The Fizz! Blog

If it was a loan, then what's the problem?

Over a period of many years, a large number of contractors working through their own limited companies signed up to a series of tax schemes that appeared too good to be true.  Essentially, the idea was that, rather than paying yourself an income, your company paid the money to a trust instead, which then just lent the money to you.  Since you now had a loan, but no income, you had no income tax to pay.  Brilliant!

The majority of contractors didn't sign up to such arrangements, because they thought they probably actually were too good to be true.  They were quite right of course.  These schemes have all failed, and the high earners who tried to avoid paying any tax at all by pretending that they were just borrowing money on a temporary basis are going to have to cough up, quite rightly.  5 April 2019 is a significant date - if the recipient hasn't repaid the "loan" (that wasn't really a loan) by then, they'll have to pay all the tax and NI that would have been due on that amount of net income.  If they do repay it, they'll subsequently have to then pay themselves properly and pay the appropriate tax.

There's been a lot of disquiet from the people caught out over this, who thought that paying no tax at all on high income was a reasonable course of action to take, but, if it was a loan, then logically it shouldn't be a problem - they always knew that they'd have to pay it back, right?  That's what loans are.  Surely they wouldn't have spent it all on holidays and cars.  If you've not made arrangements to one day repay it, then you can't really have considered it a loan at all - it's almost as if you knew it was permanent income all along...

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No, company directors *don't* always have to file a tax return

Clued-up accountants have for years been pointing out that the guidance on HMRC's website - commonly repeated as fact - that a company director must submit a Self Assessment Tax Return each year is, in fact, total rubbish.  There's no legal basis for it at all.  If HMRC ask you to submit a tax return, you have to, and they'll ask many company directors to do so.  But the rest of them don't have to submit a return unless they've got some income that's not going to be taxed adequately otherwise (just like anyone else).  Being a director is not mentioned anywhere in the legislation.  It's irrelevant.

It's nice that there's now a tax case that confirms that HMRC's guidance is inaccurate.

Mohammed Salem Kadhem was issued with a notice to complete a return.  HMRC, by their own admission, sent the notice to an address that had nothing to do with Mr Kadhem, so he never got it and didn't submit a return.  HMRC later found him at the right address, issued a new notice, and Mr Kadhem immediately submitted the return.  It was now past the deadline for submitting the return, and HMRC fined him.  Mr Kadhem appealed, saying he had no idea he had to submit a return as the first notice wasn't send to him (which HMRC admitted).  HMRC then took an angle that they like to rely on - "Well, you're a director, so you had to do a return anyway, and you should have known.  It says so on our website.".  Mr Kadhem stuck up for himself and took it to the First Tier Tax Tribunal which - because they look at the actual law, not HMRC's website - correctly deemed the penalties to be inappropriate and ordered HMRC to cancel them.

HMRC haven't seen fit to change their website, so if you ever find yourself in a dispute with HMRC that hinges on whether directors have to submit returns, the answer is "please refer to Mohammed Salem Kadhem v HMRC TC05929".

Sadly, as of 2016-17 it became significantly more arbitrarily, as most of the directors who didn't have to file returns up to that point were people working through their own company and drawing a relatively low level of dividends, meaning a personal tax bill of zero.  Now the new dividend tax means that almost all of them do now have some tax to pay and must now submit a tax return.  But in principle it's a tremendously satisfying case.

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