HMRC issued a release on 15 June relating to the Contractor Loan Settlement Opportunity (CLSO). Whilst the settlement opportunity has limitations, there are a number of similar structures that are not within the settlement opportunity that should be considered for disclosure. Broadly these structures involve an intermediate entity that, through transactions, suppresses profits or income of an individual, partnership or company with a loan being made to the principal or connected person.
It is fine to suggest to someone that they should disclose something although that challenge is greater when the law is unclear. No one wants to pay the tax on something they did that was done correctly. This is where we are, contractor loan structures are considered by many (mainly the promoters, operators and users) to be completely above board tax structuring. Put in the pot an inability to pay the tax, daunting professional costs and having to admit to the spouse and children that net earnings may reduce going forward it may be easier to conclude that HMRC are out of order. Maybe they are but read on.
There are many traits of a skilled adviser dealing with tax disclosures, for example:
- Technical prowess and ability to think through challenges and develop counter arguments
- Ability to be commercial and realistic
- Reading crystal balls
- Good looks and charm
So cutting to the chase in a charming manner, without being judgemental whilst being commercial, realistic and predicting the future:
- A user of a structure with contractor loans (and similar structures used to “mitigate” trading profits even of a company) may be suffering from episodes of delusion if they would prefer to contest
- A promoter or operator is in the business of promoting or operating the structure, of course they have a user’s best interest at heart because they are earning on every transaction placed through the structure. To advise that the structure may be subject to a successful challenge is economic suicide
- An adviser who may have suggested or introduced (not necessarily advised on) the structure still has a duty of care to bring to a user’s attention the possibility of disclosure and recommend the appropriate course of action. If the adviser suggests it is correct not to disclose, they may be putting themselves in a financially threatening position should tax become due and the client be minded to litigate.
The CLSO is available for anyone involved in a structure before 6 April 2011. That doesn’t mean users of structures that are not regarded as a “contractor” arrangement or those used after the 6 April can sit on their arse claiming they don’t need to disclose. If a contractor loan arrangement can be successfully challenged by HMRC then it is likely that most other structures based on those similar technical principals will also fail. The advantage of being proactive is that you have more clarity and a stronger negotiating position. The alternative is obviously to wait and see, which is what a large percentage of users will do because admitting a reduction in net income to the spouse is always more daunting than a jail sentence! Advisers may also feel it unnecessary to consider although we urge you do to manage your professional risks: remember the requirements of your professional body and insurers.
HMRC issued (on 15 June) ten things someone potentially within the Contractor Loan Settlement Opportunity needs to know, which are summarised below with our own unique commentary:
- Time is running out: The notification deadline is 30 June although it is noted that some people prefer playing hide and seek and have the false optimism that they will not be found
- Settling now allows you certainty, peace of mind: Of course this may be true but for the average user of a contractor loan arrangement it also means doom because not only will they have to pay the tax but their net income is likely to reduce going forward
- HMRC will work out the liability so you can decide whether to settle: Whilst this is a nice to have, we would always suggest an adviser is engaged to represent the position to HMRC
- A user will need to pay what is owed but may qualify for a payment plan: Negotiating a payment plan or looking at the options for a user of a contractor loan structure should ideally be considered by an adviser given they have experience knowing what is and isn’t achievable
- A user won’t need to pay an Accelerated Payment Notice: APNs was the topic of last week’s article and HMRC have almost proven that we have a crystal ball and know how to use it! Those within a contractor loan arrangement that HMRC know about are going to be issued an APN and then the gloves come off
- Clarity over whether there is an Inheritance Tax liability: We wonder if the risk of a potential IHT charge were ever relayed to the users of the structures
- HMRC state the loans are taxable and cite Boyle v HMRC: It may be that someone at HMRC is reading our articles because we analysed Boyle a few weeks back warning that contractor loan arrangements potentially fell within the transfer of assets anti avoidance legislation
- It will save the user from possible court action: Not sure we like the use of “possible” although it does demonstrate the need to be careful and instruct appropriate advisers
- The CLSO won’t be extended: We’re guessing given that some opportunities have been shortened, this is a true statement and likely means that HMRC’s database to mailshot out APNs etc. is fully developed and ready to be used
- And a reassuring statement that the user will be doing the right thing: Whilst entering into a settlement with HMRC over any tax irregularities is the right thing, that feeling of moral righteousness is probably going to be significantly overwhelmed by the fact that advisers earned a lot, a user may feel misguided or that HMRC have been undignified and of course the net income and spouse issue won’t be over warming. Despite those emotions, logically, the right things is to disclose to avoid the unpleasant being more unpleasant.