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Rotten teeth | AccountingWEB | Dentist's remuneration scheme rots at appeal
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Dentist’s disguised remuneration scheme rots at appeal

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A dental practice that entered into a disguised remuneration scheme has ended up in a worse tax condition after losing an appeal at the upper tribunal. Ray McCann drills into the details. 

2nd May 2024
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Occasionally a case comes along that looks straightforward, but which in the end gives rise to significant difficulties for tribunal judges and keeps those interested in how the tribunals handle tax schemes, busy for some time.

CIR and Marlborough DP Ltd [2024] UKUT 00098 (TCC) is such a case. The published judgment of the upper tribunal rewards careful study across a number of important issues only some of which are discussed here.

The dispute came before first tier tribunal in 2020 and even before judgment was given in 2021, few would have given the taxpayer any hope of bucking the trend of the failed tax avoidance schemes.

Rotten advice

The taxpayer, Marlborough DP Ltd, was a dental practice. Until around 2007 the practice had been run by Dr Thomas as a sole practitioner. Thomas was the only shareholder and director of the company.

For reasons really only known to himself he entered into a remuneration trust scheme (RTS) on the advice of Paul Baxendale Walker.

I am not sure that there is anyone who has left a larger trail of carnage in his wake than Baxendale Walker with pretty much every client being left to meet their fate once HMRC had became aware of his schemes.

That aside, here the scheme was intended to provide a corporation tax (CT) deduction for the contributions to the trust calculated to reduce the CT to nil whilst not resulting in a tax charge on Dr Thomas on loans made by the trust that in most cases were equal to the contributions.

On one level this looked exactly like the type of tax scheme that would collapse in the face of an HMRC challenge or that Part 7A Income Taxes (Earnings and Pensions) Act 2003 (disguised remuneration) was intended to catch.

Before the FTT there were three main issues: were the contributions to the RTS intended to reward Thomas as a director and thus taxable under the general earnings rule? Was the scheme caught by Part 7A? And finally, were the contributions deductible in computing the company’s profits?

Drilling into the detail

The FTT found no evidence that the contributions to the trust were intended to be a reward for Dr Thomas’s services and so they were not part of his general earnings or “disguised remuneration”.

So far as Part 7A was concerned, the FTT took the view that the tests were the same as for general earnings so Part 7A could not apply. The FTT concluded however that the rules on the taxation of company distributions were broad enough to catch the trust contributions so that a tax liability arose as though Dr Thomas had received a divided.

This final conclusion was enough to prevent the trust contributions being allowed in computing the CT profit although disagreement on this issue between the tribunal judges left whether the trust contributions should be allowed at all, undetermined.

At this stage Dr Thomas was left in a better position than he might have expected. On the plus side he would pay income tax, in effect, at dividend rates and there would be no NIC charged. On the negative he had lost the corporate tax deduction.

The arithmetically nimble can compute whether the lower income tax charge and no NIC more than offset the additional CT such that at this stage Dr Thomas was salvaging something from the scheme.

Weak grounds for appeal

If there was any sense of victory in Dr Thomas’ mind it was dispelled this year by the Upper Tribunal (UT). In their judgment, published in April 2024, they extensively addressed the three main issues from the original appeal and numerous other issues that arose in consequence.

The most important of these were the UT decision on the application of Part 7A and the question of whether the contributions to the trust could be allowed in computing the CT profit.

The irritation of the UT at HMRC’s seeming inability to properly articulate its grounds for appeal is clear and there is important advice in the judgement for anyone looking to explain their appeal grounds in similar circumstances.

Despite an HMRC challenge to the FTT’s decision on general earnings, the UT found that the FTT had correctly and in “meticulous detail” reviewed the relevant authorities and they upheld the earlier conclusion that what Dr Thomas received was not remuneration.

This part of the judgement is useful in dispelling some of the myths around what had, and had not been, decided in the Rangers case.

Hole-y and exclusively

On part 7A the UT took a different approach holding, contrary to the approach of the FTT, that the tests were not the same. “In connection with” in Part 7A was a broader test than “from employment” in S62 ITEPA 2003.

Understanding the reasoning here does take some careful study if one takes the view that Part 7A is there to tax amounts paid by intermediaries to employees that realistically would be emoluments of an employment, and it may be that Marlborough may feel that a further appeal is worthwhile on this point.

This conclusion opened up HMRC’s appeal on the deductibility issue that the UT decided was contingent upon the outcome of the general earnings and Part 7A issues and having decided that Part 7A did catch the arrangements, whether the trust contributions were disallowed as not wholly and exclusively for the purposes of the trade became a live issue.

The FTT had been split and would have allowed the deduction on a casting vote had they found in favour of HMRC on the general earnings or Part 7A issues. The UT concluded that the avoidance of tax purpose was so significant that the contributions were not wholly and exclusively expended for the purposes of the trade and there was no benefit to the trade from reducing its profit to nil.

This is a very important point, and we should expect to see HMRC increasingly disputing a CT deduction even where the trust contributions are effectively subject to PAYE and NIC.

Overall, this is a bad outcome for Dr Thomas. The scheme was typical of what we have seen from Baxendale Walker and Thomas was confronted during cross examination with the fact that the claimed purpose of the trust, on which the CT deduction relied, was a fiction.

