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Contractor loans: taxable or not?

  • CLSO is coming to an end
  • The CLSO is not for post 5 April 2011 transactions
  • Many other structures fall within the remit of why the CLSO was offered
  • Other structures are not safe from HMRC attack
  • Case law appears to be in HMRC’s favour
  • The position is going to be worse given the new criminal offence, penalties and increased target prosecutions
  • Consider speaking to us if there is even a possibility that a structure you are aware of could be challenged
By admin
01 Jun 2015
Tax Investigation

HMRC’s Contractor Loan Settlement Opportunity (“CLSO”) was launched on 24 May 2014 and is for the tax years up to 5 April 2011. Entering the settlement opportunity is open until 30 June 2015.

That is not too far away so it is probably important for users to consider whether they are in or out. It is also equally important for users of similar structures before or after 5 April 2011 to consider making a disclosure. We set out below some thought provoking points for users of “remuneration and incentive structures” to consider their tax risks.

A number of “solutions” were marketed to contractors through telesales teams, sales teams targeting professionals and website advertising. The offerings normally indicated (if not stipulated):

  • A large percentage of the gross “earnings” received tax free (say 85%)

  • Turnaround of funds within a quick period (24 to 48 hours)

  • Significant track record

  • No successful enquiries by HMRC

  • Fully HMRC compliant

The “solutions” offered up to 5 April 2011 were generally employment structures, although a handful of structures for the self-employed or those with service companies existed. The settlement opportunity is aimed at contractors so it appears to apply to individuals being contracted to numerous roles with third parties over a period of time. However, similar structures have been used in different situations:

  • A trading or investment company may have contracted with a third party or contributed to an arrangement other than an Employee Benefit Trust (EBT) say a “remuneration trust”, which in turn and not by virtue of an employment relationship, lends funds to say, a shareholder director

  • A self-employed person may have entered similar transactions as those set out in the first bullet point

In relation to a “remuneration trust”, it is noted that some structures were facilitated by a deed of adherence giving all the profits generated to the trust or an entity on behalf of the trust such as a Personal Management Company (PMC). If this is a commercial arrangement there would be a correlation between the contribution and the potential future profitability of the company – how can this be if the profits are adhered to a structure?

HMRC state that “a contractor loan scheme is a tax avoidance arrangement where non-UK employers have paid you untaxed income or given you a loan instead of part of your salary.” It may be easy therefore to consider that certain arrangements are not within the CLSO because the:

  • Structure is post April 2011

  • Contractor was not employed

  • Salary was not paid

  • Arrangement was for commercial purposes and not for tax avoidance

Are they however, within the spirit of the CLSO and would HMRC consider making use of the disclosure opportunity appropriate? Where the situation arose after April 2011, it is clear that the settlement opportunity is not available.

Where reliance is based on the structure having no employment relationship, no salary paid and not being for tax avoidance, each will be tested subjectively.

Self-employed: whether someone is actually self-employed is determined on a number of factors. It is not solely reliant on the contracts in place. The badges of trade are considered to establish whether someone is in business of their own account. Each badge needs to be considered and the balance needs to be in the favour of the person claiming to be self employed.

Salary: Many cases have challenges determining what an emolument is; it is intrinsically linked to whether a payment or benefit has been provided to an employee. It is evident that where a self-employed person is actually employed, it is likely that either directly or indirectly they would have received an emolument from the considered structures.

Commercial and not for tax avoidance: This is very much a subjective test that is ever evolving depending on whether the courts look through the legal structure at substance or not. For example, an arrangement may legally be established to incentivise suppliers of a business although the transactions that follow may simply appear to benefit employees or someone who could be challenged as being an employee.

The case of Philip Boyle v Revenue & Customs 2013 may be the reason HMRC exude confidence in this area. Admittedly, other cases like Sempra, Dextra and Rangers may not have been so warmly received. Boyle regarded a trader who was employed through an Isle of Man (IOM) company and received a modest salary plus loans through a trust arrangement. An area considered was whether Boyle had made a transfer of assets abroad for the purposes of income tax anti avoidance legislation and the verdict:

“With regard to s.739 of ICTA, whilst we consider that the monies received by Mr Boyle as purported loans are in fact employment income, in the event that we are wrong and the sums should properly be considered to be capital, then we find that by reason of s.739(3) they should be deemed to be Mr Boyle’s income for all purposes of the Income Tax Acts.”

Someone who has taken part in a contractor loan scheme may still have to pay income tax on the loan. Whilst the CLSO is evident aimed at one group, the principles on why the opportunity has been given can clearly apply to many similar structures pre and post 5 April 2011.

Those not taking the opportunity may find themselves in a similar situation to those that did not enter the employee benefit trust settlement opportunity which ended on 31 March 2015. Accelerated Payment Notices on many have been issued forcing the users to consider whether they genuinely wish to proceed through the courts or settle. No reason this won’t happen for users of contractor loan structures pre 5 April 2011.

For those within similar structures before or after 5 April 2011, it would probably be prudent to consider options now. Given that HMRC are able to identify users of these structures either by receiving information from financial institutions or direct from promoters and operators, it is to be expected that a letter will be landing within the next year or so. Maybe, HMRC will even open a few more settlement opportunities. It is unlikely that waiting for a settlement opportunity will be beneficial. Our advice would be to speak to us about disclosure options now.

One last thought, if information will pass under the offshore disclosure facility and given the new automatic criminal offence plus the higher penalties in relation to offshore, is it worth waiting?

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