GAAR panel rules against EFRBS loan schemes
The independent General Anti-Abuse Rule (GAAR) Advisory Panel has ruled that two similar schemes involving employment-based loans have failed to comply with the GAAR, leading to hefty additional tax bills for the contractors involved.
The two schemes used differing mechanisms to avoid income tax and NI by paying the contractors loans whose creditor rights were then transferred to their employers’ Employer Financed Retirement Benefit Schemes (EFRBSs).
The panel concluded that in both cases that the “tax arrangements were not a reasonable course of action in relation to the relevant tax provisions”, and that the GAAR did apply.
Mr N (name redacted)
The first case involved a contractor, Mr N, who worked on a contract at D Ltd (the end client) via E Ltd (the agency) from April to November 2014.
Mr N used a tax planning strategy whereby he was employed by a trust whose trustee was a scheme provider, ABC (the decision uses the terminology ‘agency’ here).
The agency, E Ltd, would pay ABC for Mr N’s services. ABC would then pay Mr N a minimum wage salary and the rest of his remuneration would be provided by way of interest-free loans. Mr N received around £91,000 of the circa £110,000 paid out by the agency E Ltd to ABC – a return of nearly 83%.
In September of 2014, ABC established an EFRBS and transfers the creditor rights of Mr N’s loans to the EFRBS.
HMRC took the position that the liability owed to the EFRBS by Mr N “will not be met, and was never intended to be met’ and that ‘the arrangements were deliberately structured in such a way that if liability to account for PAYE and National Insurance contributions on the whole amount were to fall on [the agency employer] there would not be adequate funds to meet that obligation.”
In responding to Mr N’s argument that the arrangement’s simplicity precluded it from being considerable as contrived, the GAAR panel ruled that “it is not abnormal for an individual to provide his services through an agency employer, whether a personal service company or an unrelated third party” or abnormal that for an employer to make use of an EFRBS, but that “it is abnormal for an agency employer, where tax is not the main motivator, to provide the bulk of an employee’s recompense by way of loan from the agency employer”.
The scheme attempted to claim that Section 207(5) of Finance Act 2013 (which introduced the GAAR) exempted it from the GAAR, because such arrangements “accord with established practice”.
In reaching a judgment, the panel concluded that Mr N and the agency employer “adopted a series of predetermined and contrived steps”, saying: “In our view neither the entering into nor the carrying out of the steps in this case amount to a reasonable course of action in relation to the provisions charging tax on and giving deductions for employee rewards (including rewards by way of loan)”.
Mr B (name redacted)
The second case involved a limited company director (Mr B) who jointly owned his company (A Ltd) with his wife.
On adopting the scheme, Mr B resigned as director, installed another director in his place and joined the company as a non-executive director.
His company, A Ltd, then hired out Mr B’s services to the scheme provider, XYZ, who employed Mr B and paid him a minimum wage salary.
The rest of the money paid from A Ltd to XYZ (minus scheme running costs) was then loaned to Mr B by XYZ and the creditor rights to the loans transferred to a previously established EFRBS. Around £10k per month was processed in this manner, of which Mr B received between 79%-82% between his salary and the loan payments.
The GAAR panel ruled that it was “abnormal for an employee providing existing exclusive services to his own company to move his employment arrangements to a third-party agency employer”. The arrangement, in this case, had “no commercial purpose other than a hoped for saving of tax”.
The panel concluded that “the entering into of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions; and the carrying out of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions”. It said that it was “inconceivable” that the legislation being used as a defence, Section 207(2)(c) of Finance Act 2013, was intended “to treat the result of a series of contrived steps as tax free when the result of economically equivalent simple steps was, and was intended to be, taxed”.
8th November 2018.