HMRC has announced a new settlement opportunity for users of disguised remuneration tax avoidance schemes known as ‘remuneration trusts’ or ‘creditor protection trusts’. The settlement opportunity is open for a limited window, with applications and supporting tax calculations to be submitted to HMRC by 31 July 2022.
Why has HMRC announced this settlement opportunity?
This is the latest initiative by HMRC to tackle the use of disguised remuneration tax avoidance schemes that avoid the need to pay Income Tax and National Insurance Contributions, although HMRC accepts in some circumstances the dividend rate can be applied.
HMRC’s view remains that the disguised remuneration rules apply. This opportunity is restricted to users of remuneration trusts as HMRC considers the scheme design is fundamentally flawed where no valid transfer of funds has been made to a trust.
The disguised remuneration settlement terms 2020 remain available to remuneration trust scheme users who qualify for those terms. An exercise can be undertaken to determine which settlement opportunity generates the better settlement outcome; this will be dependent on the facts of the scheme.
Which remuneration trusts qualify for the settlement opportunity?
The settlement opportunity is available for qualifying remuneration trusts. Broadly, there are two types of arrangements.
1. Arrangements that relate to companies:
a. a company sets up a trust that is not an employee benefit trust or employer funded retirement scheme;
b. a corporation tax deduction is claimed for the contribution to the trust and associated costs; and
c. the contribution is made to a primary administrator who then transfers the funds to a scheme user (director or shareholder of the company or a personal management company that is controlled by a director or shareholder).
2. Arrangements that relate to self-employed, including partnerships:
a. a business sets up a trust that is not an employee benefit trust or employer funded retirement scheme;
b. the contribution to the trust and associated costs are expensed within the profit and loss account; and
c. the contribution is made to a primary administrator who then transfers the funds to a scheme user (partner, individual or a personal management company that is controlled by a partner or individual).
What settlement terms are HMRC offering for remuneration trusts?
The terms of settlement differ depending on which one of four factual bases might apply to your case. Three of these relate to companies and the other to self-employed individuals or partnerships. All options require acceptance that the arrangements did not achieve its purported tax benefits but the tax outcomes for businesses and individuals are different in each.
Late payment interest will be due on legally enforceable tax and HMRC will consider on a case by case whether or not penalties should be payable.
In some cases, settlement will require payment of liabilities that HMRC is out of time to collect legally, although late payment interest will not apply to such amounts.
A key concession offered within this settlement opportunity is that, where evidence can be supplied that supports no contributions were sent to the trust, HMRC will agree there is no Inheritance Tax charge.
Extended time to pay arrangements of at least five years can also be agreed for individuals with no disposable assets and with income earnings less than £50,000 in the year of settlement and seven years where they are less than £30,000.
Why should you consider a remuneration trust settlement?
Settlement will bring finality of the tax position to those involved in remuneration trusts.
HMRC has stated that those who do not take advantage of this settlement opportunity will be investigated and could face litigation. HMRC has made it clear that it will litigate on the basis that full PAYE Income tax and National Insurance Contributions should apply to the amounts paid into the schemes. So those that don’t settle may face a larger tax bill if matters go to court.
In the recent cases of Strategic Branding Ltd v HMRC and CIA Insurance Services Ltd v HMRC, the Tax Tribunal has upheld HMRC’s view that contributions to a remuneration trust are not deductible against corporation tax and that the amounts enjoyed by shareholder directors are earnings subject to income tax.
How we can help
The settlement terms are complex and the facts of each case will need to be reviewed carefully to determine which of the four different settlement options may apply. The 2020 disguised remuneration settlement terms may be more favourable to some remuneration trust scheme users.
The impact of a settlement for a company requires consideration of the tax position of both the corporate and the individual directors and shareholders that benefitted from the arrangements. Our tax experts can deal with both.
We can review your remuneration trust arrangements quickly to determine which option under the settlement terms is most appropriate for you and undertake the relevant calculations.
Once the appropriate option has been selected, we can liaise with HMRC on your behalf to achieve a resolution.
If you would like to find out more, please get in touch for a free, no obligation discussion with either:
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.