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A.steve

A Really Wierd Conversation...

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Today, I had a conversation with someone facing early-retirement/redundancy. They were talking about a 'package' that had been suggested to them - and one phrase rang alarm bells for me... though, strangely, the person relating the story to me seemed to believe that this was all above board and 'normal'.

Essentially, with a few years to go before retirement, a package has been offered - a 'redundancy' plus a "non-repayable loan". Yes, you've guessed which phrase spooked me. The idea is that the owner of a company becomes a counter-party for a loan, but the loan is never to be repaid. Allegedly, this is a strategy with "tax advantages" - but equivalent to a 'bung'.

Has anyone ever heard of this sort of an arrangement? While I doubt anyone can put my mind at rest that this is "OK" - can anyone relate similar stories, or point me at any concrete information about this practice? While I recognise potential tax implications, these are, to steal an American phrase: 'a known unknown'. I'm far more concerned with what are, to me, the 'unknown unknowns' - with various hard questions rattling around my head... thinking, for example, that this might be a strategy to asset-strip the widow of the recipient. At least, I imagine, this has significant implications for someone's accounts. I can't believe that the loan counter-party will bin the asset this non-repayable loan generates.

I know the maxim that you can't defraud an honest man - but, I suspect, the issue here is that the payment could reasonably be expected - but the mechanisms by which such payments are structured are a mystery. I can't believe that this is a one-off, so I'm anticipating that this sort of thing fits a known pattern. Can anyone fill me in? Can anyone suggest something I can say that might help avoid any calamitous errors of judgement coming to pass?

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Guest Parry aka GOD
Today, I had a conversation with someone facing early-retirement/redundancy. They were talking about a 'package' that had been suggested to them - and one phrase rang alarm bells for me... though, strangely, the person relating the story to me seemed to believe that this was all above board and 'normal'.

Essentially, with a few years to go before retirement, a package has been offered - a 'redundancy' plus a "non-repayable loan". Yes, you've guessed which phrase spooked me. The idea is that the owner of a company becomes a counter-party for a loan, but the loan is never to be repaid. Allegedly, this is a strategy with "tax advantages" - but equivalent to a 'bung'.

Has anyone ever heard of this sort of an arrangement? While I doubt anyone can put my mind at rest that this is "OK" - can anyone relate similar stories, or point me at any concrete information about this practice? While I recognise potential tax implications, these are, to steal an American phrase: 'a known unknown'. I'm far more concerned with what are, to me, the 'unknown unknowns' - with various hard questions rattling around my head... thinking, for example, that this might be a strategy to asset-strip the widow of the recipient. At least, I imagine, this has significant implications for someone's accounts. I can't believe that the loan counter-party will bin the asset this non-repayable loan generates.

I know the maxim that you can't defraud an honest man - but, I suspect, the issue here is that the payment could reasonably be expected - but the mechanisms by which such payments are structured are a mystery. I can't believe that this is a one-off, so I'm anticipating that this sort of thing fits a known pattern. Can anyone fill me in? Can anyone suggest something I can say that might help avoid any calamitous errors of judgement coming to pass?

Just take da f-ing money.

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Would the loan still be non-repayable if the company goes bust as part of the bankrupcy procedures?Im not so sure it would. A liquidator would most probably want to see the cash repaid.

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If you call it a loan you don't have to pay tax on it, I think.

Hmmm... yes - that has been mentioned - but, I'd like to find a reference. I'd also like to know if non-taxed loans like this are often contested... if, for example, they look as much like loans as the non-declared donations to the Labour party.

Would the loan still be non-repayable if the company goes bust as part of the bankrupcy procedures?Im not so sure it would. A liquidator would most probably want to see the cash repaid.

Yes, I agree - I imagine that a liquidator would want the loan repaid. The details about the counter-party are critical... though I got the impression that the counter-party for the 'loan' would be the owner, not be the employing company. This, of course, raises questions about why the owner has cash while his company doesn't.

Are redundancy payments taxed?

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I have some dim recollection of "non-repayable loans" being used by individuals who donated to political parties so that they didn't have to declare them. Unsurprisingly it didn't end well.

