Category Archives: HMRC

Why do we have to pay tax? Are we overtaxed?

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These questions always seem to arrive as a pair.

Paying tax

The requirement to pay income tax (if we focus on just one tax) is a combination of Income Tax Act 2007, section 4 and (for this year) Finance Act 2022, section 1.

HMRC are given their collection and management powers under Taxes Management Act 1970, section 1.

Links to the legislation are here:

https://www.legislation.gov.uk/ukpga/2007/3/section/4

https://www.legislation.gov.uk/ukpga/2022/3/enacted

https://www.legislation.gov.uk/ukpga/1970/9/section/1

Overtaxed?

You may think so. Even if you are taxed less than the equivalent incomes in many other countries.

Here is an excellent blog by Dan Neidle on this topic: https://www.taxpolicy.org.uk/2022/10/10/employee-tax-comparison/

Scope of the UK trusts register widened

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The trusts register first applied to UK trusts with a tax liability. This was widened in October 2020 by anti-money laundring regulations to include most other UK trusts created by individuals during lifetime or on death.

There is a list of trusts exempt from reporting, such as charities, pensions, co-ownership of land and some older very small trusts.

For others the reporting deadline is 1 September 2022 for existing trusts and 90 days for trusts created after that date.

Information gathering for old and fairly dormant trusts may take some time, so the process is best started as soon as possible. The data requirements include details of the settlor, trustees, main beneficiaries and initial trust assets.

For non-UK trusts, with no UK resident trustee, the requirement to register only applies when the trust has a UK tax liability or acquires UK land.

Once registered annual updates are required.

We can help you complete and update the trust register for a fixed fee.

Coronavirus Job Retention Scheme – “just a little bit of work” risk?

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Those with furloughed employees will have made claims from the Government under the Coronavirus Job Retention Scheme (“CJRS”). In doing so, they have ticked a declaration that it is correct and done in accordance with HMRC’s guidance.

CJRS has been implemented quickly, is generous and will save jobs and businesses. Employees will receive some pay and employers will receive state benefits to fund that pay. What might go wrong?

No work

Para 6.1(a) of the Treasury Direction says “An employee is a furloughed employee if…
the employee has been instructed by the employer to cease all work in relation to their employment”

HMRC’s guide says “The employee cannot do any work for the employer that has furloughed them.”

There is a relaxation of this for furloughed directors, due to their statutory duties, but not for staff.

Just a little bit of work?

If we ignore those who purposely abuse the scheme, are there some employers mistakenly not meeting the CJRS requirements? If so, are they exposed to refunding the furlough payments, penalties or even criminal charges (eg Fraud Act 2006 or Theft Act 1968)? Additionally, there may be consequences under the Criminal Finances Act 2017, for others who may have assisted in making the claim.

Are some taking the view that “just a little bit of work” is fine, “how will HMRC find out” or “surely HMRC are not going to attack a struggling business and put employees’ jobs at risk”?

HMRC will check

My general outlook to reduce risk is to assume HMRC know everything that you know, plus a little bit more!

But, more specifically, are there email trails, mobile phone records, social media posts, disgruntled employees, suppliers notes and third party evidence that will show that an employee has done some work? What if HMRC interviewed staff or customers? What if your accountant notices it and insists that you correct and reduce the claim?

Even if the risk of penalties and prosecution is thought to be low, would bad publicity affect the business? Would there be public sympathy or not? It is easy to see, in say 2023, political pressure to be seen to have policed the scheme robustly, including carrying out at least some prosecutions.

Casual risk messages

I have seen or heard phrases along the lines of “I’m furloughed at the moment but I’m just doing…XYZ”. If I hear such open public statements, fortunately not from any clients (yet!), it will be easy for HMRC to also see and hear these, to trigger or assist in an enquiry into CJRS.

