Reply to: Trust Fees for settling loans

[Ex Contractor]

If you have an HMRC statement that they expect the trust to be "closed down", you have something that we have never seen. I really don't know how HMRC can ask for something that they cannot enforce.

It's a nonsense to say you have to do this to avoid the loan charge. If you have settled you have already avoided that charge.

I thought as the loan was technically still outstanding that the loan charge would apply.

I know I've settled, but it would not surprise me if they tried to charge me twice. This is pretty much what they're doing with s223. I didn't quite understand it in my previous posts, but what they want me to do is repay the company £170k (the PAYE part of the EBT) which will trigger a corporation tax bill of £32k OR I can add £170k to my salary for 2019 and suffer PAYE/NI. The first option is the cheapest, but it's another big tax hit.

ETA: My tax advisors just sent this through.

It is our recommendation that, following settlement with HMRC, the debts be written off and the trust wound up, to offer finality on the matter – as discretionary trusts, if the debts are not written off these remain as an asset of the trust and the trust will be subject to 10 year anniversary IHT charges. Furthermore, while the trusts remain in existence, they may incur future costs depending on any changes in tax legislation.

HMRC’s settlement agreements also usually include a clause which requires the trusts to be wound up within a specified time frame.

[webberg]

Thanks for the reply.

I've settled with HMRC and IHT was included (almost £10k). They said that they would expect the trust to be closed down and the loan written off within 3 months of settling.

I thought I had to do this to avoid the loan charge. Is that correct?

If you have an HMRC statement that they expect the trust to be "closed down", you have something that we have never seen. I really don't know how HMRC can ask for something that they cannot enforce.

It's a nonsense to say you have to do this to avoid the loan charge. If you have settled you have already avoided that charge.

[Ex Contractor]

Thanks for the reply.

I've settled with HMRC and IHT was included (almost £10k). They said that they would expect the trust to be closed down and the loan written off within 3 months of settling.

I thought I had to do this to avoid the loan charge. Is that correct?

[webberg]

I've just received my quote for closing my trust - £5,340 inc VAT !!

When I setup this EBT 10 years ago I specifically asked if there would be any further charges from the trustees. Twice I asked the question and twice they said no, as the fees were more than enough to pay the trustees for the lifetime of the loan.

This is a breakdown of the quote.

Trustee fee £3,000.00 + VAT
Solicitors fee £450.00 + VAT
FATCA fee £1,000.00 + VAT (Not sure why this was added, I have no foreign financial affairs)

Having settled, HMRC say I have about 6 weeks left to close the trust. I feel like I'm being extorted, how can I challenge this?

HMRC cannot force you to close the trust so why do it?

If you do not close the trust or have the loan written off, then you pay no IHT in the settlement and HMRC claim that you may owe this is in the future.

Is that claim correct?

Nobody knows.

There will be those here who say it is 100% correct and those who will claim it si 100% incorrect.

You have to take some advice and measure it against the fee you are being asked to pay.

I might also observe that a non UK entity charging VAT might be a bit odd?

[Ex Contractor]

I've just received my quote for closing my trust - £5,340 inc VAT !!

When I setup this EBT 10 years ago I specifically asked if there would be any further charges from the trustees. Twice I asked the question and twice they said no, as the fees were more than enough to pay the trustees for the lifetime of the loan.

This is a breakdown of the quote.

Trustee fee £3,000.00 + VAT
Solicitors fee £450.00 + VAT
FATCA fee £1,000.00 + VAT (Not sure why this was added, I have no foreign financial affairs)

Having settled, HMRC say I have about 6 weeks left to close the trust. I feel like I'm being extorted, how can I challenge this?

[RickG]

When you later pay the tax.

Thank you very much for taking the time to look at this and answer my questions.

[Iliketax]

So under what circumstance would s554Z11B allow double taxation relief where the earlier liability has not been paid?

When you later pay the tax.

[RickG]

No.

Looking at things from a big picture perspective, there are two sections that give double tax relief:

a. You've already paid tax on what is really the same amount before the second event: s554Z5

b. You pay tax on or after the second event on what is really the same amount: s554Z11C

As rules apply depending whether the tax is paid before / after the second event, both cannot apply at the same time. The bit you have highlighted in s554Z11B just tests when the tax is paid in relation to the date of the second event. If does set out all of the condition for double tax relief.

So under what circumstance would s554Z11B allow double taxation relief where the earlier liability has not been paid?

[Iliketax]

Isn't S554Z11B saying the exact opposite of this, though?

No.

Looking at things from a big picture perspective, there are two sections that give double tax relief:

a. You've already paid tax on what is really the same amount before the second event: s554Z5

b. You pay tax on or after the second event on what is really the same amount: s554Z11C

As rules apply depending whether the tax is paid before / after the second event, both cannot apply at the same time. The bit you have highlighted in s554Z11B just tests when the tax is paid in relation to the date of the second event. If does set out all of the condition for double tax relief.

[RickG]

No.

If that is right (which it's not) what are the terms that HMRC have agreed? The fact that HMRC cannot get the cash because the company is insolvent and has now disappeared is different from agreeing terms. For there to be an agreement, you'd need to look at contract law (e.g. consent, consideration, etc).

