A common misconception in these threads is:
I had a letter from HMRC saying that XX Scheme is tax avoidance and I owe tax. I paid the tax. Now I have ZZ Ltd saying that I have to repay the loan. Surely if the money I had was taxable remuneration, it cannot be a loan?
That is a misconception and is almost never true.
The money flows and tax and legal obligation points are these days usually based on what the Rangers case decided. (A case cited subsequently in Hoey and Higgs).
The base assumption is that contractor signed on as an employee of PROMOTER. That promoter made the contractors time and expertise available to an end client. The promoter and end client agreed a rate for those services usually with the "aid" of an agency.
Upon completion of time done, the end client paid the promoter. The money at that point BELONGS to the promoter.
The contractor and the promoter have agreed - via an employment contract - that a salary of minimum wage will be paid. This much money is legally due to the contractor.
At that point the legal obligations of the promoter to pay anything else to the contractor are over. At that point the legal right of the contractor to further sums of money DO NOT AND HAVE NEVER EXISTED.
The promoter chooses - voluntarily - to make a contribution to a third party (usually a trust). The contractor cannot force this payment to be made. The contractor cannot sue the promoter for this sum if it is not paid. In short, the money is the promoters and the contractor has no rights over it.
HMRC and the Supreme Court say that if the payment is made by the promoter to a third party, then the reality for TAX PURPOSES is that the promoter has redirected money due to the contractor to another entity. Because tax is due on money to which the contractor is entitled (note, entitled, not necessarily actually paid) at that point in the sequence, a tax liability arises.
HMRC says that the tax liability falls on the contractor. We and others say it falls on the promoter. (Strictly the employer, but in most instances the promoter either is the employer or controls the entity that is the employer. Perhaps one reason here why many groups using promoters to "defend" their position are effectively fighting with one hand tied behind their back?)
So at this point, we have real money still held by promoter/employer but a tax liability on contractor. (Who might be due to pay that liability remains undecided).
In the event that the promoter chooses to pay money to a third party, we must turn to what arrangements may exist between that third party and the contractor. There may be certain trust obligations, i.e. the third party operates a trust of which the contractor is a beneficiary. That is not always the case. Almost all the trusts here are "discretionary". This means that should the trustees have funds or assets available, they have absolute discretion to use it as they see fit. They cannot be compelled by settlor (person paying them money) or beneficiary to any course of action. In other words, if the trustee had the money and decided to keep it, the contractor could not and cannot force them to pay anything.
If they chose to make a loan to a beneficiary, this is an arrangement between third party and contractor. It creates rights and obligations. This is entirely separate from the point at which a tax liability is crystallised.
Consequently the money CAN be taxed as remuneration AND be a loan.
Views that there is a direct link between money paid to promoter and money loan from third party are equally incorrect.
On any one day, a promoter may have been paid many different sums from many different sources in respect of many different contractors. Let's simplify that. Let's assume on Day 1, the promoter gets £100 from end client A, £200 from B and £300 from C. They have £600. They pay the three contractors a total of £60 (taxable salary as appears on a payslip) and remit £540 less their fee of £120 to the third party. So the third party gets £420.
That party could have chosen to pay nothing, all of that money to one person, all of that money equally between the three contractors, all of that money to as many beneficiaries as are in the trust. If that had done any of this, the contractor would have had NO LEGAL CLAIM.
In the event they chose to pay £70 to contractor at end client A, £140 re B and £210 re C.
Why?
The practical reason is that unless they had, the promoter would have faced a revolt from contractors and probably breach of contract claims if the contractors refused to work or at the very least a messy legal row.
Here is where the tax and legal scenarios start to come back together. There is a lot of legal and tax analysis in play at this time supported (or not) by contemporaneous documents, written evidence and recorded affidavits. I'm not going into that detail here.
In summary.
The money can be both taxable remuneration AND a loan. This is because of the sequence of events and because there is very little commonality between tax law and contract law and trust law.
