We are receiving an increasing number of enquiries in respect of tax planning schemes that have been sold to Directors of owner managed businesses, as well as others within SMEs, that claim to avoid the Loan Charge.
HMRC has been increasingly vocal about these schemes, and we are now starting to see the enforcement steps being taken by HMRC in respect of such planning. This article sets out an example of the types of schemes that we are seeing, how we expect HMRC will treat these schemes, the potential outcomes of such schemes and what we can do to help.
The Loan Charge initially applied to any outstanding loans, at 5 April 2019, taken from trust--based tax structures since 1999. Following the Loan Charge review, the Loan Charge now only applies to loans taken from 2010 onwards (subject to proper disclosure to HMRC having taken place on the relevant tax return).
For several years now, HMRC has been writing about and talking about schemes claiming to avoid the Loan Charge. In its Spotlight 36, HMRC sets out its position on schemes that claim to avoid the Loan Charge on disguised remuneration but which, in HMRC’s view, do not work.
There are a number of varieties of such schemes, one of which HMRC seems to be taking particular interest in at the moment, is the scheme that was operated and promoted by Krest and supported by Partners Tax Plc (the Partners Scheme).
The Partners Scheme operates so as to make it appear as if the outstanding loans that the individual had taken from the trust have been repaid in full in cash. The scheme comes at a sizeable cost to the taxpayer (albeit significantly less than the tax bill that would otherwise be due), and is purported to function as follows:
- Taxpayer (A) has £5,000,000 of loans outstanding from his trust tax planning (the Trust);
- A buys shares worth £5,000,000 in a limited company (X Ltd). A only pays 20% of the value of the shares (leaving him £1,000,000 out of pocket);
- The 80% balance due for the shares is deferred to be cleared by dividends as they are paid out by X Ltd in the coming years. The deferred sum also carries performance warranties (meaning that if X Ltd goes under, A is not required to pay up the balance for the shares);
- Simultaneously to this, A takes out a loan for £5,000,000 from a finance house (Y Ltd) (the Loan). A pays a one-off set up and interest charge to Y Ltd;
- The Loan is paid directly to the Trust, before 5 April 2019, by Y Ltd to clear all of A’s outstanding loans;
- A sells his shares in X Ltd – for the full £5,000,000 value – to the Trust, with the proceeds being paid directly to Y Ltd to repay the Loan
- The shares then remain in the Trust.
This has had the effect of repaying the £5,000,000 of loans in cash, and at the same time re-withdrawing that £5,000,000 as consideration for the purchase of the shares in X Ltd.
It may well be the case that X Ltd is a legitimate business, with legitimate business interests, and we would expect that this is one of the most important sales points that have been used in promoting this tax planning.
HMRC’s likely view
The above scheme is an example of a very contrived way of repaying outstanding loans to a trust and avoiding the loan charge (and/or other taxes that may be due). There are significant risks associated with this planning, and we consider it is possible that any or all of the following charges could be applied by HMRC as a result of A’s use of the Partners Scheme should the planning fail:
- Income tax (PAYE and National Insurance Contributions) on the original contribution to the Trust;
- The Loan Charge on the basis that there has been no valid repayment of the Loans (that is the approach that HMRC have taken with other cases we are aware of);
- Income tax (PAYE and National Insurance Contributions) on the disposal of the shares to the Trust;
- Capital Gains Tax on the disposal of the shares in X Ltd to the trust. Only 20% of their value having been paid, but they were transferred for their full 100% value, meaning a taxable gain of 80%; and
- Inheritance Tax arising from the use of the trust planning.
What are HMRC doing?
We are already seeing HMRC issuing Regulation 80 Determinations and Section 8 Notices in respect of this planning. These notices and determinations are the first steps HMRC takes in confirming the sum of income tax that it considers is due from the tax payer. Unless these are appealed successfully or challenged (which will be time consuming, costly, and in any event very unlikely to succeed), then it is likely that HMRC will pass the sum due to its Debt Management Team, who will pursue the tax payer for the sums due.
How can we help?
There are three steps we can take to support you if you have used this type of planning.
Arguing with HMRC
We are currently reviewing several cases to challenge HMRC’s findings to the tribunal in respect of this and other planning. We are able to support such claims with a variety of funding products where appropriate.
We have also seen on a number of occasions that HMRC has issued its Regulation 80 Determinations and its Section 8 Notices either out of time or improperly. We are able to limit your liability for the tax that might be due by holding HMRC to account and ensuring that they have followed the necessary procedural steps.
Negotiating with HMRC
In some cases, the prospects of success, are slim in terms of challenging HMRC. In those circumstances, we take the necessary steps to achieve a settlement with HMRC as quickly as possible to limit your exposure to the charges set out above. This settlement can include, where appropriate, time to pay across several years where required.
In an overwhelming majority of cases that we are seeing, the tax planning that has been advised is in addition to what was already negligent tax planning. These schemes are very aggressive and are unlikely to have been correctly or appropriately explained to users at the outset. In those circumstances you are likely to have some form of professional negligence claim against the advisors (whether that be your tax advisor, accountant or financial advisor) to recover the losses that you have suffered as a result of the use of these schemes.
Do not delay
As we have set out above, there are a number of options that you have in terms of remedying the position that you find yourself in. However, what is of paramount importance in all of these steps, is that you do not delay.
The time frames for challenging HMRC’s decisions - and indeed for pursuing a professional advisor - are tight. If you do not get in touch with us in advance of the deadlines, then you will not be able to take any steps to protect your position beyond paying HMRC what they say is due. We therefore encourage you to pick up the phone as quickly as possible to us to see if we can assist in anyway. We are always happy to have no-obligation conversations over the telephone so please do get in touch with our Tax Litigation Team.