On 11 April 2022, HMRC issued settlement terms for avoidance schemes involving remuneration trusts. It appears that HMRC has now (after a few cases) identified what those trusts include ‘Creditor Protection Trusts’. Actually, I am not sure HMRC do really understand them, that is because they simply consider such trusts to be about avoidance of tax. However, a taxpayer (or in this case a non-taxpayer) may be fed up with the continual onslaught of letters as well as the potential risk that HMRC or the treasury will eventually combat the remuneration trust (or similar). If the taxpayer is waving the red flag, they have until 31 July 2022 to use these settlement terms.
I have it on very high authority that the ‘users’ of remuneration trusts will, if they haven’t already, receive a ‘nudge letter’. Nudge letters are used to encourage taxpayers to come forward and regularise their tax position. The letters being, or to be sent, will inevitably make reference to the newly issued settlement terms and of course how awful it will be if the recipient doesn’t take advantage of those terms. Inevitably, the terms that follow these terms will have to be more onerous. In such circumstances you wonder about the merit of taxpayers being treated fairly although that political rant is for another day.
The terms state that they ‘result in an outcome that the courts might reasonably be expected to reach’. I think this may be a lie because past cases basically mean each case needs to be looked at individually to determine the outcome. Each case could be different. HMRC seem to accept this because they subsequently state ‘This guidance is not intended to set out HMRC’s view of how the law will apply to any particular implementation of such schemes. Nor is it intended to set out HMRC’s view of the legal position’.
The settlement opportunity sets out the following options:
- Company basis:
The contribution and fees are not deductible for corporation tax and benefits received may be within the section 455 corporation tax charge or PAYE and NIC depending on the circumstances. Any income or gains made within the trust and extracted may be subject to tax also.
- Distribution basis:
The contribution and fees are not deductible for corporation tax and benefits received are treated as dividends. This option is only available for shareholders that have received benefit (as shareholders).
- Application of PAYE/NIC:
The contribution and fees are not deductible for corporation tax and benefits are subject to PAYE and NIC as earnings paid by the employer.
The contribution and fees are not deductible in arriving at taxable trading income. For access to the self-employed basis there are terms the scheme must reflect.
Obviously the above is just a summary of the settlement bases that are available and HMRC state that ‘The basis of all settlements will be determined by the facts and circumstances specific to each scheme user and their implementation of the remuneration trust scheme’. Each scheme will be looked at separately. There are some ‘requirements’ to access each basis – it’s not a case of simply choosing the one resulting in the lowest tax liability but instead identifying which basis is applicable in the circumstances. For example: to access the company basis a few points of ‘consideration’ include:
- The trust must not be an employee benefit trust or a employer financed retirement benefit scheme.
- The trust beneficiaries must not be employees or family members of employees.
- The contribution was not transferred to a bank account of the trustee but instead a primary administrator. This refers to the use of a company acting as administrator on behalf of the trust include a personal management company (‘PMC’) – a company managed by the scheme user.
- The primary administrator or PMC make payments direct to the scheme user.
- The scheme user pays the primary administrator the fee only and pays the balance to the PMC.
Guidance specifically states that the distribution basis is not available where in HMRC’s view the facts demonstrate that the money paid by a company through the scheme to its director should be charged as income from employment. Surely the view should be of a reasonable person and not HMRC! To date, HMRC has wrongly considered all such structures to be within the remit of disguised remuneration. It is assumed that HMRC, following recent cases accepts that benefits from such arrangements to a shareholder who is also a director may not be income from employment. It is assumed that where a company does not have a track record of remunerating a director but did formerly declare dividends, HMRC would form the view any benefit is not income from employment. Other criteria may influence the position. HMRC specifically state that the distribution basis will only be available where the benefit received is in proportion to the shareholding (although shareholders could normally waive entitlement – just a thought).
HMRC state the circumstances are subject to the normal governance procedures to make sure compliance under management powers and the Litigation Settlement Strategy (‘LSS’). The LSS states that where HMRC believe it is likely to succeed in litigation, it will not reach an out of court settlement for less than 100% of the tax, interest and penalties and if the ‘customer’ is unwilling to concede, HMRC will resolve through litigation.
We have advised in relation to a considerable number of ‘remuneration trusts’ provided through different providers. Some of the cases we have handled have been poorly implemented, which actually stood in our client’s favour when settling. Also, on many occasions, HMRC were pursuing years they legally could not. Whilst the settlement opportunity holds no particular breaks for users or a defined incentive to use, it may be appropriate for a user to take the opportunity to open negotiations with HMRC. Ahead of doing so, we would recommend a full review of the history to identify the best approach to be adopted.