We have over the last several months noticed an increase in HMRC Code of practice 9 (“COP9”) investigations following a recent reorganisation of HMRCs Fraud Investigation Service. COP9, is a serious civil investigation designed to encourage taxpayers to disclose their tax positions or face potential criminal investigation and prosecution. The increase in the number of COP9 investigations underscores HMRC’s commitment to tackling tax evasion and ensuring tax compliance in the UK.
In this Pannu Tax update, we explore HMRCs recently announced Remuneration Trust Settlement Opportunity (“RTSO”). If you have a client who has an outstanding remuneration trust arrangement, you should read this..
HMRCs RTSO offers clients who have implemented relevant arrangements an opportunity to settle outstanding enquiries and disputes on a basis which is likely to result in a lower settlement figure. The terms on offer are, in our view, far more generous than those previously offered by HMRC to other users of ‘disguised remuneration’ arrangements. Clients should, therefore, give serious consideration to the terms and whether now is the time to settle.
HMRCs deadline for all settlements to be completed by 31 July 2022 means that time is of the essence.
What is the RTSO?
The RTSO is available for clients who implemented arrangements that fall within the definition contained in HMRCs guidance. In essence, they are arrangements largely promoted by a well-known promoter and involve the use of an administrator or a personal management company incorporated within a trust structure to facilitate the scheme. In addition to companies, the RTSO is also available to self-employed individuals and partnerships who implemented similar arrangements. This update explores the issues for corporate structures as these are more common.
HMRC states that the terms on offer reflect, in their view, the likely outcomes that might reasonably be expected if the matters were litigated. This view is no doubt impacted by recent Tribunal and Court decisions relating to these arrangements (for example, see Strategic Branding Ltd [2022] TC 08348 & Marlborough DP Ltd v HMRC TC08246). In addition, HMRC seem to have been able to justify offering more generous terms (and reconciled the terms with their Litigation and Settlement Strategy) based on the view that there may be a fundamental flaw in the arrangements that means there was no valid transfer of funds to the trust.
What are the basic options on offer?
As mentioned above, the terms on offer under the RTSO offer clients far more flexibility than those previously or currently offered by HMRC for users of ‘disguised remuneration’ schemes. The potential for a more favourable outcome for clients than the usual insistence from HMRC to apply PAYE/NIC to all payments or loans received, means that for most clients the final settlement amount could be much lower than previously thought or advised.
The RTSO allows clients to pick one of three options (subject to confirmation that there is nothing in their fact pattern which excludes them from a specific option):
Option 1 – This option allows settlement on the basis that the amounts contributed to the RT (including promoter fees) is disallowed for CT purposes. The amount received by the director/shareholder (net of any fees paid) is debited to the loan account and so s455 CTA 2010 tax is due. In addition, income tax and Class 1A NIC will be due on any overdrawn loan balances under the normal benefit in kind rules for beneficial loans;
Option 2 – This allows for the amounts received by the director/shareholder to be taxed as a distribution. The amount expensed as deduction by the company in respect of the contribution to the trust is also disallowed for CT purposes (this includes all fees paid).
Option 3 – This option allows for the amounts received by the director/shareholder to be taxed as employment income in the tax year in which the payment was received and so subject to PAYE/NIC. The company’s position is undisturbed for the deductions already claimed as a contribution to the trust on the basis that they now represent employment earnings. Fees paid in respect of the arrangements are disallowed for CT purposes. If the PAYE is paid by the company on behalf of a director/shareholder and is not ‘made good’ then charges under s222 and s223 ITEPA 2003 can arise.
What are the main benefits for my client?
There are likely to be significant savings when compared, for example, to HMRCs 2020 Disguised Remuneration Settlement Terms currently on offer to most clients. The main points to note are:
- Unlike all previous HMRC settlement terms there will, in most cases, be no IHT payable under all three options on the basis that there was never a valid contribution to the trust;
- Close consideration needs to be given to the validity of HMRC enquiries and assessments on both the company and the individual as the settlement under Option 1 will only be based on ‘protected years.’ For some clients this could mean significant amounts falling out of charge. Settlement under options 2 & 3 will require consideration of whether the tax should be paid on a ‘voluntary restitution’ basis to avoid any subsequent claims from HMRC in respect of the Loan Charge provisions;
- Penalties will only be charged where there is an inaccuracy in a return, and this arose as a result of deliberate behaviour. This means that in most cases no penalties should be due and contrasts with our recent experience and prior to the announcement of the RTSO where HMRC officers were actively considering penalties on the basis of clients failing to take reasonable care.
In our view, the terms currently on offer allow clients significantly greater flexibility to settle their outstanding remuneration trust arrangements based on their specific circumstances. They also provide for the potential for a settlement which is far lower than might otherwise have been the case. As well as a potentially lower settlement outcome, clients will also benefit from the certainty and finality provided by settlement with HMRC in terms of any future litigation risk and closure of all open enquiries.
For clients worried about being able to fund a settlement with HMRC in the current climate, extended payment terms are on offer.
How can Pannu Tax help?
At Pannu Tax we have settled a large number of disguised remuneration arrangements over the years, including remuneration trusts, and we are currently engaged by a number of clients to conclude settlement under the RTSO.
We have a detailed understanding of HMRCs settlement principles and have relevant relationships within HMRC to ensure that our clients engage effectively and efficiently.
We help clients to understand their options and can model the likely settlement liabilities to enable them to make an informed decision on the way forward.
If you would like more information on these issues, please do not hesitate to get in touch. We are happy to have an initial discussion on a free and confidential basis.