Disguised remuneration: tax avoidance by owner managed companies using remuneration trusts (Spotlight 56)
Find out about the independent General Anti-Abuse Rule (GAAR) Advisory Panel opinion on a tax avoidance arrangement that rewarded a director through a remuneration trust.
HMRC have already issued warnings about disguised remuneration schemes, particularly about arrangements that use remuneration trusts and replace income with loans and other forms of credit.
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Spotlight 51 said that HMRC were considering applying the General Anti-Abuse Rule (GAAR) to these types of remuneration trust schemes.
The GAAR Panel has now given its opinion on one of these cases where a company rewarded its director using loans made through a remuneration trust. The company claimed a tax deduction for its contributions to the trust and both the company and its director claimed that the loans were tax free.
HMRC views these arrangements as tax avoidance. HMRC will challenge anyone operating such arrangements and investigate the tax affairs of all users.
What the GAAR Panel have said
The Panel agreed with HMRC’s view that entering into and carrying out these arrangements was not a reasonable course of action.
The Panel stated that:
‘In our view, the arrangements as a whole are contrived and abnormal and appear to us to serve no purpose other than to avoid tax.’
‘There has been a naked attempt to break the connection between the loans to the individual and their activities as a director of the company which have generated the economic value’
The Panel also stated that:
‘We cannot believe that Parliament intended loans to a person from a trust made out of funds deriving from economic value earned by that person’s activities as a director to escape Part 7A’.
To find out more information about the rules that apply to an income tax charge to employment income provided through third party arrangements such as remuneration trusts, read Part 7A of the Income Tax (Earnings and Pensions) Act 2003.
The GAAR Panel also said that they had already given opinions on some similar cases previously, where a director or shareholder sought to avoid tax on amounts received from their company.
The Panel agreed with HMRC in all these cases that the arrangements were not a reasonable course of action or in line with employment income tax rules.
Read Spotlight 46 to find out what the GAAR Panel opinions mean.
How these arrangements are claimed to work
Under the arrangements, a company contributes to an offshore remuneration trust and claims the contribution as a deductible Corporation Tax expense.
The trust deed may have various beneficiaries such as:
- third parties that have a commercial relationship with the company making the contributions
- providers of finance to the trust
- someone appointed to act for the trust
The director of the contributing company makes very small loans to the trust, or to someone appointed by the trust. The contributions received by the trust are not used to provide benefits to anyone other than the director of the contributing company through loans made to them on uncommercial terms.
It is claimed that the loans are not connected with the director’s employment with the company. Instead they may say they receive the loans because, as a provider of finance, they qualify as a beneficiary of the trust.
As part of the arrangements a personal management company is set up and controlled by a third party supporting the arrangements or in some cases controlled by the contributing company or its director.
The third party extracts the scheme fee, then transfers the remaining money to the director of the contributing company. Money received by the director is claimed to be a tax-free loan.
What will happen if you use these arrangements
HMRC may issue you with a counteraction notice under the GAAR, without going back to the Panel for a new opinion if:
- you have used these or very similar arrangements to those considered by the GAAR Panel
- the arrangements were entered into on or after 17 July 2013
You may also receive an accelerated payment notice (APN) if you receive a GAAR counteraction notice. This means you will have to pay the disputed tax upfront while HMRC continues its investigations. There is no right of appeal against an APN, but taxpayers can make representations.
Arrangements entered into on or after 15 September 2016 may also be subject to a 60% penalty where the GAAR applies.
What this means for promoters
HMRC will consider taking action against promoters of arrangements which in the GAAR Panel’s opinion are unreasonable. HMRC will also pursue anyone who promotes or enables tax avoidance.
HMRC will use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes. These powers include the right to impose significant conditions on how a promoter conducts its business.
This may also include using the enablers penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
The penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.
What to do if you’re using this arrangement
HMRC strongly advises you to withdraw from them and settle your tax affairs if:
- you’re using these arrangements or similar schemes
- you have used one in the past
If you do, you’ll:
- avoid the costs of investigation and litigation
- minimise interest and where they apply, penalty charges on the tax you should have paid
A charge on outstanding disguised remuneration loans (the 2019 loan charge) was introduced to deal with the use of these and similar avoidance schemes. The charge applies to loans made since 9 December 2010 if they were still outstanding on 5 April 2019. Find out how it affects you.
You may also be charged a penalty for an inaccurate return. This applies to tax returns that were was sent to HMRC on or after 16 November 2017, relating to a tax period that both:
- began on or after 6 April 2017
- ended after 15 November 2017
You may be charged a penalty because of carelessness, unless you can show us you took reasonable care.
If you’re already speaking to someone in HMRC about using an avoidance scheme you should contact them.
If you do not have a contact and you’re in a tax avoidance scheme and want to get out you can email: [email protected].
Get more information
Read the Panel’s full opinions about the company arrangement.
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