A commentator on the blog asked a question in the light of my criticism of HMRC's management of the loan charge, posted yesterday. Zacchaeus asked:
I'm intrigued, though: how would you draw the line between circumstance where there was — in substance and/or under Ramsey — an “employer”, and where there was not?
The payments to the Rangers players would have been subject to PAYE had they not used the scheme. So too, presumably, would have been those to the club's executives. Rangers was therefore the Ramsey employer under both. Presumably you would not intend the latter group, in particular, to be exempt from the loan charge?
What sort of fact pattern do you have in mind that would indicate that there is no “employer” for these purposes? Perhaps the individual exercising management/control over the business?
This question drives to the core of my criticism of HMRC and to the core of my logic of tax compliance. It is, then, worth answering.
I define tax compliance as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
The questions in this case are:
- Was there an 'employer'
- Was there an 'employee'
- Was there an arrangement put in place that sought to ensure that the wrong amount of tax (but no more) was paid in the wrong place at the wrong time because the economic substance of the transactions undertaken was not reflected in the form in which they were reported for taxation purposes?
I am not pretending that it is always easy to identify an employer/employee relationship. There can always be grey lines. In the vast majority of loan charge cases such grey lines did not exist. There was an arrangement of service i.e. the employee did what the employer asked and was paid for doing so. The employee worked on their premises, for fixed hours, in their structures, subject to their rules and without the option fo substitution. That is an employment. Indeed, many of these arrangements were put in place to get around IR35 which also tackled disguised remuneration, and which it was thought would apply.
My criticism arises in the situation where the answers to the first two questions are 'yes'. In that case since December 2004 there was no excuse for HM Revenue & Customs not to act. Dawn Primarolo, then Chief Secretary to the Treasury, said then:
I am therefore giving notice of our intention to deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today.
This action will not affect employers and employees who organise their affairs in a straightforward and ordinary way–the vast majority. In particular, genuine employee share schemes and share option plans will not be affected.
This is the date to which backdating should have taken place as a result.
But, the backdating should take into consideration the law at the time. This law was settled in 2017 in the Rangers Supreme Court case, which said it was about:
This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees' remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance contributions (“NICs”). The appeal raises a fundamental question about the nature of the income tax charge on employment income. That question is whether an employee's remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.
And it was decided that:
I see nothing in the wider purpose of the legislation, which taxes remuneration from employment, which excludes from the tax charge or the PAYE regime remuneration which the employee is entitled to have paid to a third party. Thus, if an employee enters into a contract or contracts with an employer which provide that he will receive a salary of £X and that as part of his remuneration the employer will also pay £Y to the employee's spouse or aunt Agatha, I can ascertain no statutory purpose for taxing the former but not the latter. The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party which the employer and employee have agreed as part of the employee's entitlement. Both sums involve the payment of remuneration for the employee's work as an employee.
In other words, the existence of the trusts was neither here nor there to the required tax treatment.
And as a result it was decided:
Thus, as Lord Drummond Young stated in delivering the impressive judgment of the court, the central concept in the tax regime governing employment income is the payment of emoluments or earnings derived from employment; and an employer who pays emoluments or earnings to or on account of an employee is obliged to deduct tax in accordance with the PAYE Regulations.
And so Rangers were liable for PAYE, whatever arrangement they had out in place concerning the onwards transmission of net pay to their employees.
HMRC spent a great deal of time proving this. They have claimed a great deal of tax back as a result. But not in the loan charge cases, where legislation was put in place on the wrong legal basis in 2016 before the Rangers case was decided, they have ignored this ruling and have instead claimed tax from the employees, wholly inappropriately in my opinion.
The gross miscarriage of justice is that although it is now apparent that those whom the loan charge subjects to tax - the employee - cannot have been liable for making settlement of that tax because their employer should have been, HMRC persists in asking them for it. Miscarriages of justice do come bigger than that, but systemically such deliberate neglect of what was clearly the law at the time that these loan charge payments was made is quite extraordinary.
