HMRC has issued a new General Anti-Abuse Rule (GAAR) opinion on remuneration trusts: widely marketed arrangements which are used to avoid income tax, National Insurance Contributions (NICs) and corporation tax.
Under these schemes, companies enter agreements to contribute financially to offshore trusts, the terms of which prevent employees, such as directors, from benefiting. Beneficiaries of the trust can include those in the moneylending profession and those who contribute to the trust.
However, the director and the company in question then enter into an agreement to enable the director to benefit from the trust by paying in nominal sums. These small contributions enable the director to borrow considerably greater amounts from the fund.
Those involved claim that the act of contributing to the fund breaks the link between the director in question being an employee of the company (and therefore prevented from benefiting from the fund) and receiving the loan.
As a result, it is claimed that the arrangement does not trigger Part 7A of the Income Tax (Earning and Pensions) Act 2003. This legislation aims to counter the use of intermediaries, such as employee benefit trusts, to reward employees while avoiding income tax and NICs.
However, in the opinion of the GAAR panel, such schemes (if they are successful) constitute a clear exploitation of legislative loopholes. As a result, GAAR deems the arrangement to be abusive and to fail its double reasonableness test.
Those involved in such schemes are therefore being advised to seek specialist advice regarding their future options, with HMRC penalties for involvement including a 60 per cent penalty covering the tax lost. HMRC has urged anyone involved to withdraw from the arrangement and settle their tax affairs personally in order to minimise any penalties they may receive and to avoid the costs of litigation or investigation.
Author: Steven English
30.07.2020
