Overseas loan schemes
HMRC view relies on interpretation of existing income tax and anti-avoidance legislation to challenge these arrangements. HMRC has specifically highlighted the challenge to these arrangements in statements made in September 2013 and December 2013.
What is the measure aimed at?
Targeted at smaller self-employed or limited company contractors who (typically) enter into a contract of employment with an ‘offshore employer’ and receive a substantial proportion of the payment for their services in ‘loans’ (i.e. in respect of services which are invariably performed in the UK).
How does it operate?
HMRC view is that the scheme is artificial and is simply a payment of income to the worker, i.e. to which the usual UK income tax and/or NIC liabilities arise.
HMRC is developing case law in support of its view that there is little or no commercial motive to the structure (other than to avoid tax or NIC). Furthermore, HMRC has made a general statement that all such arrangements will be challenged, and has suggested that the UK business or individual engages with HMRC to make voluntary restitution, thereby minimising penalty charges.
What is the result?
If the HMRC view prevails, the UK business would be liable to account for any income tax or NIC that was not already paid.
Even if PAYE/NIC does not apply, there may be other obligations such as liability under ‘beneficial loan’ rules.
Is there potential for duties to be transferred elsewhere?
If there is an associated UK business or presence in the UK, it would be liable to account for any income tax or NIC that was not properly accounted for. However if no such entity existed, HMRC would seek restitution from the director him/herself.