Managing CJRS risk – a few tips

  1. Review the furlough letter agreed by the employee – does it state that no work is to be done?
  2. Is there an audit trail to show that no work is done?
  3. Does the employer and employee know that “no work” = no work?
  4. Is an “out of office” set and furloughed employee email accessed by, or diverted to, non-furoughed staff?*
  5. Is it clear that client or supplier enquiries to the employee are diverted to non-furloughed staff?
  6. Even if funds are tight, discuss the CJRS process and application with a specialist with knowledge of HMRC tax investigations (in writing this, I’ve spoken to Jon Preshaw, who can be contacted here and I also thank him for his very useful input).

*HMRC confirmed (although only by the webchat function) that a furloughed employee checking email, to forward on to an unfurloughed employee to action is fine, as long as it is not worked on by the furloughed employee. [items in green updated 30 April 2020]

Update June 2020: the draft legislation pushes known errors, not reported with 30** days, into the deliberate and concealed penalty category. This could result in a 100% penalty, in addition to the refund of CJRS support. For larger amounts, this could also trigger the “naming and shaming” rules. The ATT response to the draft legislation consultation is worth a read.

**Update July 2020: the 30 day rule has been extended to 90 days but the other provisions still apply (see clause 106 and sch 16 of the Finance Bill, which should receive Royal Assent in July).

5 April 2020 year end tax planning – in three minutes

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A quick checklist before 5 April (and before the 11 March Budget, where lots of things may change!)

  1. Maximise ISA savings
  2. Review pension contributions
  3. Consider pension tax breaks for your children (even minors)?
  4. Use your capital gains tax allowance
  5. Use your £2k dividend 0% tax band
  6. 30% income tax relief, using EIS/VCT investments?
  7. Review and note gift aid tax relief
  8. Pay any outstanding 31 January 2020 tax before the end of February, to avoid a penalty
  9. Check your PAYE coding notice and benefits package
  10. Will your tax on rental income rise, due to the interest restrictions?
  11. Use personal allowances of spouse, children and grandchildren
  12. Are you paying high marginal rates of tax?
  13. Business – extract cash in a tax efficient way (salary, loan, dividend, rent, pension?)
  14. Trusts – create new ones; distributions from existing ones; close down old ones; do you need to complete the trusts register and keep sufficient records?
  15. Inheritance tax – gifts, update will or letter of wishes, create lasting power of attorney
  16. Get a fixed fee quote for your 2020 tax return
  17. Are you a Scottish or Welsh taxpayer?
  18. Are any overseas assets or income taxed correctly in the UK and overseas?
  19. Have you set up your online personal tax account with HMRC?
  20. Do you have a tax payment on account to make on 31 July 2020?

These are prompts rather than fine detail – for further information please contact me.

More record keeping for trusts in 2020?

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Guidance on record keeping obligations as at 2019 can be found here: https://blackshawtax.com/2018/07/30/hmrc-guidance-on-trust-record-keeping/

The change

This is likely to change and become more onerous once the UK adopts the 5th EU anti-money laundering directive (“5thAML”). The number of trusts affected by this may increase tenfold to 2 million. It will include many dormant trusts simply holding land or other non-income producing assets that currently do not need to formally register. In many cases the trusts will not have cash resources to pay for professional help to complete the database requirements and trustees could face personal penalties for non-compliance.

One hope is that the HMRC trust register will be improved. The current version appears to have been programmed by someone who does not understand the concept of either a trust or a database!

Transparency

It may also lead to more transparency and information being available on trust asset ownership (which may be a good or bad thing, depending on ones views on privacy).

The use of trusts

As ever, it is worth remembering that trusts are a useful vehicle to protect assets, for example minors, vulnerable persons, plus inheritance tax and wills planning encouraged by the tax legislation.

Resources

The consultation can be found here: https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive

The EU directive can be found here: https://eur-lex.europa.eu/eli/dir/2018/843/oj

The ICAEW response to the consultation can be found here: https://www.icaew.com/-/media/corporate/files/technical/icaew-representations/2020/icaew-rep-04-20-fifth-money-laundering-directive-and-trust-registration-service.ashx

HMRC guidance on trust record keeping

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In July 2018, HMRC updated its guidance on trust record keeping. This is a mix of tax and anti-money laundering requirements.

