HMRC’s campaign against disguised remuneration schemes continues apace. One of the schemes under scrutiny, is the Krest strategy, originally promoted by Partners Tax plc and UHY Hacker Young.
What is the Krest strategy scheme?
The Krest scheme is a tax avoidance scheme administered through an Employee Benefit Trust, traditionally used as a popular way of financially incentivising (normally senior) employees. They have increasingly – and deliberately – been used as tax avoidance vehicles with the express intention of sidestepping income tax and national insurance.
Krest is one of several tax avoidance schemes that, having been ‘based upon advice from tax Counsel’ was given a cloak of respectability which no doubt encouraged participants in the scheme to believe that it was approved by HMRC. Unfortunately for them, that is not the case and HMRC has announced that users of the scheme will be subject to the Loan Charge.
How did Krest work?
As with many other similar schemes, the Krest Strategy was managed through an Employee Benefit Trust (EBT) set up in Jersey and administered by Jersey-based trustees. It involved the creation of two sub-funds from which employees and their families could benefit in the accounting year in which the EBT was created, and one from which they could benefit in the following accounting year.
A Deed of Variation commits the company to make specified payments (a percentage of the company’s gross profits) into the EBT and that money, in turn, is then made available to the employees via a loan facility. Via a convoluted arrangement, registered by a Deed of Covenant, the obligations of the company, the trustees, and the employees are managed in such a way so that employees are considered to have repaid their loan. However, the reality of the situation is that the employee has received money in the form of a loan which will never be repaid.
Loan Charge, settle or do nothing?
Scheme users, who provided HMRC with the necessary information by 5 April 2019, previously had until 30 September 2019 to settle or face the Loan Charge. However, on 11 September 2019, the Chancellor commissioned an independent review of the Loan Charge to consider its impact on disguised remunerations scheme users. For those who were discussing settlement, HMRC has agreed to “pause” discussions, until the conclusion of the review. Whilst the settlement discussions are paused, scheme users do not need to comply with the Loan Charge reporting requirements.
The Terms of Reference of the review specify that whilst the review is ongoing, the Loan Charge will remain in force, in line with current legislation. Therefore, scheme users who did not register for settlement should have completed an additional information return by 30 September.
The outcome of the review is expected to be in mid-November at which point the government will consider it and respond.
HMRC has warned that it will take firm action against scheme users who failed to complete an additional information return by 30 September 2019, or who provided HMRC with inaccurate information about their outstanding loans. This includes an initial penalty, daily penalties for every day after 1 October 2019 (up to 90 days), and further penalties for inaccuracies. If scheme users do not pay the Loan Charge, HMRC intends to use its enforcement powers by carrying out tax enquiries and formal requests for information which may result in the imposition of significant penalties.
How can we help?
We have already helped many clients negotiate a settlement with HMRC following an Accelerated Payment Notice (APN), adverse determinations, or enquiries, and ensured that they deal with the Loan Charge correctly.
However, on a wider note, if you think that you have been unfairly targeted by HMRC because you entered into one of these schemes in good faith believing that, having taken professional advice, it had HMRC’s approval, you may have a claim against your professional adviser if they failed to outline the inherent risks of a tax avoidance scheme such as Krest.
We have successfully pursued claims for compensation on behalf of a number of clients against their accountant, financial adviser, tax adviser or even their solicitor. These professional advisers owed a duty of care to provide honest and appropriate advice on the risks associated with tax avoidance. If you feel you were not adequately or appropriately advised, you may have a claim for professional negligence.