And this is not a new conclusion on my part. Read this, which I wrote in 2011, where I noted discussion between me and John Whiting, then of PWC, before the House of Lords and note that I said:
Yesterday [before the House of Lords committee] John Whiting agreed with me: Primarolo's statement may have appeared to be retrospective legislation at the time, but it straightforwardly worked where nothing else had. In the face of knowing that any attempt to abuse the law would be stopped, retrospectively, people stopped trying to abuse PAYE regulations. And NIC abuse died out for some time.
Until that is Employee Benefit Trusts came along.
And it was John Whiting who wondered out loud why a) the Primarolo principle was not being applied to Employee Benefit Trusts because there seems no reason why it should not be b) it had seemed to be forgotten, which he thought an error c) (and I think this came out of our exchanges) it was not now influencing the current debate on the GAAR because the evidence was emphatic - it works.
What we were saying was HMRC had all the tools they needed to make employers pay, so why weren't they doiung so? I stress, this was in 2011. The question remains valid. And it undermines everything HMRC are doing to ask the wrong people to pay tax now when they themselves have won a case to show that it is not the employees but the employers who should be settling.
So, what if there is no employer and the structure giving rise to the loan charge was used? In essence the question is a simple one. Was the company set up by, in this case its employee, pursuing a trade and not acting as a sham to disguise an employment? The single biggest test would be were there multiple engagements of economic significance with different parties, or could substitutes be offered? I know all the difficulties at the margins, but again, in most cases this is pretty easy to determine. I stress, in most cases. And here, multiple engagements with multiple parties would suggest employment was unlikely and that this was tax avoidance at the instigation fo the employee, who should then pay the tax.
It's not hard to use a principles-based basis for determining liability here.
HMRC are acting in an unprincipled fashion.
No wonder people are angry.
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If there were a number of intermediaries such as recruitment agencies, umbrella companies, offshore employers, offshore trusts sitting between the end client and the worker then please tell me how the end client would be aware that there was mischief going on with loans at the back end?
I was badgered by a certain promoter to sign up to a loan scheme about 10 years ago. The usual spiel about “HMRC compliant”, “outside of IR35” and “QC backed” was spouted to me, which is all good and well, but part of the deal when signing up was I had to agree to an NDA which suggested that my client should be kept out of the loop regarding what was going on.
That alone was enough to make me smell a rat and if anyone fell for that (and many colleagues did) then I’m sorry, but more fool them for now finding themselves in this sorry position.
The employer has the duty to determine if PAYE operates
It’s really not hard to locate which the employer is
The Rangers case is very clear on this
Point taken, but unlike with Rangers (and forgetting IR35 for a moment) the employer was often offshore and not within the UK PAYE net.
If you’re saying the end client in the UK is the “employer” and should have applied PAYE then that’s fine. However, it sidesteps the fact that there are often multiple entities between the client and the entity making the loan, which the end client would not be privy to. Especially if an NDA was in place with the worker and the entity making the loan!
There was an employer
The employee sat in their office
What Rangers makes clear is that nothing else matters
So your argument is of no consequence
It is my understanding that when IR35 was being conceived the original intent was that the engager/client should determine the employment status of the ‘worker/contractor’. Lobbyists persuaded Govt to put the onus onto the ‘worker’ resulting in an unworkable piece of legislation.
Roll forward to current time and IR35 is now determined by public sector engagers or their agents and the same will be the case for private sector this April.
Thus it is heading towards where it might have gone originally, except that it all misses the point.
Contractors (workers) say that if they are taxed as employees (which IR35 requires), then they should have employee benefits including holiday pay, sick pay, pension, notice rights etc..
This makes sense to me – either a client/engager is employing someone, or they truly have an arms length arrangement where the contractor is in business on their own account.