Dormant trusts may not have to complete a tax return or trusts register but there are still record keeping obligations, such as under para 44 and 45 of the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

I recommend that all trusts have an annual trust meeting, asset review and simple accounts (even if just one page). Whenever I am asked to advise on a historic trust problems (eg missed IHT charge) a common theme is lack of annual meetings and accounts.

Here is the HMRC website link https://www.gov.uk/guidance/trust-record-keeping-for-tax-purposes

And a PDF version safari-30-jul-2018-at-1021.pdf

Trustee obligations and the HMRC Trusts Registration Service

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All trustees need to retain more information on the settlor, trustees and beneficiaries. In addition certain trusts need to disclose details to HMRC.

[updates highlighted in orange]

These notes quickly became out of date, as HMRC struggle to provide a suitable service and extend deadlines/update guidance. As at January 2018, the registration service remains awful (almost as if HMRC do not understand basics of both trusts and databases). For further details please contact me, check the STEP forum and HMRC helpsheet.

ATT have provided a good guide here: https://www.att.org.uk/sites/default/files/The%20Trust%20Registration%20Service%2029%20November%202017%20ATT%20Technical%20Briefing%20note.pdf

Penalties

STEP have provided a note on penalties, which can be found here.

HMRC Trusts Registration Service

There is a trust registration service for new and old trusts. Trustees can register now. Agents will be able to do so by the end of October 2017. It replaces the form 41G(Trust).

Update: there was a HMRC webinar on this topic on 10 August, one due on 8 September 2017 and 17 November 2017.

New obligations on trustees

The legislation is contained in the The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017, which came into force on 26 June 2017. This is part of the implementation of the EU Fourth Anti-Money Laundering Directive (4AML). A copy of the regulations can be found here.

Paragraphs 44 and 45 of the regulations are the key ones for trusts. The former requires trustees to keep written records of beneficial owners and provide those, if requested, when entering into business relationships or to law enforcement authorities. The latter requires HMRC to keep a register of certain trusts.

Which trusts need to register?

At the moment, it is just trusts with a UK tax consequence that need to register. The register is online only. It collects details of the settlor, trustees and beneficiaries. This includes date of birth, NI number (or address and passport number). It seems to require known discretionary beneficiaries to be logged, even if they have not (and may not) ever receive funds* from the trust. In some trusts, that could be a huge number of beneficiaries.

*Update: HMRC now appear to accept that that a beneficiary of an unnamed class (eg “the children of the settlor”) does not need to be provided until they receive funds.

The trigger for registration is “UK tax consequences*” which includes: income tax, capital gains tax, inheritance tax (eg 10 year or exit charge) and SDLT (eg buying land).

*Update: as noted on the STEP forum on 1 September 2017, this also includes stamp duty reserve tax, so looks like it includes the purchase of any shares.

The deadline for new trusts is extended to 5 January 2018.

For dormant trusts that have a taxable event, the event needs to be after 26 June 2017.

Agents will need to use a new Agent Services account, which does not appear to be part of the normal Government Gateway.

The register also collects details of the original trust assets but not additions or changes.

The HMRC software cannot handle all circumstances, in which case the online logging needs to be followed up by letter.

Future changes

There remain mismatches between the legislation and what HMRC require.

Penalties for not complying with the rules are separate from the usual tax penalties (eg failure to notify changeability) and part of the regulations, so much wider and severe.

It is possible that after the EU Fifth Anti-Money Laundering Directive (5AML), all trusts will need to register. Although cumbersome, that does make more sense from an AML point of view than just taxpaying trusts.

Actions

Obtain/update details on settlor, trustees and beneficiaries, both for the register or if any entity the trust enters into a business relationship with requests the information.