An attempt to google for the details turned up this completely unrelated piece of pure comedy gold from the House of Commons Standing Committee:

The Minister of State, Department of Health (Mr. John Hutton): I have absolutely no recollection of where we were when we broke up at one o'clock. I think that I was dealing robustly and efficiently with the points raised by Opposition Members.

Mr. Simon Burns (West Chelmsford): Perhaps I can help the Minister. He was being rather rude about the important point of loans.

Mr. Hutton: Ah, yes, it is coming back to me. I was curious that Conservative Members had found the holy grail of loans; something called a non-repayable loan, which was described as the ultimate piece of creative accountancy in terms of the Government's resource and cash allocations. Personally, I have never come across a non-repayable loan, but I wait to be pleasantly surprised.

Mr. Burns: I can give the Minister an example involving hundreds of millions of pounds in the 1970s, when the Labour Government wrote off loans given to nationalised industries.

Mr. Hutton: Very good. I am sure that that is absolutely right, but I have a vague memory in the back of my mind that the Opposition began our discussions on the Bill by inviting me not to refer to the previous Conservative Administrations from 1979 to 1997. I have tried hard not ever to refer to that period, but I have failed; I have succumbed and made a reference on occasion. Part of me would like to blank out as much of that period as possible because it was a gruesome time for many people in the national health service. However, I am interested in the fact that the hon. Member for West Chelmsford (Mr. Burns) wants to highlight a period way back in the early 1970s while admonishing me for referring to an Administration that left office only four years ago. We will not explore that point.

Mr. Oliver Heald (North-East Hertfordshire): Will the Minister give way?

Mr. Hutton: No.

Mr. Heald: It is not on that point.

Mr. Hutton: Oh, go on then.

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I have some dim recollection of "non-repayable loans" being used by individuals who donated to political parties so that they didn't have to declare them.

Yes, but - in this case, the roles are somewhat reversed.. oh, and it's not a political party.

Hmmm - I keep thinking about hidden donations - when I think about the phrase... but that doesn't make much sense.

Edited by A.steve

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This sound very like one of the current tax fiddles that are being investigated.

I have heard of schemes where people who are not UK nationals come and work in the UK for a small Ltd company, which happens to have a larger parent organised in an offshore tax haven. This is mainly done for reasons of tax efficiency for the company, as if invoices are sent from the offshore parent it is possible to avoid collecting VAT etc on sales, and the VAT you subsequently can't claim back as your not registered for VAT is very small as the UK Ltd's expenses are generally low compared with the parent's sales income. All so far so good.

But it also appears that some of the employees in this position have been looking at having salary paid in non repayable loans. Their salary is paid from the offshore tax haven into an offshore account held with an agency. The agency then gives the person in the UK a non repayable loan for a large portion of their salary, but leaves just enough to cover the minimum wage and national insurance etc. That way instead of paying 38% tax, you might only fork out 18% on the original value of your salary.

Sounds pretty dubious to me. I wonder what Mick Dundee would say about this.

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By the way, I've now decided to have my salary paid in old bits of paper with purple or red ink on and a nice picture of the Queen, some watermarks and pretty silver broken line.

Of course it attracts no tax, as it's just bits of paper.

The logic seems about as sound as the loans idea to me. :lol::lol::lol::lol:

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Essentially, with a few years to go before retirement, a package has been offered - a 'redundancy' plus a "non-repayable loan". Yes, you've guessed which phrase spooked me. The idea is that the owner of a company becomes a counter-party for a loan, but the loan is never to be repaid. Allegedly, this is a strategy with "tax advantages" - but equivalent to a 'bung'.

This sounds very fishy to me. Normally a 'severance package' is offered of a cash sum, the majority of it tax free.

Once accepted, there are no remaining ties whatever between employer and ex-employee.

I cannot see any tax-advantage to the employer in the 'non-repayable loan' idea, because a standard severance package (a normal type of remuneration) would be tax-deductible anyway. It is an ordinary running cost any large firm is familiar with. Many firms will be currently offering these to get rid of highly paid, final-salary-pension-expensive, long term employees.

If I was the individual concerned, I would reject any on-going 'arrangement' where a liability could conceivably drop on me in later years. What if the firm is sold, and a new owner won't honour prior commitments?

