In a recent conversation with an intermediary, I was informed that HMRC had extended the ‘settlement opportunity for users of remuneration trust tax avoidance schemes’. I obviously didn’t correct them because I was immediately unsure whether I had missed something. I was of the view that the guidance was withdrawn on 30 August 2022, which suggest the disguised remuneration settlement terms 2020 may be available to settle liabilities not subject to the loan charge. Herein lies a problem: if one is now accepting that a remuneration trust is disguised remuneration, there is a strong possibility that the loan charge would apply.
The loan charge worked by amalgamating historic outstanding loans between 9 December 2010 and 5 April 2019 and taxing them in one year (or spread over three by election). The loan charge applies if ‘a person (“A”) is an employee or former or prospective employee of another person (“B”) and ‘there is an arrangement (“the relevant arrangement”) to which A is a party or which otherwise (wholly or partly) covers or relates to A. Also, it is reasonable to suppose that the arrangement is a means of providing rewards or recognition or loans in connection with A’s employment, former or prospective employment.
The problem with both the disguised remuneration legislation and the loan charge is the assumption of the motives of the person entering into such arrangements. Clearly for HMRC, the motive is the avoidance of tax and of course to facilitate funds back in the users hands as if it had been their income (other than not net of tax).
Dukeries Healthcare Ltd v Bay Trust International Ltd & Ors  EWHC 2086 (Ch) (23 July 2021) was not a tax case but instead considered the appellant’s desire to overturn the trust on the basis they had no idea what they transferred vast quantities of money to.
In Marlborough DP Ltd v Revenue and Customs Commissioners  UKFTT 304 (TC), the Appellant accepted their motivation was the avoidance of tax although the manner in which funds were extracted were not governed by an intention to incentivise an employee but instead to put the shareholder in funds with the lowest tax cost possible.
The withdrawal of guidance does not change the tax treatment for those who have contributed to a remuneration trust. It might change the attitude of the HMRC officer dealing with a case but in the absence of legislative changes, the tax position remains the same although dependent on each circumstance of each contributor to a remuneration trust. HMRC state that ‘If you do not settle your tax affairs…..We will continue to investigate and litigate users of remuneration trust avoidance schemes. If you’re using this type of scheme as a company or company director, you may find that you’ll be charged for:
- Corporation tax
- S455 CTA10 tax
- PAYE tax
- National Insurance contributions
- Inheritance tax
If you are using this type of scheme as a self employed individual or partnership, deductions you’ve claimed may not be allowable expenses, and you may also have to pay Inheritance Tax.’
There seems to be an omission to whether someone motivated by extracting funds as a shareholder would be permitted to settle on the basis of dividends. Also, if s455 is in point, would that permit a dividend to be declared at a later date to clear the loan and trigger a repayment of s455?
Technically, if a taxpayer wants to regularise their affairs, they can make a disclosure and even make a formal offer to settle. It is often believed that HMRC must first approve or indicate whether an offer would be acceptable. However, making an offer to The Board of Commissioners may be done without waiting for an officer to agree the parameters of an offer.
Another problem is that many users of the remuneration trust, umbrella remuneration trust, business asset plan and umbrella asset trust along with all the derivations thereof by multiple providers, can not foresee how they will settle the liabilities due under the mechanisms HMRC outlined for settlement.
If affordability or a compromise to lifestyle is an issue at a time when the cost of living is increasing and after a turbulent few years (economic crash, war, pre Brexit, Brexit, covid and partying ministers), its no wonder embracing settlement is an issue. Had parameters been more encouraging or even better thought through and understanding the position of users, the uptake to settlement may have been greater. Some users of the remuneration trust will be concerned with the liabilities that may eventually catch them up, further onslaughts of HMRC correspondence, the ramifications if they don’t settle and the costs of doing anything further.
Users who did not spend funds passing through the remuneration trust and invested or deposited the potential tax liabilities may not be so concerned.
What is next for users of the remuneration trusts? HMRC state they will pursue and litigate although that has to be impractical and to do so would require a better understanding of the trusts and its users. The last spotlight before those issued in 2022 related to remuneration trusts (1 September 2020). At least a further 16 spotlights appear to relate to disguised remuneration and related issues. HMRC will consider they have provided considerable warning and notice for users of these arrangements. Users will feel HMRC’s inability to address tax consequences for users of the remuneration trust has unduly treated them unfairly.
In a recent meeting with HMRC regarding a remuneration trust, the officer stated ‘but it’s tax avoidance’. I responded and state ‘but it’s not tax avoidance’. This circular conversation continued a few times until I asked the officer what was the users motive. Obviously, the answer was tax avoidance and to avoid being taxed on employment income. To which I commented that most owners of businesses wish to build a pot of money away from the risks of their business to preserve family wealth so what was their motive?
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