Self Assessment - Finance from Employer

Dead_keen

day2day77 said:

It is a genuine loan.  It's a gentlemen's agreement with the expectation it will run until no longer required and to be repaid in full.

It is common among mortgage brokers.  Normally it would last several months.   Mine has gone longer due to extenuating circumstances - by principle is happy to continue with arrangement

My understanding is it doesn't need to be declared because it is not disguised employment as the loan amount is far less than the expected income.  Also it is getting paid back regularly. So in theory, I'll end up paying tax on it at some point anyway.

If the loan is a gentleman's agreement then I'd worry that HMRC would not accept that it is a loan.  But that is an evidence issue rather than anything else.  As a mortgage broker:

1. The DIMF rules would be very unlikely apply.

2. I'll leave you to worry about the Consumer Credit Act :-)

If you are happy it doesn't need to be declared then go for it.  If you no longer have to repay it for any reason then take professional advice.

Jeremy535897

Dead_keen said:

I'm not trying to be argumentative Jeremy but wanted to comment / ask further.

Jeremy535897 said:

Re 1, that is why I qualified my answer by asking whether it is a genuine loan.

It can still be a genuine loan and my three alternative tax analysis could apply.  Many employment-related loans, for example, have situations where they are forgivable or of limited recourse.  But they are still loans.  Same with the self-employed (at least pre-DIMF).

Jeremy535897 said:

Re 2, I don't see condition D being met. Even if not, if it is a small genuine repayable loan in a self employment situation, 

Why do you think Condition D is not satisfied? Feel free to make any facts you want!

Why do you think it is small?  I've seen similar situations where the loan is very large. Admittedly, I would not expect someone with a large loan to ask questions on a random forum.

Why does genuine or repayable make a difference?

Jeremy535897 said:
I don't see HMRC trying to argue it.

If it is relevant, it is a self-assessment obligation but I'm interested in why you believe that? 

My experience is that HMRC will normally pursue DIMF first but I'd be interested to know why you think that.  My experience is also mainly with LLPs rather than sole traders and if HMRC look like they might win, it would normally be better to concede that the mixed partnership rules would work. 

Jeremy535897 said:

Re 3, thanks for that. I admit I have not come across this before, but OP's post doesn't sound like this sort of sophistication is applicable, but no doubt they can confirm.

It doesn't need to be sophisticated.  If a financial adviser recommended that a client invests in a house fund, that can be enough.  An accounting doing due diligence on an acquisition is providing IMS. Normally, any sums received though are taxed as employment income or trading income and so it is just not relevant.  Again, this is a self-assessment obligation.

What I'm not sure about though is what the OP does.

I guess years of experience give you a feel for things. I had assumed the quantum is likely to be a few hundred pounds or so a month, based on the words in the OP, which have more of a feel of someone being helped to pay his mortgage for a few months  than hundreds of thousands of pounds to fund the second yacht. It also seems to be a one-off, rather than an industrial scale scheme involving hundreds of OPs, and I know HMRC take an interest in such circumstances, because although the payments may be modest, there are lots of them. My comments were based on an assumption that HMRC would not bother to seek to apply quite complex anti-avoidance legislation to the possible deferral of a few hundred pounds in income tax for 12 months, not least because I don't think the facts as I think I understand them are helpful to them, and they could get taken to a tribunal and lose, so very little upside and potentially massive downside.

Maybe I am missing something, but I don't see a third party payment within section 23C(2) ITTOIA 2005.

If the loan is a genuine loan, repayable if the arrangements end or when income suffices, I don't think that there is a tax benefit. We are not talking about arrangements where work has been done, but the remuneration for it is disguised as a loan. We are talking about where there is a loan before the work is done, and if that is a genuine loan that has to be repaid, at worst the measure of any income would be the interest foregone. I would be more nervous of a much simpler line of attack, that this is really employment to which PAYE should be applied, but the problem then lies with the payer.

It doesn't look as if the OP is advising on investing in a house fund or anything like that. He is a mortgage broker.

Your complex and very erudite analysis reminds me of working with various different tax counsel in the dim and distant past. Sometimes I would enjoy raising these sorts of sophisticated arguments to see how they would handle them in cases where clearly there was no intention of them applying, and sometimes they would enjoy throwing in a few of their own. Rather coincidentally, the old legislation on beneficial loans could be interpreted to catch absurd cases like a loan from brother to sister where a family company was involved, but it was one of those catch all comments rather than a realistic assessment of an HMRC line of attack (I vaguely recall writing a bit of a spoof article in Taxation Magazine on the topic some forty years ago or so). The capital gains tax connected persons rules are as much fun in their own way.

Dead_keen

The OP can ignore this, it's just geeky fun.

Jeremy535897 said:

Maybe I am missing something, but I don't see a third party payment within section 23C(2) ITTOIA 2005.

By way of analogy...

Imagine that you are a world famous comedian performing live at some big theatre. The theatre sells 1,000 tickets at £50 a go to the public. The comedian gets a £100 fee and a £9,900 loan from the theatre. The £100 is clearly income. The objective of the self-employed disguised remuneration rules is to tax the £9,900 loan.

