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fru-gal

More pain for contractors (retrospective tax on loans)?

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I quit contracting in 2004 due to mass local redundancies, IR35 and mass non tax paying Indian ICTs, combined to may rates pitiful.

Never heard about taking loans as an IR35 avoidance mechanism before. I was always aware that if I took a Directors loan, that I did have to pay it back.

So, were people just paying loans to themselves and then never paying them back? Almost like the celebs, that just take the cash out of the Ltd and then go bankrupt every few years.

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7 minutes ago, Unbowed said:

I quit contracting in 2004 due to mass local redundancies, IR35 and mass non tax paying Indian ICTs, combined to may rates pitiful.

Never heard about taking loans as an IR35 avoidance mechanism before. I was always aware that if I took a Directors loan, that I did have to pay it back.

So, were people just paying loans to themselves and then never paying them back? Almost like the celebs, that just take the cash out of the Ltd and then go bankrupt every few years.

IIRC that was it, yes. So it's not a retrospective tax, and not a retrospective law change - it's a change in the tax treatment of an outstanding loan, so on that basis not much different to S24 for BTL.

HMRC are fairly clear on their view of avoidance schemes and state that if it sounds to good to be true, then it probably is. A loan that you never repay sounds quite a lot too good to be true to me.

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Have read the musmnet thread, two posters actually know what they are talking about the rest are dangerously clueless. My accountant has always actively discouraged/frowned upon directors loans, it is my view that if you are running a company properly and have a viable business you should never go near them. If you need a personal loan, go to the bank.

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4 hours ago, Unbowed said:

I quit contracting in 2004 due to mass local redundancies, IR35 and mass non tax paying Indian ICTs, combined to may rates pitiful.

Never heard about taking loans as an IR35 avoidance mechanism before. I was always aware that if I took a Directors loan, that I did have to pay it back.

So, were people just paying loans to themselves and then never paying them back? Almost like the celebs, that just take the cash out of the Ltd and then go bankrupt every few years.

I think its more nuanced than directors loans - these are already fairly water tight in that they automatically incur a benefit in kind tax if not repaid within a certain amount of time. Its some kind employee benefit trust arrangement that they are clamping down on.

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It's this. I remember someone explaining it to me. Sounded mental, I had to check it up to make sure he wasn't pulling my leg. 

The way that K2 and similar schemes work is remarkably simple. Its members redirect their earnings into a Jersey-based trust. The trust then grants interest-free or low-interest loans to members, on which little or no tax is payable. The borrowers then quietly 'forget' to repay these loans, which the trust later writes off against the earnings it holds. 

http://www.thisismoney.co.uk/money/news/article-2162245/The-tricks-British-celebrities-use-pay-tax.html

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Yes. An old colleague had that arrangement but it was with his new employer. They paid him minimum wage, and the rest was a loan for which they planned to never ask for repayment.

 

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52 minutes ago, AvoidDebt said:

It's this. I remember someone explaining it to me. Sounded mental, I had to check it up to make sure he wasn't pulling my leg. 

The way that K2 and similar schemes work is remarkably simple. Its members redirect their earnings into a Jersey-based trust. The trust then grants interest-free or low-interest loans to members, on which little or no tax is payable. The borrowers then quietly 'forget' to repay these loans, which the trust later writes off against the earnings it holds. 

http://www.thisismoney.co.uk/money/news/article-2162245/The-tricks-British-celebrities-use-pay-tax.html

Correct. Its nothing to do with director's loan. Its the umbrella companies which sends all the payments to tax havens or their pet trust. Then its loan from it to you and the loan later waived off as good will. It gives 95% returns, but they dont mention that a in repaid loan becomes income.

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As a 'legit' contractor who pays all my taxes properly onshore, I think this is great.

These guys have been on the take for years, quite openly in many cases. I got into a full blown row with one of them years ago when I was still a permanent employee - open about his use of channel Island trusts & yet sat in the office moralising about benefit scroungers!

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This isn't new. They have been after these schemes aggressively for well over a year. People got letters over a year ago. Contractor UK forum has a very long thread on it. 

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These schemes are still actively sold, my father in law recently got involved in one against my advice. Greed.