Back to the above, Richard’s point that: “There was an employer, The employee sat in their office” is in my view the nub of it. An employer used to make a declaration on a P35 to the effect that no pay / expenses / benefits had been paid via a third party. It isn’t shown on end of year returns these days, but the legislation still applies.
Why HMRC is so useless at using the tools it already holds is beyond me. But then I never understood how e.g. the head of the Student Loans Co was able to operate via a PSC outside IR35. Office Holder and all that..
I’m not entirely sure many end clients knew the worker was ultimately receiving payment through a chain of intermediaries, particularly when the worker was keeping quiet on the point.
I suppose the question is what due diligence did the end clients undertake? However, if the end client wasn’t provided with all the facts by the worker…….
They all knew they were not operating PAYE
That is all that matters
But not all end clients may have been required to operate PAYE anyway, especially if they sought in hired help through a recruitment/tempting agency who arguably should be on the hook for PAYE, or engaged someone on terms outside of IR35.
Then they weren’t an employer
Which is what I discussed in my piece
Is this all the HMRC’s fault or does a law need to be changed to simplify things prevent this rort from happening?
The Loan Charge law needs to be withdrawn
It was superseded by the Rangers decision
This comment shows a complete misunderstanding of the Glasgow Rangers case.
The whole point about loan planning was that the payments were expected to be loans. i.e. theoretically repayable. In the Glasgow Rangers case all the planning was fatally flawed and the defence collapsed because it was shown that agents acting on behalf of the players had insisted on side agreements which accepted that the loans would never be repaid.
The decision in the Rangers case was not that a loan should be considered as taxable income, but rather that if something is earnings it is taxable on the employee even if the recipient of the payment is a third party.
In this case, the evidence was that the money was earnings even before it went into the EBT. They were not loans, as evidenced by the side agreements.
You simply could not use that case as a precedent to go after other loan arrangements which had been set up properly.
Nonsense
No one anywhere expected any of these loans to be repaid
Stop being ridiculous
They were sold and run on that basis
What is interesting is not just that you are trolling, but that you are wrong and have clearly wholly misunderstood what I am saying about the Rangers case
As I make clear the loan arrangements and their administration were irrelevant: the ruling was that PAYE should have applied in the first instance on the payment whether to a trust, or not. Repayment, or not, was not an issue
You are failing at trolling then
Richard
If what you are saying is true, how come EBT loan arrangements were in continuous use for over a decade from the late 90s?
Why did the government feel it necessary to change the law in 2010?
If it was as simple as you claim, why did HMRC lose a succession of cases before finally winning the Rangers case on the particular facts of that case (which included not only the side letters but the existence of contracts setting out to the players what they were going to be ‘paid’). It was those issues that led to the courts determining that the sums paid were remuneration and they are very specific to the Rangers case. Mr Smith is quite right, the Rangers case would be a wholly inadequate precedent to tackle other cases. In Rangers HMRC first proved that the payments were remuneration and then argued that it didn’t matter who the remuneration was paid to.
You should read some of the commentary on this by Robert Maas. They explain things very clearly. Indeed, I think Mr Smith above quotes directly from one of Mr Maas articles “In this case, the evidence was that the money was earnings even before it went into the EBT”.
Incidentally, IR35 has nothing to do with this matter. The EBT loan arrangements were created and aimed at cash rich owner manged businesses and very large companies looking to reward high paid employees. Nothing to do with IR35 at all. It’s irrelevant to the issue. I should know, I had a raft of clients who were approached by agents in the early 2000s with the schemes. Not one of them was a PSC. That some of the companies who were later encouraged to take part in such schemes happened to be PSCs is no more relevant to the loan. arrangement issue than that some of the companies that took part were plumbing companies or meat packing companies.
It is true
And what was said in 2004 was that they always reserved the right to introduce specific, backdated, legislation
They did
And I am arguing exactly as in Rangers: this was always remuneration and everyone knew it
The disguise did not work
I cannot see your difficulty
I can’t even see why you’re disagreeing with me: Maas and I are saying the same thing
PS does make a fair point that the Rangers decision was, to a significant degree, fact-dependent. The side letters etc. provided strong evidence that there was never any expectation that the loans would be repaid. The supreme court judgement makes it clear (see paras 61 and 65) that the expectation given by the side-letters was a key factor in the finding that the payments to the trusts were a component of the players’ earnings. Equivalent evidence is cited in relation to the executives.
Thus, even though all but the most strident apologists for avoidance know that there never really was such an intention in any of these schemes, the burden of proof essentially remains with HMRC to demonstrate the parties’ expectation that the loans would never be repaid in the other cases.
Therefore, although it will no doubt have nudged that burden towards the taxpayers to some degree, Rangers almost certainly won’t provide binding supportive precedent for HMRC in a very significant number of “follower” cases.
This was, after all, one of the main reasons for introducing the charge. (Another being, as you’ve rightly said, that they no longer had assessing positions for the employers.) On reflection, I may have been a bit too quick to agree that Rangers superceded the charge in my 6.45 comment…
I disagree
The key element in the Rangers decision was that the structure was irrelevant: the payment was always pay
The intention was to benefit the person and the payment was to that end
PAYE applied as a result
That is what was key
And that is true in the loan charge cases as well
Hello Richard you say:
“The Loan Charge law needs to be withdrawn
It was superseded by the Rangers decision”
And
“The key element in the Rangers decision was that the structure was irrelevant: the payment was always pay”
But the finding in The Rangers case that the payments were ‘pay’ was so specific, so dependant on the facts that it couldn’t possibly be used as a precedent anywhere else. No precedent was set by the Rangers case except that if you had set up a loan arrangement and then completely ruined it by (i) having contracts that talked about ‘pay’ in place at the outset and (ii) having side letters specifically stating that the loan would not be repaid, then the scheme would fail.
Since the vast majority of loan schemes were set up properly (HMRC knows they were, that’s why they had to change the law to counter them in 2010 and again in 2017) how does Rangers supersede anything?
I assume you are aware that a precedent only works if the facts of follower cases are similar?
I disagree
That’s what happens when it come to law
I think Rangers is a precedent
You don’t
I think the case was not dependent on the poor structuring but on intent, which was to pay someone
Richard,
I agree with everything you’ve said in your 0720 post. (I’ve not said anything about structure, I don’t think.)
However, it is still necessary to demonstrate EVIDENCE that “the intention was to benefit the person and the payment was to that end” if and when a case gets to tribunal. The Rangers decision doesn’t change that. If anything it reinforces it.
For the avoidance of doubt, I disagree with Steven’s suggestion that the Rangers precedent is so narrow as to only be relevant where you have the two features listed (his point (i) is plain wrong because the executives didn’t have prior contractual entitlement to their bonuses). Don’t get me wrong, the decision sets a very important precedent that, as a point of law, IF there is the intent to benefit the person, the payment is an emolument. This was very much in doubt before the decision, but the “if” bit remains a matter of fact, to be tested by reference to evidence in any future cases. That evidence included the side-letters in Rangers, and different forms of evidence may exist to demonstrate this intent in other cases, but it still needs to be demonstrated.
To expand my rather loosely-worded point above about the burden of proof being ‘nudged’ towards the taxpayer, another potential precedent Rangers set was around the use of the side-letters etc to support the finding of fact on intent. Rangers had argued – pretty outrageously – that these did not provide evidence of the parties’ intent. They lost on this point. This may potentially provide useful precedent for HMRC in some circumstances, but evidence of intent still needs to be there.
Hence, Rangers did not mean HMRC would automatically have won all the other cases.
Setting aside the fact the charge was mis-targeted (on which we agree), the retrospective (ish) element of it is quite neat. It’s effectively saying: so this loan was always intended to be repaid, was it? Go on then!
