A Really Wierd Conversation...

[Guest happy?]

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.

Do you mean these Labour party loans?

http://www.libdemvoice.org/lord-ashcroft-a...sies-11651.html

[Toto deVeer]

What a fiddle.

1. Loan shows as asset on the company balance sheet.

2. Loan may show increase in value with time thus increasing company asset value in future.

3. Loan is not taxed as income for recipient.

4. Company pays no NI or other payroll related taxes on loan.

5. When written off in future will decrease company tax liability.

And:

All financial risk is attached to the recipient of the loan.

This farce will be closed in future, no doubt about it.

[The Contractor]

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 have recently completed a tax planning strategy similar to this, can’t remember all the ins and outs but basically this is how it went:

To avoid paying both corporation tax and personal income tax the company would purchase an offshore employment benefit trust from a third party (if the trust was set up by the company it would be liable for tax) then from this point there was two options

1. A non repayable loan (less risky of the options but only really viable if you are close to retirement) there was if I remember correctly a small benefit in kind annual charge with this option. Even on death there was some clever way out of paying tax (cant remember this bit)

2. A futures trade backing both the upside and the downside of a particular market that would ‘bust’ the company trust and ‘win’ for the individual, as this is classed as gambling there is no tax payable. (more risky as the Inland Revenue is more likely to investigate)

I went for option 2 as I am nowhere near retirement and it has worked very well, apart from some steep fee’s I have paid no corporation tax or personal income

TC

[Fairies Wear Boots]

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.

I have an IT contractor friend doing this. He has a company in the Isle of man, pays stuff all tax because he is loaned the money. He reckons his brother in law reckons all or most of the IT contractors he sits with at Barclays are also doing it. They are mostly British nationals too. My friend, was told he couldn't operate his old form of umbrella company about two years ago. He went for a limited company, outside of IR35 and after the end of the tax year declared that he would be "better off working in McDonalds" and went for the Isle of Man nonpayable loan option.

Anyone know if there is any chance all of this gets shut down and back taxes paid? Seems outrageous to me. Was thinking if I signed up that would definitely happen, and penalties.

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'.

Don't worry, the spelling police are on to it!