Worried about an EBT loan?

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The Finance Bill 2017 contains provisions enabling HMRC to tax outstanding EBT loans made since 6 April 1999 as if they were disguised pay.

The charge will not apply if the loan* is repaid before 5 April 2019 or has otherwise been fully taxed.

Update: in my view this means the legislation is not retrospective (unless the taxpayer knows it was a “pretend” loan, ie low or untaxed remuneration, rather than a real loan).

Those affected should take advice. That advice should be independent from that given by the scheme promoter or adviser who introduced them into the planning. There is a settlement opportunity available with HMRC and it can be possible to arrange time to pay agreements for the tax.

A bigger problem?

Some will struggle to pay the tax but is there a potentially bigger problem: what if the EBT trustees call in the loan for repayment?

In either case you may also need to take advice from an insolvency practitioner.

Also keep an eye on the leading tax case in this area, relating to Rangers FC https://www.supremecourt.uk/cases/uksc-2016-0073.html

Win or lose*, existing loans that remain unpaid will be taxable one way or another.

*update: the taxpayer lost

QNUPS – for pension or tax purposes?

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Having posted a slightly negative view of FICs in the last blog, it is a natural step to also do something similar for another fairly common structure with apparent tax savings, QNUPS.

Tax objective or pension?

QNUPS are Qualifying Non-UK Pension Schemes. The main selling point is the possibility of IHT exemption and a tax deferral of income and gains. These benefits feel vulnerable to HMRC attack or legislative change.

If the desire is wholly or mainly to have a top up pension scheme (in addition to a fully funded normal UK pension), the concept may work. But, the more that tax is the driver, the risk of unexpected tax charges increase.

Legislation

The rules are rather thin, being mainly one paragraph of IHT legislation and a Statutory Instrument. These were introduced to amend a tax anomaly with another type of offshore pension (QROPS). The idea of a QNUPS is to piggy back on another country’s pension rules applying to its residents, subject to certain qualifying criteria.

As complex structures, advisers and offshore companies like them, as they generate relatively high or recurring fees.

What could go wrong?

  • The income and gains of a QNUPS may be taxable on the person funding it, under the UK anti-avoidance rules, although these rules have been relaxed recently, to be more proportionate in line with EU law
  • HMRC may argue that the IHT breaks do not apply
  • The press may see it, rightly or wrongly, as the next tax scam
  • Targeted legislation may be introduced to negate the tax advantages, possibly with retroactive effect
  • QNUPS may be difficult to unwind, if attacked by the tax system, as they are long term pension-like structures
  • The structure might not fully meet the requirements to be a valid pension in the other country (some countries have adapted their rules to make QNUPS attractive to UK residents – but is that enough?)
  • Even if it works, you may face the costs and uncertainty of defending it from HMRC attack

Safeguards

To safeguard against these, you should involve a pensions adviser as well as a tax adviser and I suggest taking a specific opinion from Tax Counsel, based on your own circumstances, to fully explore the risk areas.

A general opinion from Counsel may not be enough – that will be addressed to the those selling the idea to you (check that you also read the instructions to see what was asked). It may not cover downsides or specifics (eg it may say “if entered into as a pension scheme” but that doesn’t mean that you are entering into it as a pension scheme). Ensure that you ask for a review of possible downsides.

Also assume that a tax challenge will take place – does all the evidence genuinely point in the right direction? Who is responsible if ultimately tax is charged? An “audit” of the live paperwork by a tax investigation specialist may be useful to stress test the structure, advice, file notes and email trail in anticipation of a HMRC enquiry.

HMRC consultation

There is an impression that HMRC and the Treasury do not like QNUPS. There was a hint that a consultation would take place, with draft tax changes, but nothing has appeared. It would have to fit within EU law, which may limit what could be done, although a possible Brexit impacts on that, of course.

Overall, tread carefully when considering QNUPS, if the reason is any wider than “I wish to have an additional pension fund”.