That makes sense, thank you for clarifying that.

Referring to your original reply:

With s554Z11B and s55Z11C, s554Z11C(2) requires that an amount "is paid". So the fact that tax is due (or is due and a reg 80 determination has been raised) is neither here nor there. Once the reg 80 is paid (or the individual pays the tax) then the amount "is paid" and double tax relief is available.

Isn't S554Z11B saying the exact opposite of this, though?

Whereas Section 554Z5 deals with paid liabilities or those which have not become due and payable, Section 554Z11B requires that the earlier tax liability has become due and payable and is either wholly or partly unpaid at the time the relevant step is taken. Also the person liable for the tax will have not agreed terms with HMRC for the discharge of the liability.

[RickG]

Deleted

[Iliketax]

Thank you for that comprehensive reply. Just one question:

(ii) the person liable for the earlier tax liability has agreed terms with an officer of Revenue and Customs for the discharge of that liability.

Is this condition not met in a liquidation, because implicitly the reg 80 due has been discharged by way of the liquidator deeming the tax liability cannot be paid?

Isn't this the whole point of a liquidation - that the debt is included in the final report because it cannot be paid?

Edit - and to add, in case it lends any more weight. Hmrc have allowed the liquidation to complete, accepting the liability cannot be paid. Ie. The company is allowed to dissolve?

No.

If that is right (which it's not) what are the terms that HMRC have agreed? The fact that HMRC cannot get the cash because the company is insolvent and has now disappeared is different from agreeing terms. For there to be an agreement, you'd need to look at contract law (e.g. consent, consideration, etc).

[RickG]

Thank you for that comprehensive reply. Just one question:

(ii) the person liable for the earlier tax liability has agreed terms with an officer of Revenue and Customs for the discharge of that liability.

Is this condition not met in a liquidation, because implicitly the reg 80 due has been discharged by way of the liquidator deeming the tax liability cannot be paid?

Isn't this the whole point of a liquidation - that the debt is included in the final report because it cannot be paid?

Edit - and to add, in case it lends any more weight. Hmrc have allowed the liquidation to complete, accepting the liability cannot be paid. Ie. The company is allowed to dissolve?

[Iliketax]

Thank you for the above - very insightful reading. I have a specific question which I'm hoping you can help with.

Where a company has undergone an insolvency, and a Reg 80 determination has been made on the tax due, which has been included in the liquidation, does S554Z5 or S554Z11B allow the amounts which would have been due by the company (but not paid) to be used to be offset against the Loan Charge, due to double taxation rules?

Short answer: No, the tax must have actually been paid (or HMRC must have actually given time to pay). Which makes sense as the rules are designed to stop two lots of tax actually being paid on what is really the same amount.

Longer answer: For double tax relief to be available under s554Z5 a number of conditions need to be satisfied. These include the requirement that either the "payment condition" or the "liability condition" is met:

(3) Where either the payment condition or the liability condition is met, the value of the relevant step is reduced (but not below nil) by an amount equal to so much of the sum of money, or (as the case may be) the value of so much of the asset, as is within the overlap.

These two conditions are:

(4) The payment condition is that, at the time the relevant step is taken—

(a) the earlier tax liability has become due and payable, and

(b) either—

(i) it has been paid in full, or

(ii) the person liable for the earlier tax liability has agreed terms with an officer of Revenue and Customs for the discharge of that liability.

(5) The liability condition is that, at the time the relevant step is taken, the earlier tax liability is not yet due and payable.

If a reg 80 determination has been raised then the tax has already become due and payable (because it is the employer not paying the PAYE that is due that causes the reg 80 determination to be raised). So the liability condition is not satisfied.

So as the tax is still outstanding (and assuming there is no "time to pay" agreed with HMRC) then the tax must have been "paid in full". That won't have happened (unless the liquidator has actually paid the PAYE by 5 April 2019) and the the payment condition is not satisfied.

For completeness:

a. there are no deeming rules that the PAYE is treated as having been actually paid for the disguised remuneration legislation, and

b. HMRC accepts that the PAYE on the April 2019 charge is not an expense of the liquidation (so the liquidator does not have to pay it out of their own pocket, just out of the assets of the company like any other creditor of the company).

With s554Z11B and s55Z11C, s554Z11C(2) requires that an amount "is paid". So the fact that tax is due (or is due and a reg 80 determination has been raised) is neither here nor there. Once the reg 80 is paid (or the individual pays the tax) then the amount "is paid" and double tax relief is available.

In relation to the HMRC guidance you linked to, I've highlighted some bits that focus on the actual payment of the tax.

Example: Reg 80 paid in full
An employer placed £100 into an Employee Benefit Trust (EBT) in September 2010 for the benefit of one of its directors. This was subject to an earnings charge under Section 62 ITEPA 2003. This is sum Q. A Reg 80 determination was raised on the employer in January 2012 and was paid in full.

Section 554Z11C gives relief by treating the payment of that liability as a payment on account of the other. The single payment will frank both charges to tax to the extent that they arise from the same amount of income.

