HMRC issues spotlight on tax avoidance using remuneration trusts

Previous HMRC “Spotlight” publications have issued warnings about disguised remuneration schemes that use remuneration trusts and replace income with loans or other forms of credit. HMRC have also previously stated that they were considering applying the General Anti-Abuse Rule (GAAR) to these schemes, and this latest spotlight details the GAAR panel opinion on one of these cases.

[The General Anti-Abuse Rule is legislation designed to counteract tax advantages from abusive tax arrangements which go beyond anything which could reasonably be argued as a reasonable course of action. HMRC may refer arrangements to the GAAR panel for a view as to whether or not they are abusive.]

The arrangements described in HMRC’s Spotlight 56 involve a company contributing to an offshore remuneration trust and subsequently claims the contribution as a deductible corporation tax expense. 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.

The arrangements claim that the loans are not connected with the director’s employment with the company, but instead they say they 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. The third part 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.

The GAAR Panel agreed with HMRC’s view that entering into and carrying out arrangements that use remuneration trusts and replace income with loans or other forms of credit 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.’

The panel also stated:

‘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’

‘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’.

In essence, HMRC’s Spotlight 56 is intended to inform people that they should not be using schemes involving remuneration trusts, and that they have always considered these to be tax avoidance. To further reinforce their position that such arrangements are tax avoidance, they have sought the opinion of the GAAR panel, who’s conclusions support HMRC’s view. This means that the panel have considered the facts put to them and concluded that such arrangements go beyond anything that could reasonably be argued to be a reasonable course of action – i.e. it is not reasonable behaviour to enter into such arrangements.

The Spotlight also confirms that HMRC will use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.

If you think you might be using such an arrangement, HMRC strongly advises you to withdraw from it and settle your tax affairs. If you do not have a contact at HMRC and you’re in a tax avoidance scheme and want to get out you can email:

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