The overall tax position is also much worse than had he not entered into scheme and there may be significant penalties on top. Few will sympathise with him.

Replies (9)

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By Justin Bryant
02nd May 2024 17:26

It wasn't all that rotten. If this had been done pre-P7A (as a lot were) all would have been fine (except possibly the CT deduction).

Indeed, this UT case looks like binding authority that Rangers does not apply to OMB EBTs (as these are distributions rather than salary - as found in Toone and other recent EBT cases). Although HMRC will not be happy about that, I doubt they will appeal and indeed I don't think they can appeal just because they would have preferred to win on s62 rather than P7A.

So this is generally a good result for such taxpayers in my view.

Thanks (1)
Replying to Justin Bryant:
Ray McCann
By Ray McCann
03rd May 2024 13:07

Justin, it was or verged on a fraud surely you can see that? It was done pre 7A, it would be within scope of the loan charge so anything but fine.

Thanks (9)
Replying to RayM55:
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By Justin Bryant
03rd May 2024 13:15

Eh? Pre-P7A EBTs are basically (thanks to MR) outwith the 2019 Loan Charge. There are numerous tax and company/insolvency cases that confirm that similar EBT tax planning is not tax evasion or fraud/shams e.g. Re Vining Sparks Ltd. See:
https://www.taxjournal.com/articles/p-d-allen-and-another-v-a-m-bernard-...

Thanks (0)
Replying to Justin Bryant:
Ray McCann
By Ray McCann
03rd May 2024 14:20

Not if they are under enquiry and only providing there was adequate disclosure and how can an admission that the purpose of the trust, upon which any claim to a CT deduction is based, is an “untruth” i.e. lie be adequate disclosure?

This like many such schemes I have looked at was, to repeat anything but fine and if you would have signed off on it at the time you really need to check your PII.

Thanks (9)
Replying to RayM55:
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By Justin Bryant
03rd May 2024 14:38

Admittedly the taxpayer in Marlborough was (counterintuitively) helped re the s62 issue by the fact there were various untruths in the implementation of the scheme, but see also Strategic Branding Ltd v HMRC [2021] UKFTT 0474 (TC) [205]-[206]:

"205. In the present case I am satisfied that the payment of contributions to the RT by Strategic Branding was intended to deliver payments to Mr Wilson in the form of loans from SMEL to Mr Wilson. I am 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.

206. However, it was common ground that the money was paid to Mr Wilson by SMEL by way of loan under the Finance Agreement; he therefore had an obligation to repay those loans. HMRC have not established that the loans were emoluments within s62(2) (or any other type of earnings). Accordingly, the amounts lent are not earnings from an employment under general principles."

Also, in CIA Insurance Services Ltd v HMRC [2022] UKFTT 00144 (TC), similar arrangements involving payments to remuneration trusts were held not be s62 earnings – see in particular [199]-[200]:

“199. I make findings on some of these matters in the context of Part 7A below. Whilst my conclusions on the facts are that there is a connection or link between the contributions to the Trust and the Shareholders’ employment by CIAISL (for the reasons explained below), I do not accept HMRC’s submission that the contributions are earnings on general principles.

200. As acknowledged by Mr Ghosh, earnings includes a connotation of a reward for services. In Forde & McHugh the Supreme Court focused on what was received by the employee in the context of a contingent rather than a vested interest in the fund. Here, all of the amounts paid to the Shareholders were paid to them under the Finance Agreements, pursuant to which they have an obligation to repay those amounts to MEL. Whilst the Shareholders control MEL, and they have not repaid those sums which are already due, HMRC have not argued that the Finance Agreements do not have legal effect in accordance with their terms, and accordingly I find that the Shareholders do have an obligation to repay the amounts lent to them. I am not satisfied that receiving such a loan is a reward or benefit, even though I have found that there is a connection with their employment. For this reason, I agree with Mr Venables that the contributions are not earnings on general principles.”

So the fact remains that these OMB EBT cases are actually less helpful than helpful to HMRC (albeit they may look a bit dodgy to you and DN).

Thanks (0)
Replying to Justin Bryant:
Ray McCann
By Ray McCann
03rd May 2024 15:52

All of that is completely irrelevant and as an avid follower of my every word you surely did not miss what I said at the time of Rangers, that the decision was not a silver bullet for HMRC to every EBT?

The fact remains that the purpose of the remuneration trust was a lie and on the basis of that lie they claimed a CT deduction. So to repeat, what is it you don’t get that allows you to think this was all fine pre-Part 7A?

Thanks (5)
Replying to RayM55:
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By Justin Bryant
03rd May 2024 16:49

Ray, ignoring the untruths in that particular case (that helped rather than hindered the taxpayer re s62), it's self-evident from the above cases I cite that pre-P7A OMB EBTs are basically fine (except possibly re CT as I acknowledged in my first comment above in case your avid reading missed that bit) and escape PAYE/NIC without being in any way tax fraud/evasion/shams etc.

Thanks (0)
Replying to Justin Bryant:
Ray McCann
By Ray McCann
04th May 2024 11:04

Ah Justin you continue to miss the point and ignore the point I put to you about sign off.

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By ColA
03rd May 2024 11:53

Clearly advice to polish this ruse scaled the wrong heights!

Thanks (3)