Out-Law News 2 min. read

HMRC provides scope to settle remuneration trust tax liabilities

Users of remuneration trust schemes have until 31 July this year to make proposals to HM Revenue and Customs (HMRC) in the UK of how they will settle tax liabilities arising under those schemes.

HMRC has provided the settlement opportunity after it concluded that remuneration trust schemes have a “fundamental flaw” in the way they are designed and do not deliver a ‘tax free’ remuneration arrangement.

It is the latest stage in HMRC’s fight against ‘disguised remuneration’ schemes, which are structured to remunerate employees or contractors via loans from a third party. Scheme providers argue that those arrangements mean the remuneration is not subject to pay-as-you-earn (PAYE) tax or national insurance contributions (NICs), even though the loans are unlikely to be repaid.

HMRC said: “HMRC is aware of a type of tax avoidance scheme which involves a particular type of trust, commonly known as ‘remuneration trusts’. These schemes claim that by making contributions to a remuneration trust, users can get a range of tax advantages. Remuneration trust schemes do not work to deliver the ‘tax free’ environment they say they do. In HMRC’s view the scheme design may have a fundamental flaw that means there is no valid transfer of funds to the trust.”

“If you’re using any tax avoidance schemes HMRC strongly advises you to withdraw from them and settle your tax affairs,” HMRC said.

HMRC has set out guidance to help users of remuneration trusts determine what tax they owe. There are different terms for settlement depending on the type of user – whether that is a company that uses remuneration trusts for directors or shareholders only or for all their employees, or a person who is self-employed, including partnerships.

While users of remuneration trust schemes can submit finalised settlement proposals and calculations up until 31 July 2022, HMRC has expressly said that it has the power to withdraw the settlement opportunity at any time and will exercise that power if a tax tribunal rules on a trust scheme in a way that would result in greater tax being paid than under the settlement opportunity.

Tax expert Josie Hills of Pinsent Masons said the settlement opportunity will sit alongside the 2020 disguised remuneration settlement opportunity that HMRC also provided and that therefore taxpayers will need to decide which opportunity provides them with the best settlement terms. She said the fact HMRC could remove the settlement opportunity for remuneration trusts unilaterally following tribunal proceedings could encourage taxpayers to react quickly to this new opportunity.

“HMRC has moved away from the use of settlement opportunities in recent years, no longer feeling the need to offer beneficial terms to those with undisclosed liabilities to come forward due to its ever-growing sources of information,” Hills said. “The introduction of this settlement opportunity highlights HMRC’s expectation that there is still a large amount of tax to collect in respect of remuneration trust schemes despite the previous disguised remuneration settlement opportunity introduced in 2020.”

“Whether this opportunity is beneficial for those with undisclosed liabilities will be dependent on their specific circumstances but it is worth seeking advice in case this opportunity could provide a lower liability, particularly as HMRC have protected their position by stating that the terms will be withdrawn if they are found to be beneficial,” she said.

According to HMRC’s guidance, settlement proposals must take into account any ‘protected liabilities’. That term covers liabilities that would arise in relation to a period with an open enquiry, which have already raised a discovery assessment, or where HMRC is in time to open a fresh enquiry or discovery assessment in respect of the liabilities.

HMRC has committed, however, not to pursue other disguised remuneration or loan charge arguments if taxpayers include tax liabilities that are not protected in their settlement terms. Hills said this is designed to incentivise taxpayers to include all their potential liabilities in their settlement proposals.

HMRC warned users that choose not to take advantage of the settlement opportunity that it will “continue to investigate and litigate users of remuneration trust avoidance schemes”.

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