Disguised remuneration: When is it reasonable to suppose a tax avoidance motive?

Whilst entering the Covid tier system, the next round of measures to counter tax avoidance emerged. This is a strong indicator that HMRC do intend to take action. Given the mental health concerns during lockdown, it may be unlikely for HMRC to take too many assertive steps in the short term. There is another enquiry window about to close so it maybe enquiries into those suspected of using avoidance schemes or who have otherwise not declared the correct amount of tax will be opened ahead of 31 January.

HMRC’s current tax avoidance concerns are set out in their spotlights of which there are fifty seven. However, since 6 May 2016 there have been twenty seven of which more than two thirds relate to disguised remuneration arrangements. HMRC’s plight to counter these arrangements is now over a decade old. Why are they having such difficulty stopping arrangements? What are they doing about it and is it going to be effective?

The Chartered Institute of Taxation (‘CIOT’), of which the author is a proud member, has suggested that more could be done to make it clear that disguised remuneration schemes do not work, often involve sham arrangements, evasion and fraud. CIOT also suggest HMRC use their existing powers to pursue promoters and enablers and be more helpful to taxpayers caught unawares by the schemes.

The problem may be that advisers and users genuinely do not consider a particular piece of ‘structuring’ is within the definition of disguised remuneration.

Finance Act 2011 introduced an income tax charge which applies to third party arrangements, commonly involving trusts and other intermediate vehicles, used by employers, directors and employees to avoid, reduce or defer income tax and NIC liabilities on what is in substance a reward of an employment or to avoid restrictions on pensions tax relief. Similar provisions apply to self employed contractors.

The charge generally applies to employment income provided through third parties and is based on the full benefit of a sum of money paid or assets provided in the case of:

1. a person (‘A’) is a present, former or prospective employee of another person (‘B’);
2. there is an arrangement (‘the relevant arrangement’) to which A is a party or which otherwise (wholly or partly) covers A or relates to A;
3. it is reasonable to suppose that the relevant arrangement (or so much of it as relates to A) is (wholly or partly) a means of providing rewards or recognition or loans in connection with A’s employment (current, former or prospective) with B (or is otherwise concerned (wholly or partly) with the provision of such rewards etc);
4. a ‘relevant step’ is taken by a third party; and
5. it is reasonable to suppose that:
   1. the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement; or
   2. there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.

Finance Act 2018 introduced a ‘close company gateway’ to the disguised remuneration rules. The rules were introduced to widen the charge where the benefit of arrangements were designed to benefit shareholders. The gateway largely replicates the existing gateway for employment related rewards but there are some important differences.

HMRC may face continued obstacles to the application of the legislation where arrangements are not to be a means of providing rewards or recognition or loans in connection with employment. The test is satisfied where is it reasonable to suppose the arrangement is a means of providing rewards or recognition or loans. The success of any arrangement may therefore be reliant on establishing that it is reasonable to suppose. Although where it appears according to the circumstances and rationale for establishing an arrangement that it was not established to provide such reward, technically the legislation won’t apply. What is missing is an understanding or definition of when it may be reasonable to suppose. This point has left an opportunity for those establishing arrangements to find ways to cause doubt over the rationale behind an arrangement. HMRC has therefore chosen to attack the promoters of tax avoidance schemes.

HMRC and the Advertising Standard Authority (ASA) have launched a joint enforcement notice on misleading adverts as part of a campaign to disrupt promoters. The notice requires promoters to be clear about the potential consequences of tax avoidance in any online adverts. Immediate sanctions include having their paid advertising removed from search engines and follow-up compliance action, which can include referral to Trading Standards: https://www.gov.uk/government/news/hmrc-and-asa-launch-new-action-to-disrupt-promoters-of-tax-avoidance-schemes.

On 12 November 2020, the Government announced a series of measures designed to clamp down on promoters of tax avoidance schemes and shortly the Government will consult on:

• making UK partners equally responsible for the anti-avoidance regime penalties incurred by offshore promoters;
• giving taxpayers more information on the products sold to them by promoters;
• ensuring promoters face quick and significant financial consequences for promoting tax avoidance so they do not continue to profit while HMRC investigates them; and
• providing HMRC with additional powers to shut down promoters that continue to promote schemes and to stop them from setting up similar businesses.

The Government has also announced it will launch a consultation on a proposal to require advisers to hold professional indemnity insurance, giving taxpayers greater recourse against bad tax advice.

It is assumed that HMRC will take the stance that arrangements falling within those set out in their spotlights will be considered disguised remuneration schemes and will include the purpose of avoiding tax see https://www.gov.uk/government/collections/tax-avoidance-schemes-currently-in-the-spotlight-number-20-onwards.

However, the spotlights don’t allow HMRC to conclude that it is reasonable to suppose an arrangement is for the purpose of avoiding tax. That still needs to be established and will inevitably fall on the courts to decide possibly on a case by case basis. An easier option may have been for legislation to have prescribed what arrangements would automatically be deemed to have a purpose of avoiding tax.

Where there are open enquiries, HMRC are likely to raise assessments or amend a return and issue a closure notice. The taxpayer may then choose to appeal the decision and start their journey towards the tribunal and courts or a settlement.

Even where HMRC are successful establishing it were reasonable to suppose an arrangement included a purpose to avoid tax, they still must enforce the liability and collect the tax. However, given such arrangements normally include a trust or similar structure in another jurisdiction, enforcement may prove more problematic especially where the UK resident taxpayer is unable to settle a liability from assets they legally own.

Where it is reasonable to suppose the avoidance of tax and it can be established the taxpayer knowingly took steps to avoid tax and any advice received is not worthy of establishing reliance on professional advice, HMRC may start to contend the taxpayer has actually evaded tax. HMRC may also go as far to conclude that advisers or persons assisting the facilitation of such structures are also a party to evading tax. It would appear the measures introduced by the Government to counter such arrangements will require litigation and/or prosecution, which carries a mine field of problems and has a commercial cost and risk associated with it. Would it not have been simpler for the Government to have legislated better?

CIOT mention the arrangements often involve sham arrangements, evasion and fraud. The evidence required to determine a sham or fraud will be a high bar and therefore, it is likely that a long time will pass before there is clarity on such structures. A decade on from the introduction of the disguised remuneration legislation, is arguably plenty of time to have refined that legislation and provide clarity for taxpayers and advisers alike.

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