How are debts owed to family members dealt with in divorce proceedings?
The first question for the court to determine is whether the debts are legitimate, and this is a...
An interesting article in this week's Sunday Times highlighted the use by Premier League players of their own private companies to avoid paying tax on a significant chunk of their earnings. The scheme apparently works in the following way:-
- a proportion of a player's earnings (the level of which is currently being disputed by the Revenue) comprising payments for image rights can legitimately be paid into the player's private company, thereby avoiding income tax at 50% but incurring a corporation tax charge.
- the player then receives a loan from their private company which, under the complex rules for taxing benefits in kind, attracts a fraction of the tax which would have been payable had it been taxed as income.
- the loan would then be repaid when the 50% top rate of income tax is ultimately abolished or (controversially) there might be an attempt to wind up the company while the loan is still outstanding.
The tax advice surrounding such arrangements apparently (and understandably) comes with a health warning, and one suspects that the Revenue will take an even more aggressive stance in challenging these schemes now that they have been put under the spotlight. There are, however, a couple of interesting points arising from the story, quite apart from the inevitable observation that a 50% top rate of income tax tends to lead to increasingly elaborate tax avoidance schemes:-
- Before October 2007, this sort of scheme would not have been possible as prior to the Companies Act 2006 reforms, loans to directors (subject to certain exceptions) were unlawful. Of the many vaunted aims of company law reform, one suspects that lining the pockets of Premier League players was not one of them.
- Many of these schemes are apparently facing a significant risk of challenge by HMRC as a sham because of a failure to draft a proper loan agreement. This emphasises the importance of ensuring that "informal" arrangements are recorded properly, even if there is ostensibly no third party involvement - very often there will be a tax reason for doing so, but it is also sensible to consider whether the company's arrangements would stand up to a due diligence review at a later date by a prospective purchaser.