Tuesday, 12 June 2018

Boo hoo, frankly.

Something tax related was in the news a bit last week, the most recent/relevant article I can track down is a six months old Daily Mirror article, which refuses to load properly so lets go with the Daily Mail's version:

Hundreds of workers risk bankruptcy after using alleged £13m tax avoidance scheme

... The scheme, which was entirely legal, allowed AML contractors to become staff and were paid via its base on the Isle of Man.

They appear to have been paid a low salary with the rest of the cash paid as a loan with zero or little interest from its 'employee benefit trust' on the Crown dependency. Staff would then pay as little as three per cent income tax.

One client John Dickinson was paid a £11,826 salary in 2009/10 with £85,718 in the form of interest-­free loans, according to the Mirror. At the time he paid just under £9,000 in income tax - but HMRC has now asked for almost £27,000.

More crocodile tears.

Clearly, it is morally and economically wrong for employment income to be taxed at the highest rates of all forms of income, but HMRC has spent the last decade cracking down on 'workers' (i.e. employees) being paid in the form of soft/non-repayable loans, whether directly from their actual employer, or via an 'Employment Benefit Trust', an umbrella company or some even more bizarre offshore trust/company arrangement.

A couple of years ago HMRC made it quite clear that all outstanding loans would simply be treated as employment income, earned and taxable on a certain cut-off date.

The sensible thing to have done is to take money out of an umbrella company as dividends, that gives you slightly lower rate than taking it out subject to PAYE. You can always argue that in reality you were self-employed rather than employed, so you might have got away with it. Pretending that you were receiving a loan and paying next to no tax was taking the piss and was bound to blow up in people's faces later on.

As to "entirely legal", of course it is perfectly legal for an employer to lend an employee money, but there is also tax law that says how the loan will be taxed. And the law is the law, whether unfair or not, and there is no point whining now IMHO.


mombers said...

It was a very good scheme for those who have left the country - good luck to HMRC in chasing them. Had a few ex-pats who recommended it to me but I'm in the UK for the long term.
Good point about employment income being the most heavily taxed. But of course the homeownerist/landownerist dream is not having to bother with doing anything for a living.

Lola said...

Indeed. The trouble is that an overly complex tax code being used to enforce confiscatory levels of taxation is always going to result in gaming. And the HMRC love this on lots of levels. One, it makes them look good to the great unwashed as if they are pursuing rich evaders. Two it means they have to employ lots more staff; and the greater the staff numbers the higher the stipends for the HMRC managers. Three the more HMRC staff there are the better for Big Government fans and the client state. And so on. (Oh and 'we' know the cure...)

Bayard said...

"But of course the homeownerist/landownerist dream is not having to bother with doing anything for a living."

A quick glance at history shows that this has been the aspiration of the British for centuries, even before employment was taxed at all. Those who got rich by working bought land so that their heirs could live off the rents and join the landed gentry. It is a natural human desire to live without needing to work, but with the British, it's social.

James Higham said...

Hundreds of workers risk bankruptcy after using alleged £13m tax avoidance scheme

Never tell an accountant that - he will not be sympathetic.

Mark Wadsworth said...

M, good point about bunking off. My non-res clients ask me how HMRC will enforce X Y or Z against them when they are abroad again, and I tell them I don't know, and they probably can't, but that's no excuse to break the law while you are here.

L, agreed that stupid tax rules = gaming = opportunities for pin striped ponces to hawk their schemes, another reason why flattening tax rates is a good thing. But actually, HMRC doesn't have that many staff. As much as people may hate them, they are quite efficient and are only obeying orders.

B, agreed, we are all lazy, that's fine, but let's not make a virtue out of it.

JH, it was crooked accountants persuading people to sign up to this crap.

Lola said...

MW. With the huge powers the HMRC has they could not fail to be efficient. And a lot of their work is compulsorily outsourced to employers like me. However, without a doubt, a massive simplification of the tax code would create an equal opportunity to reduce HMRC numbers, reduce my overheads AND see lots of tax planning rent seekers (Moi? Non!) with no work and have to find something productive to do. And it would still collect 'enough' tax...

Mark Wadsworth said...

L, twice as many people work in DWP and dishing out welfare as work for HMRC. If you want immediate cost savings, simplifying welfare is the easy target.

Lola said...

MW. Indeed. But we are on taxes. That's Monday morning's work. DWP is Monday afternoon's job.