Tax efficient bond re-payments?

[Lonestar]

I am jumping ship in a few months and taking a pilot bonding loan with me. Does anyone know if these repayments can count as an 'allowable expense' from the taxmans point of view so that they dont come out of ones taxed income?
Any advice much appreciated.

[Boss Raptor]

very much up to you to negotiate with your local tax office...but if you can prove it was for essential training that you have actually paid for, i.e. actually making re-payments for and/or previously being contrared against your net salary after tax deduction, then yes to both the loan and the previous deductions (if taken from the gross salary then the previous payments have been taken into account in your tax liability)...best way is to get an Invoice from the company you are leaving for the outstanding amount.

[Lonestar]

Thanks very much Boss Raptor I will take your advice>

[Gerund]

Repayments of a loan are not tax deductible.

You borrow the money and pay it back. There is no tax effect.

However, if the expenditure for which the loan was taken out was tax deductible, then the deduction for tax purposes is when the expenditure was incurred, eg type rating, instructor rating etc.

It doesn't matter if the money was yours, the bank's, or the employer's. To repeat: the loan repayments are not tax deductible.

However, any interest on the loan may be tax deductible.

The determining factor for deductibility for a self-employed person, or company, is whether the expenditure (type rating, instructor rating, loan interest etc) is wholly and exclusively incurred for the business.

If, as seems likely, you are employed, the test is whether the expenditure was wholly, exclusively and NECESSARILY incurred in the performance of the duties of the employment.

The word NECESSARILY in the legislation is why the Inland Revenue are so keen to categorise people as employees. It is VERY difficult to justify expenditure as necessary in the strict legal sense. There have been innumerable tax cases establishing precedents in this area - note particulary the wording "in the performance of the duties..."

In particular, it has VERY often been the situation that cases have failed because the expenditure merely puts people "in a positon to carry on the duties" - and type ratings et al fall into this category.

To summarise:

Loan repayments of capital are never deductible.

The interest on a loan repayment may be deductible, but only if incurred wholly and exclusively in the carrying on of a business, and NECESSARILY in the performance of the duties, in the case of an employee.

The expenditure for which the loan was taken out may be deductible against earnings of the tax period in which it was incurred ie a period before you left. Relatively easy to argue if you were self-employed; difficult if you were employed.

However, tax is a beautifully grey area, and individual tax inspectors will have different views on things.

If you are serious about attempting to obtain tax relief on the actual original expenditure or the loan interest(NOT the capital loan repayments), for which you took out the loan in the first place - see a Chartered Accountant or a Chartered Taxation Practitioner. Please make sure he is 'Chartered' as most of the guys in Yellow Pages are unqualified - they may have swish offices, but beware.

I would put the likelihood of success at the wrong side of 10/90, but good luck if you have a go.

Can't help myself as I hung up my CA boots a few years back to earn a pittance flying!!!

[Boss Raptor]

As you say Gerund very much a 'grey area'...

I received full expenditure plus loan interest tax rebate against my initial type rating. As I was training during the tax year the expenditure was incurred and had little income the tax office agreed to roll it forward until the rebate was fully exhausted through my subsequent PAYE income.

Very much a case of taking professional advice and presenting your case to the Tax Office...and if you dont ask you dont get!

[This message has been edited by Boss Raptor (edited 30 May 2001).]

[Gerund]

Boss Raptor -

As you say, when self-employed, or operating through a limited company, things are different. Training expenditure etc will be tax deducible on the relatively relaxed 'wholly and exclusively' basis.

Glad to hear that you obtained tax relief on your type rating when employed. However, I think that you were probably lucky!

But as you say, if you don't ask, you don't get!

I think it is worth mentioning that PAYE is a method of collecting tax, and not a tax in itself. In the good old days, employees used to receive an annual tax assessment based on their tax return and have to pay in lumps. PAYE (Pay As You Earn) is a method of smoothing the payments out, and collecting by deduction from earnings.

The calculation of how much tax is deducted each week, or month, takes into account how much of the 'annual' earnings will not be taxable due to allowable 'deductions' (eg because of personal allowances, professional subscriptions etc). The reduction of tax for the year due to these deductions is smoothed over the year under the PAYE system. The Tax Coding is merely a system for notifying the employer of which set of tables to use when operating as unpaid tax collector.

