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Strategic decision: remuneration trusts

/ 19 January 2022

Anthony Newgrosh

At best, a tax avoidance scheme works.  At second best, it doesn’t work, but you end up no worse off for having tried.  At worst, you end up far worse off than if you had never got involved.

Strategic Branding ([2021] UKFTT 0474 (TC)) fell within the third category.

The case concerned payments to a remuneration trust, of the sort popularised by the colourful Paul Baxendale-Walker.  The general idea behind these arrangements is that a company makes a payment of money to a trust.  That money finds its way, via an indirect route, to one or more directors in the form of a (non-taxable) loan – the timing (and even the fact) of the repayment of which is at best uncertain.  Meanwhile the company claims to be able to deduct the amount of the contribution in computing its taxable profit.

It’s fair to say that remuneration trusts have, like their creator, led an interesting life which has brightened the sometimes mundane world of taxation.  It was largely remuneration trusts that drove the Government to the lengths of enacting in 2011 the controversial and complex rules on ‘disguised remuneration’ in Part 7A of ITEPA; and also a remuneration trust that led to the ground-breaking Supreme Court decision in the Rangers case [2017] UKSC 45 showing that those same rules were to a large degree superfluous.

The main issues in remuneration trusts are, naturally, whether the company gets tax relief for the payment; and whether the person benefitting from the receipt of the money suffers tax on it (and if so, under what provision).

Last year, the First-tier Tribunal handed down its decision in Marlborough DP Ltd [2021] UKFTT 0304 (TC).  In that case a company had made the conventional payment to a remuneration trust and the money had duly found its way to the company’s sole shareholder and director, a Dr Thomas.  The company successfully argued that Dr Thomas was not liable to tax on the sum as employment income, either under the basic earnings code or under Part 7A, because the evidence supported the view that as a matter of fact the money had come to him not in his capacity as director or employee but as shareholder.  (Whether a charge could lie under the distributions legislation on an amount that was ostensibly a loan is an interesting question but was not before the Tribunal.)  The company accepted that in that case it was not entitled to deduct the contribution in computing its profits.

In Marlborough, the Tribunal went on to say that if it was wrong on that point, and Dr Thomas was taxable on the amount received as employment income, it would follow that the company’s purpose in laying out the money was to remunerate him; which was a trading purpose; so tax relief for the company would be available.

That seems a sensible conclusion.  But the Tribunal in Strategic Branding did not agree.

The basic facts in Strategic Branding were broadly similar to those in Marlborough (and indeed to the facts in many remuneration trust cases).  However, there was in Strategic Branding no argument advanced, and no evidence produced that the loans were distributions to the sole shareholder and director.  The Tribunal was ‘satisfied that on the facts there is a link between the payments and his employment.  There might have also been a causal connection with his shareholding, but (as noted above) I make no findings in relation thereto’.

Further, the Tribunal in Strategic Branding declined to follow the logic of Marlborough that if the amount was taxable as employment income in the hands of the individual, the cost of providing it was a tax-deductible expense for the company.  The Tribunal ‘concluded that Strategic Branding’s purposes were to benefit Mr Wilson’s family and to enable some of the money to [be] spent on building relationships with suppliers or increasing the profile of the company, and for this to be done in a manner in which the company could obtain a tax deduction for payments in circumstances where there was no taxable receipt for Mr Wilson. These are not payments which are wholly and exclusively for the purposes of Strategic Branding’s trade’.

Are Mr Wilson and Strategic Branding Ltd entitled to feel hard done by?  Perhaps.  But as a judge in the Court of Appeal said some 80 years ago, ‘It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers’.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Anthony Newgrosh

Partner, Head of Business Tax

T +44 (0)20 8922 9144
E anthony.newgrosh@bkl.co.uk

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