Contractor Loans scheme opportunity extended
HMRC have extended the Contractor Loans Settlement Opportunity to 30th June 2015. This opportunity, which is open to all users of contractor loan schemes up to 5th April 2011, was originally intended to close on 9th January 2015.
According to HMRC thousands of taxpayers have been talking to the Revenue about settlement, so much so that HMRC have recognised that they need to provide further information and clarification on some specific issues which will help those affected make better informed decisions about whether to settle. This in turn has prompted the extension of the closure date to 30th June of next year.
It is estimated that around 16,000 freelancers are eligible to take up the opportunity to 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.
Those individuals who still believe they have done no wrong can 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.
Transfer of Assets Abroad Rules
An ‘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.
Anyone wishing to take up the settlement opportunity needs to contact HMRC by 30th June 2015 with a view to agreeing a settlement by 30th September 2015.
Further information can be found by visiting the gov.uk website.
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