Disclosure of Tax Avoidance Schemes: tax avoidance using offshore trusts (Spotlight 52)
Decisions by the First-tier Tribunal in 2 cases using tax avoidance schemes and disguised remuneration arrangements to avoid tax and National Insurance.
HMRC has argued 2 cases in the First-tier Tribunal (FTT), involving Hyrax Resourcing Limited and Curzon Capital Limited.
The FTT decided in both cases that the disguised remuneration (DR) arrangements being promoted were notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation.
In both cases, the arrangements were designed to disguise income for which tax and National Insurance contributions would be due. Scheme users were rewarded with amounts paid as loans which they ultimately owed to an offshore benefit trust.
The FTT agreed with HMRC in both these cases that the arrangements were notifiable under the DOTAS rules.
In the Hyrax Resourcing Limited case, the FTT said:
“… there is no other rational reason for why anyone would implement a convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage… Objectively speaking, the main benefit that might be expected to arise from the arrangements would be the tax advantage”
The FTT also made an order requiring the promoter to notify HMRC of the scheme.
Read the full Hyrax Resourcing Limited decision on the FTT website.
In the Curzon Capital Limited case, the FTT said:
“There were no corresponding non-tax benefits against which that saving should be weighed… and accordingly it was self-evidently the case that the tax saving was the main benefit that might be expected to arise from the Arrangements”
In this case the FTT refused HMRC’s application for an order, because it decided that Curzon Capital Limited had not been a promoter of the scheme.
Read the full Curzon Capital Limited decision on the FTT website.
How the arrangements are claimed to work
The arrangements used in these cases are typical examples of DR schemes that involve individuals receiving their earnings through a small taxable element and the remainder in the form of a loan.
They are contrived arrangements that pay scheme users their income in the form of loans, normally routed through an offshore trust in a low or no tax jurisdiction, with the only purpose being to avoid Income Tax and National Insurance contributions.
The loans are provided on terms that mean they are not repaid in practice, and the amounts paid by way of a loan are no different to normal income and are - and have always been - taxable.
These DR arrangements claimed to offer a much lower tax charge than if the scheme user had been paid all of their income as a salary.
What these decisions mean for tax avoidance promoters
These decisions confirm HMRC’s view that contrived arrangements involving employment income related loans are notifiable under DOTAS.
HMRC will pursue anyone who promotes or enables tax avoidance.
Scheme promoters should carefully consider the DOTAS rules to decide if the arrangements they are marketing should be declared to HMRC.
HMRC will closely examine whether DOTAS should apply to individual cases.
What this means for scheme users
Following a DOTAS notification, HMRC will consider issuing Accelerated Payment Notices to bring into immediate charge the disputed tax and National Insurance contributions that is due.
If you’re using these or similar arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
If you do, you’ll:
- avoid the costs of investigation and litigation
- reduce any interest payable on the tax you should have paid
A charge was introduced to tackle the use of DR avoidance schemes, which came into effect on 5 April 2019. The charge applies to all DR loans made since 6 April 1999 if they are still outstanding on 5 April 2019. Anyone with an outstanding DR loan will now have to report and account for your loan charge.
If you’re already speaking to someone in HMRC about the use of an avoidance scheme, you should contact them.
You can settle your tax affairs if you don’t have a HMRC contact and you’re in a tax avoidance scheme and want to leave.
Get more information
Find out more about:
- how to identify tax avoidance schemes
- settling your tax affairs if you’ve used disguised remuneration