If you just looked at the payment of £9,900 (by way of loan) to the comedian then there would be no third party payment since that is a payment to T (which can't be a third party payment). This may be equivalent to what you are thinking of.

That's not the end of it though as there are 1,000 other payments of £50 that the audience pays the theatre. As these are not to the comedian, they would each be a third party payment.  They would also be qualifying third party payments because of the trade connection codition.

Jeremy535897 said:

If the loan is a genuine loan, repayable if the arrangements end or when income suffices, I don't think that there is a tax benefit. We are not talking about arrangements where work has been done, but the remuneration for it is disguised as a loan. We are talking about where there is a loan before the work is done, and if that is a genuine loan that has to be repaid, at worst the measure of any income would be the interest foregone.

The legislation doesn't care whether a loan is "genuine" or not but looks at whether there is payment and whether there is a tax advantage.  This is a very low bar to cross. Where there is and the legislation applies, it is the quantum of the money lent that is taxable, not the interest forgone (s23E(2)(b)). Like the employee equivalent disguised remuneration rules, there is no refund of the tax when the loan is repaid (although there can be double tax relief to mitigate things).

For there to be an advantage you need to compare it to something else.  The legislation does not say what the comparison would be to but there is case law on this.  Basically, what would be a reasonable alternative?  There may be none.  If so there is no tax advantage.  But if there is, for example, a deferral of tax compared to a hypothetical comparison then there is a tax advantage.  The Hyrax FTT decision summarises what a tax advantage is (and refers to IRC v Parker which is the leading case).

It will be a question of fact whether there is a tax advantage and these need to be viewed realistically. If, for example, I said:

1. "Jeremy, let's go into partnership writing corny articles for Taxation.  We'll share profits equally.  I recognise we won't make much money to start with so I'll lend you £300 per month to pay your mortage until we make enough profits for you to pay me back":  Then it's hard to see that there is a reasonable comparator and so no tax advantage.

2. "Jeremy, I want to publish corny articles for Taxation. I don't want to write them so please write them for me.  I'll review them and put my name to them.  We'll share the money we receive equally.  I recognise we won't make much money in the first year so I'll lend you £300 per month to pay your mortage until we make enough for you to pay me back.  If we don't make enough money, don't worry about repaying me":  Then a reasonable comparator might be for me to pay you a fee of £300 per month plus an extra amount if we do well.  Then there would seem to be a tax advantage as the fee would be taxable and the loan not (even if it reversed out in a later year).  

3. "Jeremy, I want to publish corny articles for Taxation.  We'll never make money doing it. Instead of paying you £300 a year as an employee, you can become a partner in my LLP and draw £300 per month regardless of whether we make a profit.  I'll fund your drawings with capital I contribute and you won't have to pay tax on the £300 per month": Then a reasonable comparator might be to pay you £300 per month as an employee and so there would be a tax advantage. 

The questions I asked the OP were to work out what type of scenario we had.  

In terms of 

Jeremy535897 said:

I would be more nervous of a much simpler line of attack, that this is really employment to which PAYE should be applied, but the problem then lies with the payer.

Absolutely.  I've not worked with mortgage brokers and so don't know enough about the FCA regulatory regime.  However, I've worked with other FCA regulated firms where their self-employed financial planners are very, very likely to be regarded as employees because of the regulatory framework that they have to work under and the way that they are given leads.  But as you say, any PAYE problem lies with the payer.

Jeremy535897 said:

Your complex and very erudite analysis reminds me of working with various different tax counsel in the dim and distant past. Sometimes I would enjoy raising these sorts of sophisticated arguments to see how they would handle them in cases where clearly there was no intention of them applying, and sometimes they would enjoy throwing in a few of their own

My old day job involved the analysis of complex issues involving individuals and significant amounts of money.  So getting a realistic view of the facts and considering all the potentially relevant legislation (and how HMRC would perceive things) was important.    

Jeremy535897

In response to your geeky fun:

In the end it all comes down to theoretical versus practical. I made an assumption at the start (although I made that assumption clear) that here we had a case of a bit of short term help by way of a genuine loan (not a disguised payment of remuneration) for probably not a lot of money that would end up being repaid in the short term. In such circumstances, I would be confident in declaring the income I invoiced, plus any work unbilled but done, in the tax year, without adding on the loan. I included unbilled work because, while a sole trader can normally ignore unbilled work at the year end that is represented purely by their time, I would be less confident where money, even by way of loan, had been received by the year end as well. That is because I would not have to repay that part of the loan as it would be offset by work already done in the tax year. That is the practical.

The theoretical extra liability may come from (in my opinion) a rather contrived reading of anti-avoidance legislation that is intended to catch loans that are never really intended to be repaid, despite the appearance of the documentation, but the reality is that if we are talking about the deferral of a few pounds of tax for one person for a year, why would HMRC risk taking a stance where an appeal to a tribunal could curtail future implementation of that legislation? All my experience tells me that, unless the reality is somewhat different to the apparent facts, this is something that is simply not going to happen in your scenario 1 above, which I perceive to be reasonably analogous to this situation.