HMRC say the loan is taxable, therefore it cannot be a loan. Right? WRONG HMRC say the loan is taxable, therefore it cannot be a loan. Right? WRONG
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  1. #1

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    Default HMRC say the loan is taxable, therefore it cannot be a loan. Right? WRONG

    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.
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  2. #2

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    Quote Originally Posted by webberg View Post
    Consequently the money CAN be taxed as remuneration AND be a loan.
    But if I go get a loan from Barclays that loan is not taxed by HMRC.

    Further still Barclays (and many other Banks) sell that loan on and its still not taxable.

    Not disagreeing with you I am just pointing out how one sided this is from someone who works with this.

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    Quote Originally Posted by lowpaidworker View Post
    But if I go get a loan from Barclays that loan is not taxed by HMRC.

    Further still Barclays (and many other Banks) sell that loan on and its still not taxable.

    Not disagreeing with you I am just pointing out how one sided this is from someone who works with this.
    I think rather than contesting HMRCs view I am actually saying this should give weight to those people finding themselves on the receiving end of these loans being called in.

    If HMRC make the connection legally in a court of law between the "loan" money being made and that it is actually income then for that legal reason irrespective of any loan agreemnt the moneys paid cannot be considered a loan. The money cannot be two things legally and that is accounting law. Its either income or a loan.

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    we must have some accountants on here. Please check GAAP rules. Would not know where to find it ... soz

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    Quote Originally Posted by lowpaidworker View Post
    But if I go get a loan from Barclays that loan is not taxed by HMRC.

    Further still Barclays (and many other Banks) sell that loan on and its still not taxable.

    Not disagreeing with you I am just pointing out how one sided this is from someone who works with this.
    If you had a loan from Barclays you need to repay it.

    Also that loan was not made to you because of work you did for Barclays and therefore its a normal commercial loan.

    If you did not repay the loan when asked, Barclays would take action.

    That action may well be to sell the loan to a debt collector for a percentage because barclays do not want to named in Court as chasing a debt.

    Sorry, but you are comparing apples and lemons.
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    Quote Originally Posted by lowpaidworker View Post
    I think rather than contesting HMRCs view I am actually saying this should give weight to those people finding themselves on the receiving end of these loans being called in.

    If HMRC make the connection legally in a court of law between the "loan" money being made and that it is actually income then for that legal reason irrespective of any loan agreemnt the moneys paid cannot be considered a loan. The money cannot be two things legally and that is accounting law. Its either income or a loan.
    But HMRC are very deliberately NOT making that connection.

    They are saying that their argument stops at the point it becomes taxable income, i.e. when a legal obligation comes into being.

    HMRC and the Courts have not really examined what happens next.

    It is in HMRC's interest NOT to do that and therefore THEY DO NOT.

    Money can and often is more than one thing legally. Tax law can and does create a fictional world in which money flows create liabilities for tax but not for any other purpose. It's true that the reverse is less common.

    Further money is fungible. With an aggregator such as a trust it is NOT POSSIBLE to trace money from end client through a promoter to a trust and to you. A trust may have received tens of thousands of pounds on any one day and it is legally and financially impossible to identify that £X relates to those 40 hours you did at end client. Therefore the connection your work and "your" money earned is broken BEFORE the lender gets involved.

    HMRC is not required to give any weight to what it is claimed that money eventually becomes. It's just not part of the tax argument.
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    Quote Originally Posted by lowpaidworker View Post
    we must have some accountants on here. Please check GAAP rules. Would not know where to find it ... soz
    GAAP is irrelevant.

    GAAP tells you how to account for transactions.

    It tells you very little and is not determinative of the tax or legal definition of a transaction.

    If it was, we would not need tax law, not contract law, nor trust law, nor banking law.

    GAAP operates a set of guidelines which are compliant with the law but are restricted to accounting.
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  8. #8

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    as an individual or entity I cannot have a payment state this money is a loan but or and is also income.

    think about it. They cannot be the same thing. Impossible

    Sorry not GAAP the other accounting.

  9. #9

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    Quote Originally Posted by webberg View Post
    Money can and often is more than one thing legally

    If I get £100 in my account... that is either income or a loan. It cannot be classed as both. I'm not talking about the muddy world of tax and maybe there needs to be some clarity between the two but in accouting £100 credit in my account cannot be both a loan and income.

  10. #10

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    Quote Originally Posted by lowpaidworker View Post
    If I get £100 in my account... that is either income or a loan. It cannot be classed as both. I'm not talking about the muddy world of tax and maybe there needs to be some clarity between the two but in accouting £100 credit in my account cannot be both a loan and income.
    I've no skin in this game, but if you do, then repeating the above ad-nauseum is as good as shouting at the moon and will not make either HMRC, or those that are now attempting to coerce money out of the scheme users, go away. You need to remove the emotion from your thinking and come up with a plan for how to get out of this mess.

    Whilst webberg obviously does have some commercial interest in how people extricate themselves from said mess, he has provided a *lot* of free information/advice on these boards, and I suggest arguing against his points are not the best use of your time or effort.
    Last edited by Paralytic; 16th April 2020 at 15:18.

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