Guidance

Tax on contractor loans: extended time limit and more information

Updated 10 August 2015

This guidance was withdrawn on 22 June 2016

This settlement opportunity closed on 30 June 2015.

This publication was archived on 22 June 2016. The settlement opportunity closed on 30 June 2015.

More time for the Settlement Opportunity

This Settlement Opportunity allows eligible individuals to pay tax and interest to resolve open years of use of ‘Contractor Loan’ arrangements and have certainty.

It was originally planned to be open until 9 January 2015. We have now extended the closing date to 30 June 2015. By that date we would expect people wanting to take part to have contacted us and be discussing possible settlement, which should be agreed by 30 September 2015 at the latest.

At the time the Contractor Loans Settlement Opportunity (CLSO) was opened we wrote to customers and their tax agents with some detailed advice to explain just what it is about, and why we are taking this action. Here we are giving more guidance in areas where people have asked for clarification since then. This includes some general points, and some more specific advice on the application on Inheritance Tax rules and on possible instalment settlements.

This document has the following parts:

1. Information on some issues which have been raised in the first 4 months of the Settlement Opportunity
2. Inheritance Tax in the Settlement Opportunity
3. Possible instalment terms in circumstances of hardship
4. Contact us

Information on some issues which have been raised in the first 4 months of the Settlement Opportunity

The extension of the settlement opportunity is not a better deal for those who have not already settled with HM Revenue and Customs (HMRC). The basis of what you need to pay in order to settle has not changed. All of the information provided in the original advice remains relevant. Please ask us using the contact details below if you need a new copy of this original advice. We have only extended the CLSO for exceptional reasons. The settlement opportunity has proved very popular, with thousands of users talking to us about settlement. But in light of the feedback from some users, we recognise that further information and clarification on some specific issues raised could help users make better informed decisions about whether to settle. We are therefore extending the deadline to help those users who wish to settle but were unclear about some aspects of the settlement opportunity. We will not extend the deadline again.

Accelerated Payment Notices

We can give no assurances about whether or when customers might receive Accelerated Payment Notices (APNs). Advisors and users of Contractor Loans avoidance schemes will be informed shortly before issue of notices, in line with our published commitment. These notices may be issued to users of Contractor Loans avoidance schemes before the end of CLSO. If you receive an Accelerated Payment Notice (APN) during the CLSO, you must pay the amount requested or make representations within the specified time limit, even if you are discussing settlement with Contractor Loans team, otherwise you may receive late payment penalties. The notice will tell you how much you need to pay. It will also tell you the circumstances in which you can make representations and how this should be done.

If you reach a settlement with HMRC within the specified time limit and pay the amount due, then the APN will be withdrawn.

If you reach a settlement with HMRC after the due date for payment of the accelerated payment, then the amount paid will be treated as a payment on account and offset against the final amount due.

If you receive an APN and have questions about it, please contact the number shown on the notice you have received. Alternatively call our Contractor Loans helpline on Telephone: 03000 534 226 if you want to pay the tax and interest due and settle with us.

Possible further enquiry notices and assessments.

We expect to commence issuing discovery assessments to protect tax for the 2010 to 2011 tax year shortly. These will be issued before CLSO ends in June 2015 to ensure we meet the statutory time limits for making these. If you receive an assessment and wish to appeal, you must do so within 30 days as detailed in the letter. CLSO does not affect your requirement to pay the assessed sum or appeal within the stated time limits. You must also request postponement and specify the amount you wish to postpone, if you appeal and do not want to pay the tax. Please note that, in the event you were to subsequently receive an APN which included any sum assessed for any tax year, any tax postponed would become due in accordance with the APN.

Tax case decisions

A number of tax decisions about cases involving loans from an Employee Benefit Trust (EBT) have been decided in the taxpayer’s favour. HMRC believes that these do not apply to loans to Contractor Loans scheme users.

Many customers and their advisors are aware of decisions such as Murray, Dextra and Sempra, which considered whether loans to employees from their employer’s EBT were taxable as earnings. In these cases, it was found that the loans were not taxable as earnings - although the Murray case is not yet final and remains to be decided. All 3 cases involved different arrangements with different sets of facts. In particular, none of these cases involved offshore employers and so none of these cases consider the Transfer of Assets rules on which CLSO is based. We consider that our position using Transfer of Assets rules is very strong. However, we also consider that we have good reasons to suggest that the income you have received as loans is taxable as earnings in the same way that your salary element is. The employment relationships and ongoing connections between individuals using Contractor Loans scheme and the trustees differ from the circumstances in Murray, Dextra and Sempra. Please seek professional advice before relying on these cases and consider engaging with HMRC through our dedicated Contractor Loans helpline on Telephone: 03000 534226 if you would like to discuss how your circumstances might differ from these decided cases.