The original scam was that you would pay your wages to iom/offshore co. That company would then loan you an amount that was really just your wages less their managment fee deductions. As stated the loans were assumed by the contractor to never be repayable. HMRC saw a loan repayable in the future and , initially anyway, assumed that would happen.

Most of the original iom management companies have gone bust and disappeared. Some are still trading. Now the inland revenue are clamping down on the companies still trading are trying to cover themselves, some are asking the contractors to repay at least some of their 'loans' to demonstrate to HMRC that the loan agreement was in fact a legitamite loan agreement.

This is the worst of both worlds for the contractor

- the dodgy iom company still effectively has your original wages.

- the dodgy iom company now wants you to repay your loan. The loan you originaly thought was your wages. Which you have spent.

- the dodgy iom company promises that, once you have repaid the loan, they will identify another tax free scam which is legitimate and which they will use to pay you back at an unspecified future date.

So plenty of greedy grabbing contractors out there potentially facing being sued by their iom managment company for failing to repay their 'loans'.

Hmrc watching closely as these clown tie themselves further into knots trying to get out scott free.

The loan companies covering themselves by telling HMRC they will reclaim the loans and painting the contractors as the fraudsters if they refuse to repay the loans. Potentially even taking contractors to court for non payment of loans to save themselves (their directors) from fraud charges. 

Im not too familiar with the legalities but i think this has taken so long to crystalise as inland revenue have had a few large court cases they have waited for to establish case law before they get cracking on the rank and file tax avoiders (the recent film funding scams, rangers football club etc) 

Regarding the iom loan companies who have gone bust im surprised their loan books havent been sold on to debt collection agencies, or even 'bought' like mortgage securitisations.

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31 minutes ago, regprentice said:

These schemes are still actively sold, my father in law recently got involved in one against my advice. Greed.

The original scam was that you would pay your wages to iom/offshore co. That company would then loan you an amount that was really just your wages less their managment fee deductions. As stated the loans were assumed by the contractor to never be repayable. HMRC saw a loan repayable in the future and , initially anyway, assumed that would happen.

Most of the original iom management companies have gone bust and disappeared. Some are still trading. Now the inland revenue are clamping down on the companies still trading are trying to cover themselves, some are asking the contractors to repay at least some of their 'loans' to demonstrate to HMRC that the loan agreement was in fact a legitamite loan agreement.

This is the worst of both worlds for the contractor

- the dodgy iom company still effectively has your original wages.

- the dodgy iom company now wants you to repay your loan. The loan you originaly thought was your wages. Which you have spent.

- the dodgy iom company promises that, once you have repaid the loan, they will identify another tax free scam which is legitimate and which they will use to pay you back at an unspecified future date.

So plenty of greedy grabbing contractors out there potentially facing being sued by their iom managment company for failing to repay their 'loans'.

Hmrc watching closely as these clown tie themselves further into knots trying to get out scott free.

The loan companies covering themselves by telling HMRC they will reclaim the loans and painting the contractors as the fraudsters if they refuse to repay the loans. Potentially even taking contractors to court for non payment of loans to save themselves (their directors) from fraud charges. 

Im not too familiar with the legalities but i think this has taken so long to crystalise as inland revenue have had a few large court cases they have waited for to establish case law before they get cracking on the rank and file tax avoiders (the recent film funding scams, rangers football club etc) 

Regarding the iom loan companies who have gone bust im surprised their loan books havent been sold on to debt collection agencies, or even 'bought' like mortgage securitisations.

Perhaps HMRC just sees it as if they wait to go after the people in these schemes, they get back not only the unpaid NI+income tax but also interest, so it is worth their while to go after someone who has had multiple years of loans as they will have a huge amount of interest stacked on top. 

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5 minutes ago, fru-gal said:

Perhaps HMRC just sees it as if they wait to go after the people in these schemes, they get back not only the unpaid NI+income tax but also interest, so it is worth their while to go after someone who has had multiple years of loans as they will have a huge amount of interest stacked on top. 

It's more a lack of resources to process the cases. plus little incentive for HMRC to add resources (oh a tax dodger is still under investigation 10 years later - what a shame)...