Bargepole required to fend off this 'offer'.

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This sound very like one of the current tax fiddles that are being investigated.

Yes, that would be a pretty obviously a fiddle - and, except for tax implications, pretty benign... assuming that the non-repayable loans were to the owners of the company.

If, in my story, the recipient acts in good faith, the worst-case scenario sounds like a bill for the CGT that would have been due. This suggests that the tax issue for the recipient is not my key concern.

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This sounds very fishy to me. Normally a 'severance package' is offered of a cash sum, the majority of it tax free.

Once accepted, there are no remaining ties whatever between employer and ex-employee.

Can you (or anyone else) point me at credible information to back this up?

What is the normal tax status of a severance package?

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Well Anthea Turner seems to have done just that. She took a £600k loan from Imagine Furnishings before it went bankrupt. The loan was written off, but I have no idea who decided it should be. :angry:

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What is the normal tax status of a severance package?

The redundancy payment is taxed as income at the same bracket as your normal income. However, you do get a special tax allowance of £30k per annum (which cannot be carried forward) for redundancy monies.

So, a severance package under £30k in value would be tax free.

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There were a number of "non repayable loan" schemes running as a tax avoidance scheme for IT contractors in the last few years. You "worked for" the comapany performing your contract, they paid you a pittance to cover NI contributions then loaned you the balance (minus their fee)

I believe since then some of these loans have started to be called in, esp when the comapanies have been taken over. I'm all for paying as little tax as possible but if you are prepared to walk around with a loan hanging over your head which you signed for you are frikkin bonkers.

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The redundancy payment is taxed as income at the same bracket as your normal income. However, you do get a special tax allowance of £30k per annum (which cannot be carried forward) for redundancy monies.

So, a severance package under £30k in value would be tax free.

Ah-ha, I see... so, it would make sense to defer any payment over £30k in order to avoid higher rate tax on it. Hmmm... it seems mad that such schemes appear to have an effect... and bizarre that this sort of shenanigans goes on.

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Today, I had a conversation with someone facing early-retirement/redundancy. They were talking about a 'package' that had been suggested to them - and one phrase rang alarm bells for me... though, strangely, the person relating the story to me seemed to believe that this was all above board and 'normal'.

Essentially, with a few years to go before retirement, a package has been offered - a 'redundancy' plus a "non-repayable loan". Yes, you've guessed which phrase spooked me. The idea is that the owner of a company becomes a counter-party for a loan, but the loan is never to be repaid. Allegedly, this is a strategy with "tax advantages" - but equivalent to a 'bung'.

Has anyone ever heard of this sort of an arrangement? While I doubt anyone can put my mind at rest that this is "OK" - can anyone relate similar stories, or point me at any concrete information about this practice? While I recognise potential tax implications, these are, to steal an American phrase: 'a known unknown'. I'm far more concerned with what are, to me, the 'unknown unknowns' - with various hard questions rattling around my head... thinking, for example, that this might be a strategy to asset-strip the widow of the recipient. At least, I imagine, this has significant implications for someone's accounts. I can't believe that the loan counter-party will bin the asset this non-repayable loan generates.

I know the maxim that you can't defraud an honest man - but, I suspect, the issue here is that the payment could reasonably be expected - but the mechanisms by which such payments are structured are a mystery. I can't believe that this is a one-off, so I'm anticipating that this sort of thing fits a known pattern. Can anyone fill me in? Can anyone suggest something I can say that might help avoid any calamitous errors of judgement coming to pass?

I've seen many 0% loans made to family members at the firm i work for. A subprime lending firm. I'd always assumed it was the owner helping family members out to invest in property. I'll check for any repayments (although they could always pay off one loan with a greater loan).

Oh and you'd better hope 'fairies wear boots' doesn't see the mispelling in the title, i once got a PM telling me off for spelling weird 'wierd'.

Edited by slurms mackenzie

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A loan will be a taxable benefit. if it is 0%, then the taxman will tax it at a rate as if borrowed from a bank.

Course, any loan could be non repayable...its called Interest Only. if the tax man sees the loan in made with no repayment date, I cant see how it could be seen as anything other than income.

otherwise, to avoid NI and other costs, just about every employee would be paid in non repayable loans.