European Union (EU) law

You may have been told that the Transfer of Assets Abroad rules are contrary to EU law so HMRC cannot use them.

That is not right. As with many areas of law it is more complex than that. 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 subject to charge are artificial.

A Tribunal judge has recently agreed with HMRC that the Transfer of Assets Abroad rules can continue to be applied if EU Freedoms were not engaged (Fisher v HMRC TC03921). We can’t see that they would be engaged in such highly artificial arrangements as these, especially where professional activities remain in the UK.

Consistency

We must be clear that no agents or customers can get better ‘deals’ than others. HMRC is committed to fair and consistent treatment of all its customers. We will apply our guidance to the facts of your particular use of these arrangements and to your personal circumstances in the same way that we will to the circumstances and facts of other customers. This may not mean that everyone pays the same as some customers might have personal circumstances which affect their tax position, for example where a customer was only temporarily resident in the UK when using the arrangements or where HMRC is unable to collect tax for all years for some reason. All agents and customers are welcome to engage with us to find out more about our terms and how they apply to any individual customer. We also intend to hold a webinar shortly to allow customers and agents to ask questions and to send updates to interested parties. Please contact cl.resolution@hmrc.gsi.gov.uk or call Telephone: 03000 534226 if you would like to register an email address to be kept updated.

If you choose not to settle.

If you have taken advice and do not want to settle, please contact us. You do not have to wait until September 2015 before you can progress a case to First Tier Tribunal. We can help you to ensure we have all the information we need to have your case heard by the Tribunal and we can issue any paperwork required before you can ask the Tribunals Service to hear your appeals. Please do not destroy any documents relating to these arrangements as the Tribunal may require these to hear your case.

Inheritance Tax in the Settlement Opportunity

Whilst HMRC views the payments made under the contractor loans schemes as income and subject to Income Tax, the use of discretionary trusts in these arrangements may also give rise to Inheritance Tax (IHT) liabilities. This is not double taxation, but a reflection of the more general position where taxed or untaxed income is settled into discretionary trusts which is then subject to ‘relevant property’ trust charges for IHT.

As a contractor who entered a contractor loan scheme, we know that often IHT was not mentioned to you. It is important, though, because many of the contractor loans schemes sought to avoid income tax by routing the payments you would have received from your contract through offshore discretionary trusts which then loaned the money to you.

The application of the ‘Transfer of Assets’ rules does not alter the fact that a documented loan was made and exists, nor that there is a valid trust. The trustees retain the power to recall the loans. IHT recognises the existence of the loans, following the legal form of the documents and any charges which arise from events which involve them.

Where money becomes held on discretionary trusts, the IHT relevant property trust charges may apply.

Relevant property trusts

The liability to pay tax arising from relevant property trust charges is wide and as well as the trustees, the beneficiaries of the trust and the settlor can also be liable for the tax. As the recipient of the loan you are a beneficiary and by arranging your affairs to route your contract income through the offshore trust, you are also treated as a settlor.

There are 2 main charges which apply

A charge may arise once every 10 years from the date your contract income was first received by the trustees. The charge is calculated by reference to the value of the assets held in the trust at that date and is known as the 10 year anniversary charge.

A charge may also arise when the trust makes a payment or transfers value to you, or the trustees take an action which reduces the value of the trust fund. This is often called the exit charge.

The relevant property charges apply where value has been transferred, either because money has been paid out from the settlement, or the trustees have taken action which reduces the value of the trust fund. There may not be any charge when a loan is made if the money loaned to you is replaced by a debt of equivalent value in the Trust. However, if the Trustee writes off the debt, or the debt becomes worth less for any reason, then an exit charge may arise.

If the debt remains due to the trust at the 10 year anniversary date then the value of that debt will be charged as part of the 10 year anniversary charge.

