Tax Schemes – Remuneration Trust Too Good to Be True
Andrew Parkes, National Technical Director, and Andrew Park, Tax Investigations Partner examine three recent decisions and HMRC’s settlement offer regarding remuneration benefit trusts.
Reports of tax cases involving marketed avoidance seem to come and go in waves. We had a series of cases involving NT Tax Advisors, which HMRC won, and now we seem to be on a run of cases involving the [insert adjective to taste] Mr Baxendale-Walker, although to be fair, issues involving BW have been rumbling on in the background for many years and involve quite a bit more than tax – forgery, bankruptcy, planning, negligence, etc.
We are interested in three recent decisions and HMRC’s settlement offer for so-called remuneration benefit trusts which, in their latest iteration, were still being marketed last year. As ever the arrangements, if we can call them that, were “tweaked” from time to time in an attempt to get around the relevant rules. The rules in question are the disguised remuneration provisions found in Part 7A Income Tax (Earnings and Pensions) Act 2003.
When is a victory not a victory?
In the case of Marlborough DP Ltd v HMRC  UKFTT 0304 (TC) the taxpayer’s appeal was allowed. Whether you would call it a Pyrrhic victory or a hollow one is debatable – what isn’t up for debate is that the scheme failed, the issue was how badly. Of course, if you’re due to be hung, drawn and quartered, perhaps only being hung is worthwhile.
The general idea behind the scheme was that your company would set up a trust whose assets would be available to reward persons who would help the business of the company, thus enabling the company to get a deduction on payments to the trust.
The trust would appoint a company controlled by the user of the scheme (usually the UK resident shareholder of the company) as a fiduciary with all the necessary powers to deal with the assets of the trust but none of the responsibilities. The fiduciary company would then lend the money to the user.
This was said to lead to the Holy Grail of tax planning/mitigation/avoidance – the company gets a deduction for the payment, no Inheritance Tax is due upon the payment to the trust, and the loan from the fiduciary company would not be taxable upon the user, who would never have to pay it back.
It won’t come as any surprise to find out that HMRC did not agree with this! By the time of the enquiry, the taxpayer didn’t either. They accepted being hung by treating the payments as distributions such that no Corporation Tax (CT) deduction was due and the taxpayer was taxed upon the income.
However, it looks as if HMRC were going for drawing and quartering by arguing that the payment was within the disguised remuneration rules such that a CT deduction still wasn’t due, income tax was due at the higher “normal” rates and also National Insurance.
The Tribunal agreed with the taxpayer and he was despatched swiftly.
Interestingly, or perhaps not, the IHT position was not covered – this is so because the trust was supposed to be a discretionary trust and the payments to it were presumably relevant property. However, the RBT settlement opportunity published by HMRC gives a clue here – it presupposes that such trusts were either set up incorrectly, or implemented such that the money never actually went to the trust and everyone can quickly, and with a sigh of relief, draw a veil over this part of the scheme.
A definite loss
Another iteration of the underlying scheme came before the First Tier with the decision being released on 1 December 2021 in the case of Strategic Branding Ltd v HMRC  UKFTT 0474 (TC). Interestingly, although the taxpayer had used the scheme from 2012 to 2019, only 2012 to 2015 were being heard. This could be that the later years were still being enquired into, although HMRC would normally try and get all years closed and heard at a hearing, or could it be that a GAAR penalty could be charged for 2016 so the taxpayer quickly dropped those years? We’ll probably never know.
Here, the FTT “went another way”. How much of that was down to the taxpayer involved is certainly a question. The director’s evidence was held to be unreliable and some of it dishonest.
The payments by the company were not distributions, and were not allowable as they were not wholly and exclusively for the trade of the company. To put the nail in this particular coffin, the FTT then found that even if the payments were wholly and exclusively for the trade they would still be disallowed as payments to an employment benefit scheme. There was an interesting comment here as regards the RBT too. The Judge acknowledged that the trust deed did not allow the director to benefit, but the overall scheme was definitely to benefit him and therefore the RBT was an employee benefit scheme. An example of a judge applying substance over form, or possibly the Ramsay doctrine, “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
The taxpayer could possibly take some cold comfort that the Judge did hold that the payments were not earnings. However, they fell within the disguised remuneration rules, so charged as employment income in any event.
More of the same
A third decision was released on 4 May 2022, CIA Insurance Services Ltd v HMRC  UKFTT 144 (TC). This judgement was given by the same Judge as in Strategic Branding, so it may not come as any surprise that the taxpayer was despatched the same way.
This may be partly due to the director who gave evidence for the taxpayer being found to be unreliable and not credible as a witness. Something else the decision had in common with Strategic Branding.
Admittedly, defeats two and three were to the same Judge, so not as compelling as defeats by different jurists, but overall, if you or a client has used a Baxendale Walker trust then you need to look very carefully at HMRC’s settlement opportunity.
You do have to move quickly though, as the opportunity is only open to 31 July 2022.
All that said, the opportunity is not the be all and end all. As mentioned above, these structures have, generally (in our experience), not been implemented correctly. In some cases that could work for HMRC, if the errors bring extra tax into the picture, but potentially they could work for the taxpayer or at least leave them flat.