Something tax related was in the news a bit last week, the most recent/relevant article I can track down is a six months old Daily Mirror article, which refuses to load properly so lets go with the Daily Mail's version:
Hundreds of workers risk bankruptcy after using alleged £13m tax avoidance scheme
... The scheme, which was entirely legal, allowed AML contractors to become staff and were paid via its base on the Isle of Man.
They appear to have been paid a low salary with the rest of the cash paid as a loan with zero or little interest from its 'employee benefit trust' on the Crown dependency. Staff would then pay as little as three per cent income tax.
One client John Dickinson was paid a £11,826 salary in 2009/10 with £85,718 in the form of interest-free loans, according to the Mirror. At the time he paid just under £9,000 in income tax - but HMRC has now asked for almost £27,000.
More crocodile tears.
Clearly, it is morally and economically wrong for employment income to be taxed at the highest rates of all forms of income, but HMRC has spent the last decade cracking down on 'workers' (i.e. employees) being paid in the form of soft/non-repayable loans, whether directly from their actual employer, or via an 'Employment Benefit Trust', an umbrella company or some even more bizarre offshore trust/company arrangement.
A couple of years ago HMRC made it quite clear that all outstanding loans would simply be treated as employment income, earned and taxable on a certain cut-off date.
The sensible thing to have done is to take money out of an umbrella company as dividends, that gives you slightly lower rate than taking it out subject to PAYE. You can always argue that in reality you were self-employed rather than employed, so you might have got away with it. Pretending that you were receiving a loan and paying next to no tax was taking the piss and was bound to blow up in people's faces later on.
As to "entirely legal", of course it is perfectly legal for an employer to lend an employee money, but there is also tax law that says how the loan will be taxed. And the law is the law, whether unfair or not, and there is no point whining now IMHO.
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