Now, if you borrow money to take a type rating which is treated as 'allowable' for tax purposes, the allowable deduction will be in the tax year it is incurred. (There are very few legal provisions for spreading income and expenditure across tax years; eg authors (who spend years writing the blockbuster), farmers (who have two dud harvests and then a good one)).

For example, if £4000 was spent on a type rating in the year ended 5 April 2001, the allowance will be given against income of the tax year 2000/2001. If a loan was taken out over five years to pay this, the 60 loan repayments get no tax relief (apart from the interest element - gaining relief in the tax year in which the loan payments are made).

The tax 'rebate' for the £4000 expediture will normally be given as a direct cheque repayment if the tax year has ended (after submission of the year's tax return), or by repayment through the PAYE system if it hasn't. What happens in the latter case is that a new Tax Code is sent to the employer, and if the tax calculated by the tables using the new tax code is less than already paid, a tax refund appears on the payslip.

If you change employers, during a tax year, before the full tax refund has been made, the refund will just roll over and be made by the new employer. The employer is the unpaid tax collector (or refunder) and PAYE is just a method of collecting (or repaying) tax.

The actual deductions of the training bond from salary will not be deductible - ie they will come off net pay, not gross.

God!! I have just looked at what I have written. I must be bored! In fact I am - waiting to go abroad at the moment! Sorry everyone for my past life beancounting.

I've just had a look back at the thread before finally posting - and you've changed your post Boss Raptor....that's cheating!

What you describe is DEFINATELY extra-statutory. You had a nice tax inspector!!

By the way Boss, you don't have a job do you? A bit of a cheek, but don't ask, don't get! I have all sorts of skills and, even if you don't, maybe you can point me in a direction?

Edit: This will help! [email protected]

[This message has been edited by Gerund (edited 30 May 2001).]

[Lonestar]

So, in summary if the local tax inspector is a nice chap I may be able to pursuade him that my old type rating was essential in getting me to where I am now (couldnt have done it without it etc,etc)and he may allow tax relief on the capital repayments as well as the interest. Otherwise, more likely, he may only allow the interest on the remainder of the repayments.
Thanks everyone. If anyone else has any positive or negative experience of trying this please continue....TA

[Gerund]

Lonestar -

NO! Do not try to persuade him the type rating was necessary to get you where you are now, or you will fail! You must persuade him it was NECESSARY in the perfomance of the duties of the employment when you incurred the expenditure. The best way to get this sort of expenditure allowed, but by no means certain, is to have it written in to the contract of employment that the type rating is necessary for the employment and must be obtained at the employee's expense. In other words it is necessary expenditure in the performance of the duties under the contract of employment.

If you go in on the basis of the expenditure getting you to where you are now, it is prima facie non-deductible. There are reams of tax cases where people have had a go and failed. Not surprising if you think about it. Imagine the effect on the Exchequer if all doctors, lawyers and uncle tom cobbly could claim tax relief for their training expenses to get them where they are now.

I firmly believe Boss Raptor was very lucky!

The chance of gettting the original type rating expenditure allowed is low. The chance of getting the loan interest allowed is even lower!

And don't confuse the capital repayments with the original expenditure on the type rating. The latter may be allowable, the former definately won't be. It is a red herring. If the expenditure is allowable, it is allowable. It doesn't matter if you paid for it out of your own pocket, robbed a bank to pay for it, or borrowed it. (Although if you robbed a bank the Inland Revenue may be after you for tax on the proceeds of your crime, especially if you made a 'business' of it! I'm not joking! Drug smugglers don't only get fingered by the police!)

One caveat on all the foregoing. The Inland Revenue may be operating an unpublished extra-statutory concession on this type of aviation payment. A qualified tax accountant should be able to winkle this out if it exists - which I doubt.

Good luck!!

[Boss Raptor]

Yes I altered my post slightly as I thought the original was a little over complex and no covering the saliant points...still I did get the relief and it was spread over three tax years - I am assuming that as it was 'initial type rating' it came within the bounds as you have so rightly stated, I doubt I would have had the same success with subsequent requests...as I am now Self Employed these matters get much simpler to account for...and I get everything!