position is to argue for employment - unless it suits them otherwise.

    So, Part 7A does apply only to employment but whether you were an employee in employment is a far more difficult question to answer.
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  4. #4

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    What an unholy mess these scheme people have created. And they walk away with millions. Sickening. There must be good media documentary opportunity in the making here.
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  5. #5

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    Quote Originally Posted by Fred Bloggs View Post
    What an unholy mess these scheme people have created. And they walk away with millions. Sickening. There must be good media documentary opportunity in the making here.
    These schemes have created multi-millionaires.

    One scheme even had a company yacht. Second homes in the Caribbean, South of France, Bentleys, race horses.

    Even a billionaire.
    Billionaire boyfriend of bra tycoon Michelle Mone linked to alleged GBP13million tax avoidance scheme - Mirror Online

  6. #6

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    Quote Originally Posted by Fred Bloggs View Post
    What an unholy mess these scheme people have created. And they walk away with millions. Sickening. There must be good media documentary opportunity in the making here.
    Makes me feel sick to the stomach every time I think about it (which I try not to but until this mess is all sorted it will play on my mind) , the amount in fees they took from me which I was not even aware of (my stupid fault for not checking I realise now).
    The lies and BS these people peddle.

    And yes surprised there has not been a doc yet, on BBC watchdog or a dedicated investigation doc.

  7. #7

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    I think we need to keep this on topic.

    Plenty of space for rants about those who have profited from misery. I will observe howver that we ahve been contacted many times by TV production companies who show an interest but then decide that tax is just not sexy enough.

    As I said above, the theory that the "loan is a loan" and therefore all the income tax implications fall away, is - in my opinion - harking back to the day when a Court would look only at the letter of the law. Those days are long behind us and I cannot see any Court going down that road today.

    Away from the tax arena, what happens if you go a Court and they say "yes, this is a genuine loan!."

    This would put that transaction firmly within section 554C ITEPA and any write off or reduction in value would be a relevant step = taxable.

    If I were an unscrupulous acquirer of third party loans and knew this, perhaps I would say to the borrower, "you have now set a price for this loan".

    You need to pay me £x, otherwise I'll simply write it off and you have a tax charge.

    Hard place >< Rock.

    Once again, this argument fails.
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  8. #8

    Fingers like lightning


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    Quote Originally Posted by webberg View Post
    As I said above, the theory that the "loan is a loan" and therefore all the income tax implications fall away, is - in my opinion - harking back to the day when a Court would look only at the letter of the law. Those days are long behind us and I cannot see any Court going down that road today.
    +1

  9. #9

    More time posting than coding


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    From the twittersphere

    " if you argue that it was always earnings/income you will end up owing the tax along with penalties for having deliberately filed an incorrect tax return in the first place. If you disagree that's obv fine but don't say you weren't warned."

    How do you counter that?

    To me it seems you are ignoring RFC rulings and arguing HMRC's case for them. What I find also hard to overlay is how the time that has passed since many of these transactions will affect matters when the view wasn't that that existed at the time.
    Last edited by dammit chloe; 15th February 2020 at 16:39.

  10. #10

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    Quote Originally Posted by dammit chloe View Post
    From the twittersphere

    " if you argue that it was always earnings/income you will end up owing the tax along with penalties for having deliberately filed an incorrect tax return in the first place. If you disagree that's obv fine but don't say you weren't warned."

    How do you counter that?

    To me it seems you are ignoring RFC rulings and arguing HMRC's case for them. What I find also hard to overlay is how the time that has passed since many of these transactions will affect matters when the view wasn't that that existed at the time.
    Can you ask Phil for the context?

    Without the context, it's difficult to understand where this comes from. For example, he says "A loan is NOT taxable" and that has no context. A loan can be taxable in lots of ways (e.g. s23A, s175, s188, s415, s455, s554Z2, s809EZA, s850C, etc).

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