I had a letter from HMRC saying that XX Scheme is tax avoidance and I owe tax. I paid the tax. Now I have ZZ Ltd saying that I have to repay the loan. Surely if the money I had was taxable remuneration, it cannot be a loan?
That is a misconception and is almost never true.
The money flows and tax and legal obligation points are these days usually based on what the Rangers case decided. (A case cited subsequently in Hoey and Higgs).
The base assumption is that contractor signed on as an employee of PROMOTER. That promoter made the contractors time and expertise available to an end client. The promoter and end client agreed a rate for those services usually with the "aid" of an agency.
Upon completion of time done, the end client paid the promoter. The money at that point BELONGS to the promoter.
The contractor and the promoter have agreed - via an employment contract - that a salary of minimum wage will be paid. This much money is legally due to the contractor.
At that point the legal obligations of the promoter to pay anything else to the contractor are over. At that point the legal right of the contractor to further sums of money DO NOT AND HAVE NEVER EXISTED.
The promoter chooses - voluntarily - to make a contribution to a third party (usually a trust). The contractor cannot force this payment to be made. The contractor cannot sue the promoter for this sum if it is not paid. In short, the money is the promoters and the contractor has no rights over it.
HMRC and the Supreme Court say that if the payment is made by the promoter to a third party, then the reality for TAX PURPOSES is that the promoter has redirected money due to the contractor to another entity. Because tax is due on money to which the contractor is entitled (note, entitled, not necessarily actually paid) at that point in the sequence, a tax liability arises.
HMRC says that the tax liability falls on the contractor. We and others say it falls on the promoter. (Strictly the employer, but in most instances the promoter either is the employer or controls the entity that is the employer. Perhaps one reason here why many groups using promoters to "defend" their position are effectively fighting with one hand tied behind their back?)
So at this point, we have real money still held by promoter/employer but a tax liability on contractor. (Who might be due to pay that liability remains undecided).
In the event that the promoter chooses to pay money to a third party, we must turn to what arrangements may exist between that third party and the contractor. There may be certain trust obligations, i.e. the third party operates a trust of which the contractor is a beneficiary. That is not always the case. Almost all the trusts here are "discretionary". This means that should the trustees have funds or assets available, they have absolute discretion to use it as they see fit. They cannot be compelled by settlor (person paying them money) or beneficiary to any course of action. In other words, if the trustee had the money and decided to keep it, the contractor could not and cannot force them to pay anything.
If they chose to make a loan to a beneficiary, this is an arrangement between third party and contractor. It creates rights and obligations. This is entirely separate from the point at which a tax liability is crystallised.
Consequently the money CAN be taxed as remuneration AND be a loan.
Views that there is a direct link between money paid to promoter and money loan from third party are equally incorrect.
On any one day, a promoter may have been paid many different sums from many different sources in respect of many different contractors. Let's simplify that. Let's assume on Day 1, the promoter gets £100 from end client A, £200 from B and £300 from C. They have £600. They pay the three contractors a total of £60 (taxable salary as appears on a payslip) and remit £540 less their fee of £120 to the third party. So the third party gets £420.
That party could have chosen to pay nothing, all of that money to one person, all of that money equally between the three contractors, all of that money to as many beneficiaries as are in the trust. If that had done any of this, the contractor would have had NO LEGAL CLAIM.
In the event they chose to pay £70 to contractor at end client A, £140 re B and £210 re C.
Why?
The practical reason is that unless they had, the promoter would have faced a revolt from contractors and probably breach of contract claims if the contractors refused to work or at the very least a messy legal row.
Here is where the tax and legal scenarios start to come back together. There is a lot of legal and tax analysis in play at this time supported (or not) by contemporaneous documents, written evidence and recorded affidavits. I'm not going into that detail here.
In summary.
The money can be both taxable remuneration AND a loan. This is because of the sequence of events and because there is very little commonality between tax law and contract law and trust law.
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