A recent decision by the First-tier Tribunal has decided that contributions to, and subsequent loans from, a remuneration trust scheme were not ‘earnings’ or disguised remuneration.
This contrasted with HMRC’s position that the sums were earnings and accordingly no corporation tax reduction should be applied and rather the loans fell afoul of the disguised remuneration rules under Part 7A ITEPA.
Dr Thomas, a dentist, and sole shareholder and director of Marlborough DP Limited (‘MDPL’) implemented a scheme on the advice of (the now defunct) Baxendale Walker Solicitors and associated entities. The arrangements consisted of the following steps:
- A company was incorporated in Belize (‘MTL’). MTL’s sole shareholder and director was, again, Dr Thomas;
- A discretionary trust (‘the Trust’) was established by MDPL and a trustee based in Belize (‘the Trustee’) was appointed;
- MTL, pursuant to a delegation of powers and a fiduciary agreement, ultimately assumed the role of the Trustee’s nominee;
- Dr Thomas was appointed protector of the Trust;
- MDPL made contributions to the Trust (‘contributions’) and claimed a deduction for corporation tax purposes;
- MTL, in its role as the Trustee’s nominee elected to make loans to Dr Thomas (‘loans’) for an amount equal, or close to equal to, the contributions; and
- None of MDPL, MTL or Dr Thomas paid any tax on the contributions or loans.
HMRC had denied MDPL from claiming a corporation tax deduction for the contributions on the basis that they were wholly and exclusively incurred for the purposes of MDPL’s trade. They had also issued regulation 80 determinations on the basis that the contributions and loans were taxable as earnings or chargeable to tax under the disguised remuneration rules. As common with trust based schemes, HMRC attempted to rely on the Rangers case.
MDPL, however, asserted that the contributions/loans were not made as a reward for Dr Thomas’ services as a director of MDPL and the amounts were instead distributions linked to Dr Thomas’ 100% shareholding in MDPL.
The FTT determined that the contributions and loans were not earnings. The tribunal stated that it is evident from Rangers, and other case law, that sums could only constitute earnings if they were paid as remuneration or reward in return for a person’s services as an employee and simple payment pursuant to a trust arrangement was not enough.
In the absence of any significant evidence, such as contractual obligations, the FTT found it difficult to ascertain MDPL’s purpose behind the contributions and loans. Ultimately the FTT concluded that the sums were paid as a return on Dr Thomas’ shareholding in MDPL and not as reward for his role as a director. The tribunal pointed at the fact that the amounts paid to Dr Thomas were MDPL’s total profits (including work done by people other than Dr Thomas) and paid as and when profits were available and that there was credibility in Dr Thomas’ evidence that, in absence of the trust arrangements, the sums would have been extracted as dividends.
Disguised remuneration rules
Part 7A ITEPA 2003, amongst other conditions, states that if third party arrangements are used to provide for what is in substance a reward or recognition, in connection with the employee’s current, former, or future employment, then an income tax charge arises.
Although the Tribunal found that the arrangements consisted of relevant steps for the purpose of the disguised remuneration rules, it did not, for the same reasons above, find that the sums received by Dr Thomas were in connection with this employment. Therefore, the FTT considered that Part 7A did not apply to this transaction.
Corporation tax deduction
In light of the FTT’s decision on earnings and the disguised remuneration rules, the MDPL accepted that it was not entitled to a corporation tax deduction.
HMRC had argued that even if the Tribunal had found that the sums were earnings, the taxpayer would not have been entitled to a corporation tax deduction as they were not incurred wholly and exclusively for the purposes of MDPL’s trade.
The Tribunal, via a split decision, again found in favour of the taxpayer.
Although HMRC are likely to appeal the decision, the decision as it currently stands will no doubt be useful for those people who were involved in similar situations who will use the case to argue their position in disputes.
If you have been involved in a scheme similar to this, or a scheme were HMRC are attempting to apply Rangers, and you haven’t settled your position with HMRC, please contact us and we would be delighted to go through the options available to you.