Contractor Loan Schemes and Employee Benefit Trusts – The Latest News

Posted by on Apr 30, 2014 in News Alerts, Newsletters | No Comments

In January, the HMRC published a consultation document, Tackling Marketed Tax Avoidance.  Two of areas covered in this proposed anti-avoidance strategy were Employee Benefit Trusts (EBTs) and Contractor Avoidance where contractors used offshore intermediaries and EBTs who make loans in place of remuneration to avoid Income Tax and National Insurance Contributions.

The gist of the proposal was that, where the HMRC are able to issue a ‘Follower Notice’ to someone whose case is the same or “substantially similar” to a case already decided in HMRC’s favour by a tribunal or court, the taxpayer will be required either to settle their dispute or to pay the tax in dispute where the dispute is not settled.

An Accelerated Payment Notice will be issued alongside the ‘Follower Notice’ which would have a ninety-day response time and the payment would be due at the end of this period unless a settlement is agreed with HMRC.

Two key points within the proposal were that, as HMRC will have issued a ‘Follower Notice’ on the grounds that, in HMRC’s opinion, the tribunal or court has decided the substantive issue, there would be limited grounds for the taxpayer to challenge the Accelerated Payment Notice (an error in process) and this procedure would apply to open Self-Assessment tax assessments which are under appeal.

Despite receiving representations from legal and tax experts such as The Chartered Institute of Taxation who, whilst agreeing with the principle of ‘Follower’ cases, stated that “However, the way of achieving this should not be to take away a taxpayer’s normal safeguards and rights of appeal and to give HMRC almost unprecedented executive powers….”, the measures in the 2014 Finance Bill are virtually unchanged from the HMRC Consultation Document published in January.

Although the legislation states that, once an Accelerated Payment Notice has been issued, the taxpayer has ninety days to pay the tax demanded, there has been an acknowledgement that, in many cases, the taxpayer would not have the funds to pay.  In such circumstances, the taxpayer can contact HMRC in the ninety day period to agree arrangements for payment.

In terms of the legislative process, the 2014 Finance Bill is being considered by the Public Bill Committee of the House of Commons who are due to report by 17th June.  The timetable remains for the Bill to receive Royal Assent and become law by mid-July. 

Although there have been powerful submissions against these proposals, there is little doubt that they will be passed into law.

As a result, we have been in discussions with HMRC on this and can summarise the latest position:

–          There is an acknowledgement by HMRC that there are inaccuracies in the Tax Assessments calculations that have been issued and there is an opportunity to correct these.

–          There has been an acceptance by HMRC that individuals entered into Employee Benefit Trust and Contractor Loan schemes “with the perhaps mistaken belief that it was correct.”  As a result, the HMRC will not being seeking to charge a penalty but will be looking to recover unpaid tax and interest,

–          There is the opportunity to reach a full and final settlement with HMRC on this basis before the 2014 Finance Bill becomes law.

–          The agreement of an extended period of time to pay the HMRC will be based on individual circumstances and whether the individual has used the ‘Time To Pay’ scheme before.

–          A new phrase – Contractor Loan Schemes – has started to be used in the correspondence from HMRC.

–          The HMRC are actively using the First Tier Tribunal ruling in the Boyle Case (which was a soft currency loan scheme) to support their assertion that Employee Benefit Trust loans were “not a loan but remuneration for work done or services provided in the UK…”

–          The First Tier Tribunal in the Boyle determined that the loans were taxable income but could potentially be taxed as employment income or under the transfer of asset rules.

–          As neither party has appealed the First Tier Tribunal ruling in the Boyle Case, the HMRC considers that this decision is final.

These last two points need careful consideration.  The HMRC are clearly intending to argue that the Boyle case is “substantially similar” to Contractor Loan schemes. 

Once the Finance Bill becomes law in July, as the HMRC has a Final Ruling in the Boyle case, they may well issue Follower and Accelerated Payment Notices on this basis.

Furthermore, the vagueness as to whether the loans ought to be taxed as employment income or under the transfer of asset rules carries an implicit risk.  If the HMRC opt to pursue this as employment income (which is not currently their position), then the amounts would not only be subject to Income Tax but also National Insurance.

However, there is a strong body of expert opinion that believes the HMRC will be open to legal challenges on their decisions.

At CooperFaure, we have extensive knowledge of this sector.  If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.