Remuneration trust avoidance scheme labelled high risk
HMRC has issued a warning regarding a tax avoidance scheme, which it says is often marketed as a wealth management strategy, and is used to disguise income and other taxable profits as loans or fiduciary receipts by using a remuneration trust
13 May 2019
The latest spotlight 51 notice from HMRC focuses on the scheme, which the tax authority says is used to provide remuneration or profits free of tax, and is different to the loan scheme used by contractors paid through trusts or umbrella companies, which was also subject to an earlier warning in spotlight 33.
This latest scheme is marketed at self-employed individuals, partnership partners, and a company or a company director. The user contributes to a remuneration trust, with trustees based offshore.
The remuneration trust is set up in a contrived manner and is claimed to provide benefits to individuals (beneficiaries), other than the scheme user.
The alleged beneficiaries are individuals employed in the trade or profession of lending money.
The trustees take no action to identify or reward the alleged beneficiaries, because the trust contributions are always intended to be used by the scheme user.
As part of the scheme arrangements a personal management company is set up and controlled either by the scheme user or connected party supporting the scheme.
The money contributed to the remuneration trust is actually paid - often minus the 10% scheme fee - to the personal management company. This allows the scheme user full access to the funds.
The scheme user accesses the contribution to the remuneration trust through unsecured loans or fiduciary receipts from the personal management company. It is claimed to be tax free and on terms not available from high street lenders.
Interest and capital repayments on the loans are rarely made. The receipts from the personal management company are often used by scheme users as living expenses. In some cases, the scheme user decides how the money is invested by the personal management company.
The scheme is marketed by firms offering wealth management strategies. HMRC understands that scheme users are told that they will always remain in control of the funds.
HMRC’s view is that the claims made by scheme promoters about the tax savings are not credible or genuine.
It warns individuals using this scheme may find that corporation tax, PAYE tax, National Insurance contributions and inheritance tax (IHT) are all chargeable for company and company director users.
In addition, deductions claimed by self-employed individuals and partnerships are not allowable expenses, and IHT is chargeable.
Individuals will also be charged interest on any tax paid after the statutory due date, and may face penalty charges.
HMRC is strongly advising anyone using this or similar schemes or arrangements to withdraw from it and settle their tax affairs.
HMRC is also considering if the general anti-abuse rule (GAAR) may apply to this scheme. Transactions after 14 September 2016, where the GAAR applies, will be subject to a 60% GAAR penalty.
Scheme users could also be charged a penalty for an inaccurate return. For transactions after 16 November 2017, they may be charged a penalty because of carelessness, unless they can show they took reasonable care.