Contractors' Questions: Should I pass up this offshore loan scheme?

Contractor’s Question:I have read the first, second and third most recent pieces on ContractorUK about offshore loan schemes, but need to know more. Like other contractors in my client’s office, I have been approached by an accountant running another offshore loan scheme -- this one uses a ‘self-employed’ set-up.

I have turned the scheme down but a few of my colleagues are signing up. They are stating that the scheme is not subject to DOTAS and offers over 80% of turnover as retention. Have I missed a trick by not proceeding? I believe the scheme is at risk from GAAR and other tax rules. I’d like to warn my colleagues of such risks if I’m right, but am I?

Expert’s Answer: The area of offshore loan schemes continues to develop on an almost daily basis and whether any particular scheme is likely to be effective will only be known following the passage of time, and eventual consideration by HM Revenue & Customs.

I am not in a position to comment on the individual scheme you outline, but I support your tentative approach. HMRC has multiple avenues to resist avoidance schemes and the pitfalls of Transfer of Assets, GAAR, Ramsey and Sham can all be used as alternative attacks if ‘emoluments via loan’ fails them, which on the bare facts provided in your question seems unlikely. 

I would need to see the full proposal including the inevitable Counsel’s opinion upon which so much reliance is put (and the Brief presented to Counsel by the scheme promoter), to be able to give a more informed opinion.

Generally-speaking, we are seeing more and more schemes which are designed specifically to avoid disclosure under DOTAS. However, just in the same way that a Scheme Reference Number was never an assurance that a scheme would be effective for UK tax purposes, a scheme that is marketed as ‘not notifiable’ under DOTAS will not necessarily be accepted by HMRC as valid. There are real dangers in future that HMRC will treat such circumstances as constituting fraud and the penalties for concealing such a scheme could be exceptionally severe. The offence may even be seen as prosecutable.

The decision in the Boyle case gave great comfort to HMRC because they won the day without having to resort to their alternative arguments. The Murray ruling didn’t damage them at all, as the Upper Tier finding was concerned only with procedures at the FTT and at the moment, I believe the Revenue has the upper hand in these matters. To benefit from the Murray decision, an individual contractor would have to persuade the FTT Judges to a finding of fact that his loan was a loan and not emoluments.

More positively, and based on our reviewing of new schemes in the planning stage, there are some credible proposals recently which I believe will pass the test of time. 

For now however, I recommend to you (and other contractors in a similar position) that consideration should be given to schemes ONLY when the promoter is:

  • fully transparent;
  • providing access to all documentation including the Brief to any barrister giving an opinion;
  • fully traceable by telephone, website and address; and
  • providing a commitment to support scheme users (at least to FTT stage) in the event of a challenge by HMRC.

I also recommend that any contractor approached or tempted by an offshore loan scheme keeps in mind that old adage ‘If it seems too good to be true, then it probably is.’

The expert was John Green, an adviser at Cobham Murphy, a chartered accountancy firm specialising in tax investigations.

Thursday 21st Aug 2014
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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