Readers' Forum - Shanghaied

Shanghaied

My client company had an employee who was based abroad. He had left the UK some years previously and was working on a full-time contract of employment for my client in the Far East. HMRC had agreed that the duties of his employment were performed wholly abroad, that he had become not resident and not ordinarily resident and they had consequently issued a no tax, 'NT', pay as you earn code number.
My client company lent £50,000 to the employee to assist him in buying a property abroad.
The loan was interest free and was to be repaid after ten years or when the property was sold, whichever came first. The employee has recently ceased employment with the company and sold the property, but has refused to repay the loan. As he remains in Asia, contact with him is sporadic and it seems unlikely that the money will be repaid. The company is coming to accept that the loan will have to be written off as it will probably be uneconomic to attempt to recover it. Readers' thoughts on the tax consequences would be appreciated. Are there PAYE implications and can the company obtain relief for this debt?
Query T16,651                                                — Creditor.

The 'NT' code number, together with the mentioning of not resident and not ordinarily resident, gives the game away. The beneficial loans provisions come under ITEPA 2003, Ch 7 ss 173 to 191; with the meaning of employment-related loans being defined under s 174, in so far as they are loans made by an employer to an employee. ITEPA 2003, ss 188(1) and (2) deal with a 'loan released or written off: amount treated as earnings'.

'If:

(a) the whole or part of an employment-related loan is released or written off in a tax year; and
(b) at the time when it is released or written off the employee holds the employment in relation to which the loan is an employment-related loan (“employment E”),
 the amount released or written off is to be treated as earnings from the employment for that year.

'But if the employment has terminated or become an excluded employment and there was a time when:

(a) the whole or part of the loan was outstanding;
(b) the employee held the employment; and
(c) it was not an excluded employment;

subsection (1) applies as if the employment had not terminated or become an excluded employment ...'

HMRC's Employment Income Manual at EIM21740 onwards covers this section, with EIM21743 focusing on
s 188(2). It therefore appears that s 188(2)(c) is the weak point in the link as we have been told 'the duties of his employment were performed wholly abroad ...', and that because of the not resident and not ordinarily resident status there will be no PAYE liability.                   — N.K.

'Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.' It seems that Shakespeare knew something that Creditor's client did not — and we like to think that we are so advanced nowadays.
Presumably there is no longer a friendly relationship between employer and employee and by acquiring £50,000 the employee will be able to postpone any need for 'husbandry' — the meaning of which my dictionary confirms as acting in a thrifty or economical manner — for at least a little while longer!
Tax implications? The first thing that comes to mind is the charge under TA 1988, s 419. But this applies to 'loans to participators'. However, I would doubt that the employee falls within the definition of participator in TA 1988, s 417(1).
Potentially there would have been a benefit in kind in respect of the interest-free loan, but we are told that HMRC had agreed that the employee was not resident and not ordinarily resident and had issued an 'NT' code number. Consequently, an income tax charge would not have arisen. The writing off of a loan normally results in an income tax charge under ITEPA 2003, s 188 and this applies — by virtue of s 188(2) — even when the employment has ceased. Again, this is somewhat academic as the, now ex, employee apparently remains not resident in the UK. We therefore come to the question of whether there is any relief for the employer company.
It seems to me that the loan will fall within FA 1996, s 81, 'Meaning of “loan relationship” etc.', which states:

'Subject to the following provisions of this section, a company has a loan relationship for the purposes of the Corporation Tax Acts wherever:

(a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and
(b) that debt is one arising from a transaction for the lending of money;

and references to a loan relationship and to a company's being a party to a loan relationship shall be construed accordingly.'

Having established that it is within s 81, FA 1996, s 84 states that:

 'The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, in accordance with an authorised accounting method when taken together, fairly represent, for the accounting period in question … all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions …'

FA 1996, s 82 then provides that 'to the extent that … a loan relationship of a company is one to which it is a party for the purposes of a trade carried on by it, the credits and debits given in respect of that relationship for that period shall be treated (according to whether they are credits or debits) either:

(a) as receipts of that trade falling to be brought into account in computing the profits of that trade for that period; or
(b) as expenses of that trade which are deductible in computing those profits'.

The loan was made to the employee as part of his remuneration package and should therefore fall within the definition above of being 'for the purposes of a trade carried on by it'.                                                     — Marlow.

Issue: 4018 / Categories: