Spotlight 61 – ‘Disguised remuneration: remuneration trusts used to reduce profits and disguise income’ – such tax avoidance schemes do not work
January 26, 2023
On 22 December 2022, HMRC published its tax avoidance bulletin Spotlight 61 – ‘Disguised remuneration: remuneration trusts used to reduce profits and disguise income’ which follows the warning given by HMRC in Spotlight 51 and Spotlight 56 about remuneration trust tax avoidance schemes and explained why these do not work.
HMRC have noticed that certain promoters continue to market such non-workable tax avoidance schemes and have warned about their continued promotion and use.
Briefly, a remuneration trust is an offshore trust established by a scheme user, which may be a company or any other type of entity. As part of the scheme arrangements a personal management company is set up and controlled either by the scheme user or a connected party supporting the scheme. Contributions are made by the scheme user which are paid to the personal management company and the scheme user has full access to the funds contributed. The main objectives of a remuneration trust are to:
(a) provide tax free loans or fiduciary receipts to the recipients, and
(b) claim corporation tax deductions on the contributions made.
The publication of Spotlight 61 follows the decisions in three first tribunal decisions concerning remuneration trusts, namely, Marlborough DP Limited v The Commissioners for HMRC, Strategic Branding Limited v The Commissioners for HMRC, Strategic Branding Limited and CIA Insurance Services Ltd.
All of these cases concern the use of remuneration trusts artificially to reduce company profits and to disguise income of various individuals who held one or more positions of director, employee or shareholder. Contributions were made by the scheme user to the remuneration trust and loans were made to certain individuals from such contributions.
In all of these cases, the Court held that the contributions to the remuneration trust and the fees paid to the personal management company were not deductible. In the Marlborough case, the Court held that the contributions to the remuneration trust were dividends and that the loans to the director were not employment income. In the other two cases, the contributions were held not to be deductible expenditure as they were not incurred wholly and exclusively for the purposes of the trade and the loans to the individuals from the remuneration trust were, in fact, disguised remuneration on which PAYE and NIC liabilities were due. It should be noted that the decisions in these cases may be changed on appeal.
HMRC have made it abundantly clear that they:
• will challenge remuneration trusts using the full range of legislation
• in appropriate cases, follower notices and associated accelerated payment notices would also be issued
• will litigate these cases and have no intention to settle them
• will go after any anyone who designs, promotes, sells or otherwise enables others to use tax avoidance schemes.
Anyone who has used or is using a remuneration trust or similar scheme and who is concerned about it, is advised to take independent tax advice and contact HMRC. HMRC also strongly advises anyone using such tax avoidance schemes to withdraw from them and settle their tax affairs with HMRC.
Users (any company, directors or employees) of such tax schemes may be able to settle their position using the Disguised Remuneration Settlement Terms 2020. The payment of tax could be settled in instalments tailored to one’s personal circumstances, based on what one can afford to pay and not subject to any minimum time or income limit. In this way, interest and penalties may be minimised.