HMRC toughens position on use of offshore trusts to avoid tax

HMRC is cracking down on the use of disguised remuneration and contractor loans after winning two tax avoidance cases at the tax tribunal over use of offshore trusts to avoid tax and NICs

The decisions in Hyrax Resourcing Limited and Curzon Capital at the First Tier Tribunal (FTT) involved the use of disguised remuneration to avoid payment of income tax and national insurance contributions (NICs) through the use of offshore trusts.

HMRC has issued a spotlight notice 52 stressing that abuse of NICs will not be tolerated, particularly when funds are funnelled through offshore trusts and reiterated that this type of arrangement is notifiable under Disclosure of Tax Avoidance Schemes (DOTAS) legislation.

The FTT decided in both cases that the disguised remuneration arrangements being promoted were notifiable under DOTAS.

In both cases, the arrangements were designed to disguise income where income tax and NICs would be due. Scheme users were remunerated with amounts paid as loans which they ultimately owed to an offshore benefit trust.

In the spotlight, HMRC said: ‘The arrangements used in these cases are typical examples of disguised remuneration schemes that involve individuals receiving their earnings through a small taxable element and the remainder in the form of a loan.

‘They are contrived arrangements that pay scheme users their income in the form of loans, normally routed through an offshore trust in a low or no tax jurisdiction, with the only purpose being to avoid income tax and NICs.

‘The loans are provided on terms that mean they are not repaid in practice, and the amounts paid by way of a loan are no different to normal income and are - and have always been - taxable.

‘These disguised remuneration arrangements claimed to offer a much lower tax charge than if the scheme user had been paid all of their income as a salary.’

HMRC also warned that it would take swift action to curb use of such schemes, advising scheme users that following a DOTAS notification, participants in notified schemes would be sent an accelerated payment notice (APN) to bring into immediate charge the disputed tax and NICs.

The latest FTT decisions reinforce HMRC’s position on the loan charge, legislation which came into force from 5 April 2019 giving the tax authority powers to recover unpaid tax related to disputed disguised remuneration loan made since 6 April 1999. The measure has come in for fierce criticism due to its retrospective nature, with MPs lobbying the Chancellor to review the rules, without success.

HMRC guidance: Disclosure of Tax Avoidance Schemes: tax avoidance using offshore trusts (Spotlight 52), published 15 May 2019

Sara White

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