At the beginning of August, I wrote about the Dukeries case where claimants were denied having contributions to a remuneration trust overturned. That case was not a tax case and I commented:
“For the tax legislation to apply, it will be required to look through and determine the real purpose of the RT is for benefiting employees or that the intention of the employer was to benefit employees. This may be difficult for HMRC and therefore, the Treasury may have to rethink legislation. If they do, will that legislation be retroactive and as much as a balls up as the disguised remuneration legislation?”
Well smoke me a kipper skipper, there has been a First Tier Tribunal Judgement regarding a remuneration trust: Marlborough DP Ltd v Revenue and Customs Commissioners  UKFTT 304 (TC).
The case went in the taxpayer’s favour. The taxpayer openly accepted their motive to be the avoidance of tax and accepted that many documents providing for contributions to the RT contained inaccuracies or untruths:
“The documentation and its implementation exhibit a complete disregard for tax compliance obligations.”
However, the reasons why the taxpayer found success may be a result of the approach taken by HMRC. Let’s be honest, if you confess a tax avoidance motive, have inaccurate and untruthful documents you would expect the tax authorities to be able to nail you, but not on this occasion. A fundamental lack of understanding by HMRC has given hope to those who have contributed to a remuneration trust. Is that hope misplaced? Has the FTT sent a message to taxpayers that it is acceptable to avoid tax and do so with inaccurate and untruthful documents?
Dr Thomas was the only shareholder in Marlborough and that company had used a remuneration trust (‘RT’) for several years. The RT was for the benefit of person who had provided or might in the future provide services, custom or products to Marlborough. Contributions were made to ‘reflect part of the economic costs of earning profits’ and those contributions were treated as allowable expenses in arriving at the profits chargeable to corporation tax. Shortly after contributions were made, the personal management company controlled by Dr Thomas made loans to Dr Thomas. There was no dispute that the purpose of the arrangements was to extract profits to Dr Thomas, obtain a deduction for corporation tax purposes and for Dr Thomas to have no personal liability on accessing those funds.
Not surprisingly, HMRC contended the deduction against profits was not allowed and Dr Thomas should be liable to PAYE on the contributions to the RT as earnings or under the disguised remuneration provisions.
The only driver for deciding how much was to be paid into the RT was to reduce profits to nil for corporation tax purposes. It was accepted that if the RT arrangement had not been put in place, profits would have been distributed.
Dr Thomas had an expectation that money would be lent to him and that he was told that the loan was not going to be repaid if he did not want it to be. Dr Thomas knew the trustees had legal power over trust assets although did not accept it. It was accepted that loans needed to be repaid although the provider had indicated a loan would simply be renewed:
“Well, there is a ten-year term, because when I was coming towards the end of the ten−year term, I did ask, I said: right, well, what happens now? And…I was told that…. there would be a new loan form……and…because it says ten years in the agreement, I questioned [BW] as to what happens when the agreement runs out, and he said: rolling over, yes, but you would – there would be a new agreement….I never got to the ten years with them being loans, and they’ve been changed to fiduciary receipts.”
HMRC contended that Dr Thomas’ evidence was not relevant, however, it was relevant because it indicated the purpose behind the steps to extract funds and ‘provide him with a return on his investment in it as shareholder in the same way as if it had formally declared and paid a dividend’.
The Tribunal identified that:
- the fact the relevant sums were paid through the RT arrangements, which were implemented only for tax avoidance purposes, did not provide evidence that the relevant sums are a reward for services.
- the manner in which the relevant sums were extracted demonstrates the desire to avoid a tax charge and obtain a tax deduction.
It was not established that an underlying purpose was to avoid a tax charge for Dr Thomas on sums intended as a reward for his services or as a return on his shares whilst generating a tax deduction against profits.
The FTT found the reliance HMRC put on the evidence that the contributions/loans do not constitute dividends/distributions was misplaced.
The FTT considered the decision in Rangers commenting in that case, it was clear the sums in dispute constituted a reward for the footballers’ and other employees’ services as employees.
The FTT also considered whether the relevant sums are taxable under part 7A (disguised remuneration legislation). The legislation applies if:
- a person is an employee, or a former or prospective employee, of another person,
- there is an arrangement (“the relevant arrangement”) to which the employee is a party or which otherwise (wholly or partly) covers or relates to them and,
- it is reasonable to suppose that, in essence the relevant arrangement, or the relevant arrangement so far as it covers or relates to the employee, is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with the employment, or former or prospective employment,
- a relevant step is taken by a relevant third party and it is reasonable to suppose that, in essence, it is taken (wholly or partly) in pursuance of the relevant arrangement, or there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.
The legislation is broadly intended to catch employee benefit trust arrangements or similar arrangements. The legislation is drafted widely to catch the broad spectrum of similar arrangements, which could be many different types of third-party arrangements whether corporate entities, trusts, foundations etc. The legislation even goes as far to state that it does not matter if the relevant arrangement does not include details of the steps which will or may be taken in connection with providing, in essence, rewards or recognition or loans. The legislation, as the FTT found, does clearly apply to ‘the provision of rewards of recognition or loans in connection with an employment’.
HMRC argued that the relevant sums constituted earnings and declaring a dividend would have severed the connection between relevant sums and employment but contributing to an RT as part of a tax avoidance scheme did not. However, taking the argument that a contribution to an RT is employment income could also mean that the declaration of a dividend payable to an employee shareholder is also earnings connected to that employment. HMRC’s argument lacked credibility and understanding of the application of the disguised remuneration legislation. The contention suggested that the source of funds used to provide a benefit means it is connected with employment.
The FTT also pontificated over whether contributions to the RT were deductible against profits chargeable to corporation tax. Consideration was given to whether the payments were wholly and exclusively for the purposes of the trade and whether there was a duality of purpose being the avoidance of tax. The relevant documents giving rise to the contributions to the RT were untrue and these untruths were admitted by Dr Thomas. HMRC argued that the existence of inaccurate or untrue statements in the relevant documents as regards the reasons for the routing of the relevant sums through the RT arrangements is a free-standing reason for a corporation tax deduction to be denied. The tribunal concluded they must simply establish the company’s purpose for making the contributions, which was to obtain a tax deduction.
HMRC also set out a second argument that the deduction be denied under the provisions that apply to employee benefit schemes. However, those rules do not apply where the relevant contributions are paid out of the RT in a form which is taxable under ITEPA.
Following this FTT case, can those with remuneration trusts sleep well?
The case makes the required difference between the desire to recognise and reward an employee and the desire that the shareholder may have to maximise profits and access those profits tax efficiently. The case also identifies the difficulties securing a deduction against profits for tax purposes. HMRC could have better presented arguments although the case highlights what we have commented on previously for more than a decade: the legislation is not drafted with this structure in mind. Its rather shambolic that HMRC has been aware of the mechanisms of the RT for a long time, attacked them and not realised some fundamental flaws in their attacks. Legislation could have been introduced long ago. The future of RTs does however have to be questioned. It would not be in the wider public interest to allow those wishing to avoid tax to blatantly do so and without regard for accurate and untrue documents.
The fact the FTT differentiates between an employee and the desire of a shareholder has inevitably made several planning ideas rattle through my head…. To be continued.