Disguised remuneration: remuneration trusts used to reduce profits and disguise income (Spotlight 61)
Find out about tax avoidance schemes that use remuneration trusts to reduce profits and disguise income.
Spotlight 51 and Spotlight 56 warned about remuneration trust tax avoidance schemes and explained why these do not work. Despite this, promoters continue to market these types of schemes.
The tax tribunal has released 3 decisions about the remuneration trust tax avoidance scheme used by Marlborough DP Ltd, Strategic Branding Ltd, and CIA Insurance Services Ltd.
All 3 companies used the same avoidance scheme:
- read the full Marlborough DP Ltd decision on the British and Irish Legal Information Institute (BAILII) website
- read the full Strategic Branding Ltd decision on the BAILII website
- read the full CIA Insurance Services Ltd decision on the BAILII website
In all 3 cases the tribunal found that the remuneration trust scheme used by these companies is tax avoidance. HMRC’s view is that these types of schemes do not work and we will challenge anyone operating such arrangements and investigate the tax affairs of those who use a scheme.
The tribunal’s decisions
The tribunal agreed with HMRC in all 3 cases that the arrangements were designed to artificially reduce company profits and to disguise income of various individuals who held one or more positions of director, employee or shareholder.
In all of these cases, the tribunal decided that the money paid into the trust (trust contributions) and scheme fees (set at 10% of each contribution), were not allowable expenses so that the companies involved in the arrangements would need to pay additional Corporation Tax.
In the case of Marlborough DP Ltd, the tribunal decided that the trust contributions were distributions of the company’s profit, not expenses. Distributions are treated for tax purposes in the same way as dividends.
In the other 2 cases, the tribunal decided that both the trust contributions and scheme fees were not an allowable expense for tax purposes. In those 2 cases the tribunal also decided that loans paid to the individuals from the trust were a form of disguised remuneration on which Pay As You Earn (PAYE) Income Tax and National Insurance contributions were due.
Following the tribunal decisions, all 3 companies that used the scheme need to pay significantly more in taxes than if they had not entered into a remuneration trust tax avoidance scheme. This is in addition to the fees they paid to the promoter of the scheme.
What the tribunal’s decisions mean
The tribunal judges decided that:
- neither the trust contribution nor the fees incurred to buy the scheme were expenses that are allowable for tax purposes, resulting in each company being liable for additional Corporation Tax
- in Marlborough DP Ltd, the trust contribution was a distribution, which is taxed in the same manner as a dividend
- in Strategic Branding Ltd and CIA Insurance Services Ltd, each company should have operated PAYE and deducted Income Tax and National Insurance contributions on loans by the trust to their company directors or employees out of the money the company contributed to the trust
These decisions could change following further consideration of any appeals.
All 3 decisions were about Income Tax, National Insurance contributions and Corporation Tax issues arising from the scheme when it was used. Further tax charges, including the Loan Charge and Inheritance Tax, may also be due from the scheme users as a result of using the scheme.
What will happen if you use these arrangements
When a company uses this type of tax avoidance scheme, additional Corporation Tax may be due because the claimed expenses are not allowable. In addition, either the:
- company shareholders will need to pay Income Tax on the money their company contributed to the trust on the basis that it was a distribution
- company will need to operate PAYE, and deduct Income Tax and National Insurance contributions on any payments that are from, or connected with, an individual’s directorship or employment
The company, its shareholders, or directors may need to pay penalties on any underpaid tax resulting from careless or deliberate behaviour.
HMRC will take action against remuneration trust schemes using the full range of legislation. This will include HMRC considering, in appropriate cases, whether to issue follower notices and, if relevant, associated accelerated payment notices.
HMRC will use all the tools at its disposal including litigation where customers choose not to settle their scheme use with HMRC.
What this means for promoters
HMRC will pursue anyone who designs, promotes, sells or otherwise enables others to use tax avoidance schemes including schemes that use remuneration trusts.
HMRC will use its powers under the Promoters of tax avoidance schemes regime against those who promote tax avoidance schemes.
Scheme promoters should carefully consider the Disclosure of tax avoidance schemes (DOTAS) legislation to decide if the arrangements they are marketing should be declared to HMRC.
What to do if you’re using these or similar arrangements
If you’re worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place. Contact HMRC if you have any concerns.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
Anyone concerned about the schemes they are currently using should consider:
- getting independent professional tax advice
- speaking to one of the tax charities such as Tax Aid — find out more about the Tax Aid helpline on the Tax Aid website
Paying your tax
HMRC has set out terms on which anyone who has used a disguised remuneration scheme can settle their tax affairs. These are called the disguised remuneration settlement terms 2020. Any company, director, or employee who participated in this scheme can settle their tax position under these terms.
Anyone concerned about paying the tax they owe can ask to pay any settlement through instalment arrangements, where payments can be spread based on what they can afford.
These arrangements are:
- tailored to an individual’s personal circumstances
- based on what an individual can afford to pay
- not subject to any maximum time or income limit
By withdrawing from the arrangements and settling your tax affairs, you’ll:
- minimise interest and penalty charges (where they apply) on tax you should have paid
- avoid any costs of investigation and litigation
If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further. If you do not have an HMRC contact and want advice on how to settle your tax affairs then contact HMRC.
Get more information or report a scheme
Find out more about tax avoidance schemes and how to spot the signs of avoidance.
You can report tax avoidance arrangements, schemes and the person offering you them to HMRC by using our online form. You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC if you cannot use the online form.