I think you miss the point
Rangers decided the payment of wages to a third party does not change liability to deduct PAYE
How they got to that decision does not matter, in my opinion. That was the decision
So applying the GAAR standard of reasonableness the only question to be asked to determine who has liability is did the employer make this payment to secure the services of a person who should have been an employee? If yes, there is no further question that they are liable: this is what the law requires
The only defence is not that they could not know this – no reasonable person could believe otherwise – I refer again to the GAAR test – but that they were not an employer because they had good reason to think the person self employed. In most cases this would fail as well
I really do not see what the issue is
I’m not being contrarian – I cannot see how the case I make – that HMRC were negligent in not seeing the law as it is / was – is wrong and they if they wanted they could make the case against the employers
The reality is that they cannot recover from them
So they are refusing to take the cases
That is not tax justice, as I said
Thanks for expanding in this, Richard. Nice to get a mention in despatches.
If I’m understanding correctly, this can be summarised as the loan charge should only apply where personal service companies (“PSCs”) that would not have been caught by IR35 were “lending” to the individual whose PSC it was. (I appreciate you may be focusing on the two tests you have specifically mentioned, rather than the murky totality of the IR35 criteria, but I think the principle is the same.)
Of course, while I understand the distinction you are trying to make, in such a case, the PSC can be characterised as the employer and the individual as the employee.
Might it not therefore be better, rather than to introduce this distinction, to change the loan charge such that the settlor of the trust is liable for the charge? This would stop the social workers etc being on the hook for it and, with some suitable rules about shareholders being liable if the company is unable to meet the liability (if insolvent, dissolved, etc.), ensure that users of PSCs as described above are still caught.
One issue is that it starts to ‘feel’ more clearly retrospective than the current charge, even if the courts have generally seemed pretty relaxed about that.
…all of which brings us back to your point that the charge is superceded by the Rangers case, so it’s HMRC’s fault for not having had/kept enquiries open into the settlors.
I disagree
The employer is liable
In 95% of cases that is likely to be ‘the client’ who made us of ‘the services provided’
The settlement is inconsequential
So is the PSC
There is an employer/employee relationship by default in these cases
This only fails when no employer can be identified
And this happily accords with Rangers
But the settlors WERE the employers in almost all cases, as I believe they were in the Rangers case. Making the settlors liable for the loan charge means that, in most cases, the employer is identified and caught. In the cases where no employer can be identified, which would include the non-IR35 PSC fact-pattern, amongst others, it ensures that someone is caught, without having to apply a very difficult test to determine whether the worker is liable.
If you don’t like the use of the word “settlor”, perhaps because you – quite rightly – consider that the settlements were essentially a fiction for the purposes of the avoidance, then some definition along the lines of the person who made the payment is fine. I’ll use “payer” as shorthand here.
Otherwise, you have to come up with a definition of “employer” that will work in all the multitude of factual variations of schemes that essentially existed to prevent there being an employer/employee relationship. This seems very difficult to me. “Sitting in the office” just doesn’t cut it, attractive though it might seem (travelling salesman, etc.), so one would have to fall back on the status/IR35 tests, which we all know are hugely complex.
In comparison, attaching liability to the payer has the distinct advantage of simplicity, as the payer can be readily identified in almost (?) all cases.
In fact, I would perhaps simplify it further and say:
– the “payer” (for want of a better label) is liable UNLESS
– the payer is a company that is controlled by the recipient of the loan*, in which case that person is liable.
(* – this might need to be finessed a bit to catch circumstances where loans were made to family members, but you should catch the drift.)
I am not sure your new definition works
I am also bemused that the employer was the settlor: I really do not think that was true
The scheme vendor was usually the settlor
But none of that matters: the employer knew they were disguising the remuneration of an employee. That was all that did matter. It was subject to PAYE as a result