The 10 year anniversary charge will apply to the value of the debts that you owe the trust. If the total value of the debts is less than the IHT nil-rate band (currently £325,000), it is unlikely that there will be any IHT to pay at the 10 year charge. An exit charge will only arise when money is paid out or the trustees take an action which reduces the value of the trust fund, for example writing off the debts they are owed. Again, if the total value of the trust fund is less than £325,000, it is unlikely that there will be any IHT to pay.

Other types of discretionary trust

Some trusts settled by the offshore company are worded in a particular way which means that the trust is capable of benefitting ‘all or most’ of the employees of the company. Where this applies, the trust deed may qualify for an exemption from IHT under section 86 Inheritance Tax Act 1984 (s86), so that the relevant property charges do not apply.

This does not always mean that there are no IHT charges. That depends what has happened with the trust. Some trusts which satisfy s86 also created sub trusts for the benefit of an individual or smaller number of employees. So although the main trust may meet the conditions of s.86, property allocated to sub-trusts does not because the allocated funds are not held for ‘all or most’ employees. This is the case even if the sub-trusts are can be revoked. Relevant property charges can apply to assets held in sub trusts and to loans made from them.

There can be a charge when property is allocated from the s86 trust into a sub-trust. The charge is a flat rate charge and is depend ant on the length of time the property was held subject to the terms of the s86 trust. If a charge arises in these circumstances the nil rate band does not apply. There is no charge where this occurs within three months of the date the money went into trust.

If the trust satisfied s86 and did not use sub trusts, there could still be IHT charges. Where you, as the settlor, have received loans directly from the s86 trust, a form of exit charge may be due if the terms of the loan are such that the value of the trust was reduced when the loan is made. This will typically be the case where the loan is not made on commercial terms.

In addition, if the trustee subsequently writes off the debt or the debt becomes worth less for any other reason, then a charge may arise at this point.

If charges arise in connection with trusts which satisfy the conditions of s86, the nil rate band does not apply in these circumstances.

No charge arises on any loan or loss of value to the trust where this occurred within 3 months of the date the money went into trust.

Settlement of all liabilities, including any IHT

We can let you have an estimate of all the IHT charges relating to the loans, where these have crystallised and include these in the settlement you reach with HMRC. However there are charges which might arise in the future, for example the 10 year anniversary charges, or where the trustees subsequently agree to write off the loan. As these charges will not crystallise until the event triggering them occurs, these future charges cannot be included.

To finalise all your liabilities arising from use of a contactor loan scheme and ensure that no IHT charges arise in future, you may be able to arrange with the trustee for all the loans to be written off now. This may give rise to an IHT liability now but it will mean no further IHT charges will arise in future.

Where charges may arise, such as at the future 10 year anniversary or where the trustees write off your loans, you should write to us letting us know. We can tell you then whether there will be a charge.

Flexible instalment possibilities for settlement in circumstances of hardship

Where a customer has insufficient funds available to pay the full settlement of liabilities relating to CLSO straight away, HMRC would expect him or her to withdraw funds, obtain loans or realise assets wherever possible to meet the liability within 90 days of their offer to settle. Where the full amount cannot be met within 90 days, HMRC will usually be prepared to settle by instalment over a period of up to 24 months if the following conditions are met.

The customer will be required to make as large a payment on account as they can within the 90 days. The balance will then be payable over the remainder of the 2 year period, under a binding contract settlement, and being subject to forward interest. To ensure an instalment offer is appropriate, we need assurances that the customer can meet the instalments proposed, and that the customer:

• cannot pay in full within 90 days, from all sources of income, including any sources other than regular income, and the reason why
• has no other payment arrangements in place, or can fund this instalment offer in addition to any existing payment arrangements
• has honoured any previous instalment plans

There may be exceptional cases where an instalment arrangement would not be appropriate for other reasons.

We can agree a payment period for instalments over the phone and confirm this in writing as long as the customer satisfies us that they qualify for a payment arrangement, this will involve providing the details above. We will also accept a written assurance from the customer or their agent which covers these points.

Any customer requiring longer than 24 months to pay will need to contact us to discuss their individual circumstances and how they might make repayments. We expect that 24 months will usually be sufficient. But the Settlement Opportunity team are keen to assist customers in reaching agreement to pay, wherever possible.

We will no longer require a statement of assets and liabilities or income and expenditure form where a customer can satisfy us that they qualify for an instalment offer of up to 24 months.

How to contact our dedicated team who are happy to help with any questions you may have

For information on contacting us by email, phone or by post see Settlement opportunities: contractor loans.