Before Finance Act 2010 made amendments to the legislation there was a fairly widespread piece of tax planning in use. This worked as follows:
This gave a significantly better tax result than if the loan write-off had been subject to employment taxes under PAYE. HMRC did not like this and raised a few enquiries and the door was also closed by the introduction of legislation in Finance Act 2010 which prevented loan write-off legislation from taking priority over PAYE.
Things had gone a bit quiet while HMRC took a case. In actual fact it took a few cases which they won at first tier tribunal and these cases have not been appealed. The detailed cases can be viewed by clicking here.
HMRC are now using this case as a smoking gun to ‘encourage’ companies to settle. They are making ‘regulation 80’ PAYE assessments and suggesting that amounts made under self-assessment could be offset. They say that failure to settle may lead to follower notices being issued. Follower notices are HMRC’s way of saying that ‘the game is up because somebody else has already lost a very similar case to yours’.
The cases that have been heard relate to a very specific set of facts and may not be easily applied to all tax payers. Broadly the cases involved taxpayers being encouraged to build up loan accounts by ‘scheme providers’ and so that they could then ‘earmark’ a bonus which could then instead be ‘paid’ by writing off the loan account. HMRC’s killer argument here was that loans were not really being written off but were rather being settled by the forfeiture of a notional bonus which would otherwise have been paid.
HMRC’s killer argument cannot be applied as easily to cases where there was no ‘scheme provider’ and where a company simply wrote off a naturally occurring loan account. Whether there was a notional bonus seems to be a key part of their argument and in many cases a loan was simply waived in connection with services without there being any such notional bonus. The difference is analogous to ‘property dividends’ where if the property is truly paid ‘in specie’ then there is no consideration and therefore no SDLT, but if the property is in settlement of a declared dividend there is consideration and so SDLT is payable.
Hopefully HMRC will only use follower notices to catch the ‘low hanging fruit’ of certain specific scheme users. However, I am possibly being too optimistic here because follower notices are quite an effective weapon for HMRC to use to raise the stakes with taxpayers. Although there is a representation process to the follower notices this is quite one sided and before they know it the taxpayers end up being on the hook for penalties which probably would not have been due if they had settled.
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