Offshore loan schemes

Offshore loan schemes used by contractors are under attack by HMRC, following the successful outcome for HMRC in the case of Philip Boyle v HMRC at the First-Tier Tribunal.

HMRC is giving the 16,000 or so users of these schemes the opportunity to bring their affairs up to date on the best possible terms. Those who have used the loan schemes may still have to pay income tax. The opportunity is open for years up to 5 April 2011 and is available until 9 January 2015. 

The opportunity is not available to those who:

  • are subject to HMRC’s criminal investigation policy;
  • are subject to civil investigation of fraud procedures;
  • a UK employer who has used an employee benefit trust and should be using the employee benefit trusts opportunity. 

The offshore trusts scheme that was the subject of the case was marketed to Mr Boyle in 2000. He had initially worked as an employed IT consultant but had set up his own company taking advantage of the preferential tax system for companies at the time and paying himself earnings and a dividend; his income was about £70,000. In 2000, he became concerned as to whether his company would be IR35 compliant and his then accountant was unable to advise him.  

He was introduced to Paul Bishop, a director of Consulting Overseas Limited (COL), and met him at the London address of Sandfield Systems Ltd (SSL), of which he was also a director. Around September 2001, Mr Boyle entered into a contract of employment with Sandfield Consultants Ltd, a company registered in the Isle of Man, with a UK representative office in London. He was paid a salary and was also given a loan in a fluctuating currency, but paid in sterling. All or part of the loan was subsequently waived. 

In 2002, a local office enquiry was opened into another individual’s use of a tax avoidance scheme. It was referred to the Special Compliance Office. The individual had taken up employment with Sandfield Systems Ltd and later with Sandfield Consulting Ltd at which time a significant drop in his income occurred. The taxpayer’s agent advised that the reason for the drop in income was that either SSL or SCL kept around two-thirds of the income generated by the taxpayer and paid this by way of a loan made in a rapidly depreciating currency. 

SSL had a master service agreement with SCL, an Isle of Man company, having moved there in 2001. SSL retained 5% commission plus VAT from the balance of funds received and remitted the balance to SCL or its agents. In all cases, SCL’s ratio of earnings to loans was about one-third. SCL had no assets in the UK. 

All the employees of SCL used Credex International SA (Credex), a foreign exchange broker, when taking out the loans in question. Credex was a Bulgarian-based company registered in the British Virgin Isles. Its business as a foreign exchange broker was web-based; its website ceased to be accessible after the last loan payment was made by SCL on 10 February 2004. The company only dealt with Sandfield employees. The loans were made in Romanian Lei, Byelorussian Roubles or in Uzbekistani Soums, but paid to the employees in Sterling. The exchange rates were not representative of rates in the market, but produced a profit of about 22%. 

The Tribunal decided that the sums were made available to the employees and were thus emoluments.   

If this affects you or your client, you must contact HMRC by 9 January 2015.