Avoidance or evasion ??

[lady topaz]

My other half recently had a meeting with his accountants. At the end the accountant asked if my other half had ever thought of setting up a "trust" for employees. He suggested that if he did then it would be possible for him to reduce his salary by say 50%, Pay the usual tax etc on half, but the other 50% could be put in the trust and then "borrowed" back at 4.5% interest but no further tax or NI.
It may be more complicated than this but this is the basic outline.
Is this correct or total BS? I cant beleive there is this loophole or everyone would be doing it.
Any comments please.

[kryten]

Ask them about the 'exit strategy'! At the end of the year you take out a new 'loan' which is the value of the previous year PLUS the interest that was owed, at the end of the second year you do the same...

Also check the history of those behind the scheme

These schemes usually include an indemnity to cover you for Revenue investigations into the scheme only. However, as they must be declared you will probably find that the Revenue take a VERY close interest in all other areas of your tax/business affairs.

[Eric Mc]

It probably complies with the "letter of the law" i.e. you won't go to jail if the Revenue block it.

However, the Revenue does have the power to order schemes to be closed and unpaid taxes to be calculated and paid over if they decide that the scheme is purely a tax saving device nad has no other commercial purpose.

[lady topaz]

kryten said:

These schemes usually include an indemnity to cover you for Revenue investigations into the scheme only. However, as they must be declared you will probably find that the Revenue take a VERY close interest in all other areas of your tax/business affairs.

Tell me about it. He recently claimed back £400,000 VAT after a buying new business premises. In spite of including copies of the completion statements on his VAT return they were down on him like a ton of bricks. Three investigations in as many months.
Nothing to find, but very disconcerting.

Edited by lady topaz on Thursday 25th June 11:53

[lady topaz]

Eric Mc said:

It probably complies with the "letter of the law" i.e. you won't go to jail if the Revenue block it.

However, the Revenue does have the power to order schemes to be closed and unpaid taxes to be calculated and paid over if they decide that the scheme is purely a tax saving device nad has no other commercial purpose.

Oddly enough Eric, the accountants are a well known (in this area) very straight and by the book company so he was rather surprised they suggested this. He has asked for written details which may be more illuminating.

Thanks to both for replies.

[flyingjase]

lady topaz said:

My other half recently had a meeting with his accountants. At the end the accountant asked if my other half had ever thought of setting up a "trust" for employees. He suggested that if he did then it would be possible for him to reduce his salary by say 50%, Pay the usual tax etc on half, but the other 50% could be put in the trust and then "borrowed" back at 4.5% interest but no further tax or NI.
It may be more complicated than this but this is the basic outline.
Is this correct or total BS? I cant beleive there is this loophole or everyone would be doing it.
Any comments please.

This is perfectly legal and there are a number of 'lend and forget' schemes in existance. I have recently looked at one myself with a very well known firm of accountants.

The devil is in the detail and Eric is right that HMRC will take a lot of interest and no doubt challenge it. The risk is that if something is not quite right with the scheme and HMRC win the case then your O/H will have to pay the tax on the 'borrowed' money but will have also paid a minimum of 10% managemnet fee for the scheme (non refundable) therefore he will have paid 10% more than he needed to.

His accountant will be getting a large fee for either a. setting this up or b. referring him to a third party provider, so their interest is not completely selfless.

Jason

[Eric Mc]

Whether you are happy with such schemes depends on your atitude to risk. They are looked oin a s fairly high risk because they are pushing the tax legislation right to the edge. Whether they go over the edge may be decided ina Court Case.

[kryten]

But what is the exit strategy from them? There doesn't seem to be one so as soon as you sign up you are committing yourself to having these loans 'for life'.

The only suggestion we had was that the trust would write the loan off, but then the Revenue would almost definitely win a case for evasion.

[UpTheIron]

As Kryten states...loan schemes are high risk and plenty of those who have been in such schemes are currently having many sleepless nights. BN66 and retrospective taxation mean what may have been "legal" at the time might get reinterpreted and land you with a very large bill.

I'd say worth the risk if there are £millions involved and you can hide the money and go bankrupt, otherwise not.

[UpTheIron]

Also, to answer the question, a correctly set up scheme will result in efficient tax planning (i.e. avoidance) but the reality is that the tax WILL be due when the loan is written off - and at that point it will become evasion if you don't pay.

HMRC may well change the rules in their favour between you entering the scheme and the tax becoming due as well...

[ukshooter]

Employee Benefit Trusts have been around for years. John Lewis is effectively a giant EBT. The government made some changes a few years ago which made some of the fancy uses of EBT's obsolete but they stilkl have merit in certain circumstances.

[Tiggsy]

as above, EBT.....nothing new.