Calling in all loans

Contractor Loans Settlement Opportunity ends this month

Users of contractor loan schemes before 6th April 2011 and who wish to settle with HMRC and take advantage of the Contractor Loans Settlement Opportunity (CLSO) only have a few weeks to register as the closing date is 30th June.

According to HMRC the settlement opportunity has proved very popular, with thousands of people talking to them about settlement.

Once registered HMRC will calculate the tax liability and any interest.

Originally, the CLSO was planned to be open until 9th January but was extended as HMRC recognised that they needed to provide further information and clarification on some specific issues which would help those affected make better informed decisions about whether to settle. This deadline will not be extended again and the Revenue expect all those that want to take part in the CLSO to have contacted them and discussed possible settlement, which should be agreed by 30th September 2015 at the latest.

Those that are eligible to take up the opportunity must pay the tax HMRC believe they owe or risk facing heftier tax bills and massive legal costs. Should they choose to do so then they will pay the tax and interest due on the sums they received as loans under the scheme. When a settlement is agreed with HMRC, the terms of the agreement will be legally binding on both the person and HMRC and won’t be affected by any future legal proceedings.

Of course, there may be those who still believe they are not culpable and they are at liberty to continue to challenge the Revenue through the courts but this will come at a cost and could even leave them in a worse financial position.

How a Contractor Loans scheme works
Contractor Loans schemes involve complex arrangements whereby an individual signs a contract of employment with an offshore employer. Although the individual works on contracts in the UK they receive their remuneration through an offshore company or trust in the form of, what are claimed to be, non-taxable loans, rather than as salary. Unsurprisingly, HMRC do not agree that these loans escape tax and that they should be treated as taxable earnings.  

Tax case decisions
A number of tax cases involving loans from an Employee Benefit Trust (EBT) have been found in the taxpayers favour, the most recent being Murray Group Holdings (Glasgow Rangers) and previously, Dextra Accessories Ltd and Sempra Metals Ltd. However, HMRC believes that these judgements are of no help to users of Contractor Loans schemes. In these cases it was found that the loans were not taxable as earnings, although the Murray case is still not yet final and remains to be decided, as HMRC are contesting previous rulings through the courts.

In the opinion of the Revenue, all three cases involved different arrangements with different sets of facts. In particular, none of the cases involved offshore employers and so none of these cases considered the Transfer of Assets rules on which the current opportunity is based.  

The employment relationships and ongoing connections between individuals using Contractors Loans schemes and the trustees differ from the circumstances in the above three tax cases, according to HMRC.

In the 2013 First Tier Tax Tribunal case of Boyle v HMRC the tribunal decided that a contractor loan scheme which tried to take advantage of using a loan in an artificially fast depreciating foreign currency to avoid PAYE & NIC did not work.

Transfer of Assets Abroad rules
‘Income Charge’ applies to an individual who transfers assets, or who procures or is associated with a transfer by somebody else. The legislation applies to an individual who has not personally transferred assets but who benefits from a transfer made by somebody else.

The broad conditions for application of the ‘Income Charge’ are:

• There must be a transfer of assets by (or procured by) an individual.
• As a result of the transfer (alone or in conjunction with associated operations), income becomes payable to a person abroad.
• The individual has power to enjoy that income in some way as a result of a transfer of assets alone or together with associated operations, or receive/be entitled to receive a capital sum in any way connected with any relevant transactions.
• The individual must be ordinarily resident in the UK in the year of liability.

Where these conditions are fulfilled, income is treated as arising to the individual and therefore taxable.

EU law
There are those who believe that the Transfer of Assets Abroad rules are contrary to EU law, so HMRC cannot apply them. HMRC say this is incorrect as the rules can be used in tax anti-avoidance situations, as long as no EU Freedoms are restricted. Even if there is a potential restriction on an individual’s EU Freedoms, the legislation can still apply if the arrangements are artificial.

Most recently, a Tribunal judge in the case of Fisher v HMRC, agreed that the Transfer of Assets Abroad rules can continue to be applied if EU Freedoms were not engaged.

Accelerated Payment Notices (APN’s)
HMRC can give no assurances about whether or when a person might receive an APN, but individuals will be informed shortly before the issue of a notice. Where an APN is issued and a person reaches settlement with HMRC within the specified time limit and pay the amount of tax due, then the APN will be withdrawn.

Where settlement is reached after the due date for payment of the APN, then the amount paid will be treated as a payment on account and offset against the final amount due.

Discovery assessments and enquiries
HMRC will be issuing protective tax assessments for the year 2010/11 before the 30th June 2015, to ensure that they meet the statutory time limits. Anyone receiving one of these has 30 days in which to appeal and make any application to postpone all or part of the tax charged.  

If a person is the subject of an open enquiry or has already received an assessment then, depending on the number of years involved, HMRC can either agree:

• to bring tax into charge by closing the enquiry and any appeals
• an overall contract with that person to include the tax owed for all years

Further information can be found by visiting www.gov.uk/government/publications/tax-on-contractor-loans