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Um, everyone's focussing on tax, and could it be reclaimed.

What strikes me is an altogether different consideration. The loan appears as an asset on the company's balance sheet. Thus the company appears financially stronger than if it had paid out the same money, attracts more business and investment, and generally prospers.

Just like, say, Enron.

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Ah-ha, I see... so, it would make sense to defer any payment over £30k in order to avoid higher rate tax on it. Hmmm... it seems mad that such schemes appear to have an effect... and bizarre that this sort of shenanigans goes on.

It's mad, but not entirely surprising given the very high rates of tax that some people pay. When the incentive is high enough, all sorts of strange schemes appear - witness the excitement over the parking tickets thread elsewhere on the forum.

The problem with loopholes is that they may have unforseen problems - notably, this scheme has a problem that if the loaning company becomes insolvent, the official receiver is highly likely to come after the loan.

Of course, this loophole is easily closed - the Yanks have the right idea. If you take a loan, but default, or for other reason, the loan is written off, then you are taxed as if you received the written off/defaulted portion as income.

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Ah-ha, I see... so, it would make sense to defer any payment over £30k in order to avoid higher rate tax on it. Hmmm... it seems mad that such schemes appear to have an effect... and bizarre that this sort of shenanigans goes on.

I confirm Chumpus Rex's account. I have personal experience of exactly this deal from an HE institution.

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Essentially, with a few years to go before retirement, a package has been offered - a 'redundancy' plus a "non-repayable loan".

He'd do well to ensure the paperwork documents this as a non-recourse, collatoralised loan (pledge a paperclip as collatoral). Also - in general tax offices (and officers) as well as official (bankruptcy) receivers take a very, very dim view of such arrangements when they're uncovered; in fact it's become all the rage in those circles to permit the tax office to treat the arrangment as a simple cash transaction (ie, completely unwind the sheltering arrangement) if it can be established that the structure's only purpose is the avoidance of tax (and the tests for this are again quite obvious - that there is no expectation of the principal being repayed and particularly no consideration for the sum advanced - nil interest rate, and no underlying security). I'm unsure how far along the Inland Revenue is down that road, but I'd at least check with someone competant in the field.

Another angle to consider is the effect of this on pension arrangements; this arrangement effectively reduces both his term of employment as well as depresses his final recorded salary figure - the individual concerned would do well to compute the net present value of potential losses on that front (ie to ensure that the compensation advanced is the greater figure).

By the way, I've now decided to have my salary paid in old bits of paper with purple or red ink on and a nice picture of the Queen, some watermarks and pretty silver broken line.

http://www.gata.org/node/7696

A federal jury Friday found Las Vegas businessman Robert Kahre guilty of all 57 felony counts of evading taxes, failing to withhold taxes from workers' wages, and engaging in fraud during real estate transactions.

Three other defendants were found guilty of most but not all of their related charges.

Kahre had claimed he tried to legally avoid taxes by creating a cash payroll system that disbursed gold and silver coins, on the theory that recipients could go by the coins' face value for tax purposes.

Though the trial lasted almost three months, the jury took only a day and a half to deliberate.

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Would the loan still be non-repayable if the company goes bust as part of the bankrupcy procedures?Im not so sure it would. A liquidator would most probably want to see the cash repaid.

I think you are right. The non-paying borrower would be regarded as a creditor.

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I think you are right. The non-paying borrower would be regarded as a creditor.

I'd imagine the Inland Revenue would be rather interested in recovering the NI due (during insolvency proceedings) too.

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Hi - I am a tax manager in house and a reputable firm of accountants tried to sell this to us as idea for remunerating employees - basically if its a loan its not taxable in the way income would be (although there is some tax on the notional interest) - the principal is taxed when its written off.

They suggested that it could be written off either on death or maybe on retirement when marginal tax rate lower.

I also understand some companies are planning to do this for employees falling into 50% tax bracket based on assumption tory government will try and reverse this.

Personally I wouldn't go for it because of the long term nature of the arrangements and the risk that HMRC will change the rules and the person with the loan could find themselves subject to tax.

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