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31 minutes ago, monkeyprojects said:

It's more a lack of resources to process the cases. plus little incentive for HMRC to add resources (oh a tax dodger is still under investigation 10 years later - what a shame)...

Never understood why Osborne reduced the HMRC workforce so much. Then again with technology I suppose in the next few years/decade there will be some amazing quantum computer that will be able to tell HMRC what a tax evader is about to think ;).

Edited by fru-gal

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The offshore "never repayable" loan was going way back in 2001.

Even then it looked and smelled like tax evasion. Nothing has changed and the people who used these schemes deserve everything they get. 

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2 minutes ago, Futuroid said:

The offshore "never repayable" loan was going way back in 2001.

Even then it looked and smelled like tax evasion. Nothing has changed and the people who used these schemes deserve everything they get. 

Judging by that thread in the Contractors forum the standard advice is to go bankrupt and put everything in someone else's name!

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There's been a sea change in governmental collaboration over the years. It used to be "Inland Revenue" and "HMRC" as two separate institutions and it seemed very little collaboration occurred. Then they merged. A couple of years later, I believe, with better IT systems, much more analysis could be done. Bring in SPSS, Hadoop, Analytics, Elastic Search, ArcSight, N3tReve@l in conjunction with wider data access authority and a better picture can be garnered and analysed. 

I know a few people in I.T. who have received £50+ per hour for 18 years who have used these types of avoidance, whilst I baulked (and refused) adjusting contractor income so as to benefit from a £120/month child benefit (I.e. announced ineligibility although creative accountancy could have justified it). Pay fair on £80+k p.a.

I feel morally clean albeit far worse off than if I'd used (and abused) these schemes, but feel little sympathy for those who now are being asked to contribute what they sought to avoid to their benefit. 

Conscience is a personal thing. 

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8 hours ago, Futuroid said:

The offshore "never repayable" loan was going way back in 2001.

Even then it looked and smelled like tax evasion. Nothing has changed and the people who used these schemes deserve everything they get. 

When I was a contractor in the UK between 2005-2011 there was a scheme going with this loan scam via the isle of mann, I know a few people who considered it, but even they thought it was way too dodgy, with many question marks even in 2005 about what would happen with the loan  in the future, looks like reality is catching up with some people.

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These things were going on when I started contracting in the early 90's. 

I have never been tempted, luckily when I started I got some good advice from other contractors. I'm in engineering as a designer so the rates have never matched the it ones being bounced around further up thread. I've had some very good years but then I've had some terrible years, to me the lowish amounts of tax I legally pay make up for the poor years where I soldier through without resorting to the dole (I had nine months out with back surgery 18 months ago and took not a penny).

I do have a conscience, but it is wearing thinner every year.

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Also happy to say that I was never tempted by any of this nonsense when I was contracting in the city in the early 2000s. After the introduction of IR35 plenty around me were, involving all sorts of ludicrous things (I have a vague memory of a scheme involving pineapple plantations in the Bahamas - or perhaps I dreamt it?). I never even tried to get out of IR35.

People are whinging about a retrospective change but it sounds to me that HMRC have a point if all they are asking is "when are you going to pay this loan back then?". I can think of a couple of people I know who could well be bankrupted by this if they get caught by it.

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2 hours ago, hp72 said:

There's been a sea change in governmental collaboration over the years. It used to be "Inland Revenue" and "HMRC" as two separate institutions and it seemed very little collaboration occurred. Then they merged. A couple of years later, I believe, with better IT systems, much more analysis could be done. Bring in SPSS, Hadoop, Analytics, Elastic Search, ArcSight, N3tReve@l in conjunction with wider data access authority and a better picture can be garnered and analysed. 

I know a few people in I.T. who have received £50+ per hour for 18 years who have used these types of avoidance, whilst I baulked (and refused) adjusting contractor income so as to benefit from a £120/month child benefit (I.e. announced ineligibility although creative accountancy could have justified it). Pay fair on £80+k p.a.

I feel morally clean albeit far worse off than if I'd used (and abused) these schemes, but feel little sympathy for those who now are being asked to contribute what they sought to avoid to their benefit. 

Conscience is a personal thing. 

HMRC don't do much of the data consolidation themselves. Bae does a lot of it....

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