The start point for any such calculation has to be to identify which charge is being paid by the taxpayer. If the earlier tax liability is being paid, it is necessary to consider how much of that liability relates to the income included in the later charge on the relevant step. If the relevant step charge is being paid, it is necessary to consider how much of the income included in that charge relates to the earlier tax liability..

[RickG]

Yes



I've mentioned s554Z5 a number of times, but you've declined to explain why you think it does not apply. That's obviously your choice.

But for people who want to play along at home (or with their own tax adviser), let's pretend:

<snip>

If you want to read more about this on the forum, google "site:forums.contractoruk.com/ s554z5"

Thank you for the above - very insightful reading. I have a specific question which I'm hoping you can help with.

Where a company has undergone an insolvency, and a Reg 80 determination has been made on the tax due, which has been included in the liquidation, does S554Z5 or S554Z11B allow the amounts which would have been due by the company (but not paid) to be used to be offset against the Loan Charge, due to double taxation rules?

Reading: Tackling disguised remuneration: draft guidance for changes to Part 7A - GOV.UK

It seems it is possible:

Example: Reg 80 paid in full
An employer placed £100 into an Employee Benefit Trust (EBT) in September 2010 for the benefit of one of its directors. This was subject to an earnings charge under Section 62 ITEPA 2003. This is sum Q. A Reg 80 determination was raised on the employer in January 2012 and was paid in full.

The funds were left in the EBT until October 2017 when the trustees of the EBT made a loan of £100 to the employee which was chargeable as a relevant step under Pt 7A. This is sum P.

The Pt 7A step is taken on the same amount of money as was originally settled in the EBT. The loan (sum P) therefore fully overlaps with the amount of money which was the subject of the earlier tax liability (sum Q). The value of the relevant step is therefore reduced by the amount of the overlap. This reduces the value of the step from £100 to £0.

The earlier tax liability does not have to be an earnings charge under Section 62. The overlap can be between two relevant steps, provided that the tax due on the earlier relevant step has become due and payable and has been paid or has been the subject of an agreement for the discharge of the liability.

Section 554Z11B – Earlier Tax Liability Due but Unpaid – Identification of Sums or Assets P and Q
ITEPA 2003 – Sections 554Z11B
As noted in the previous paragraph Section 554Z11B details the circumstances which need to apply for relief to be given.

Whereas Section 554Z5 deals with paid liabilities or those which have not become due and payable, Section 554Z11B requires that the earlier tax liability has become due and payable and is either wholly or partly unpaid at the time the relevant step is taken. Also the person liable for the tax will have not agreed terms with HMRC for the discharge of the liability.

The charge to tax on the relevant step is again described as being on sum of money or asset “P”. The earlier tax liability is on sum or asset “Q”. It needs to be reasonable to conclude that P and Q are the same sum of money or asset or that P directly or indirectly represents Q. Both charges to tax are effectively on the same income.

It may be that capital growth has been added to sum Q before the relevant step on sum P is taken. Due to Section 554Z11B(4), the provisions detailed in Section 554Z5 – other provisions in relation to the identification of the overlap between P and Q also apply where an amount of growth is included in a relevant step.

Example 1:
2008 to 2009 - Contribution to EBT £100,000 – Sum Q – charged under s62 – £40,000 2014 to 2015 – Loan made £50,000 – Sum P – charged under Pt 7A £20,000

The amount of the loan originates from the amount contributed to the EBT. It is therefore reasonable to conclude that the original contribution and the loan are the same sum of money.

Example 2:
2011 to 2012 – Loan made £100,000 – item charged under Pt 7A – £50,000
2012 to 2013 – Loan made £100,000 – item charged under Pt 7A – £50,000
2018 to 2019 – Loan charge £200,000 – item charged under loan charge provisions – £90,000

The 2011 to 2012 and 2012 to 2013 loans are still outstanding at 5 April 2019 so the FA 2017 loan charge provisions apply. It is reasonable to conclude that the 2018 to 2019 loan charge is on the same income as was charged under Pt 7A in the earlier years.

However, reading this article suggests it may not be, as the relief has been legislated out in the 2018 FB: http://www.qubictax.com/cmsfiles/qub...20Jennings.pdf

Double tax
Paragraph 4 also confirms that no overlap relief can be
claimed if any earlier event has not led to the tax being paid,
rather than simply being payable. This removes any argument
that could apply under the older definition of overlap relief in ITEPA 2003, s 554Z5 which allowed relief if tax was payable.
Relief can be claimed only if tax has been paid in full.
Legislation was also introduced (new s 554A5B introduced
by FA 2018, Sch 1 para 1) at the same time to put beyond doubt
that any earlier part of the transaction (such as the employer
contributing to a trust) that might be said to have been a
‘redirection of earnings’ per the Rangers judgment, will not
prevent tax being due under the loan charge rules unless it has
already been paid in full on the redirection of earnings. This
is important because the redirection argument was brought
up only recently in litigation and HMRC had not always raised
the requisite enquiry or assessment in time to backdate this
approach to older cases. This amendment, therefore, now
ensures the department is not shut out from applying the loan
charge rules if a taxpayer may have tried to argue they should
not be taxed twice.

But then this article contradicts the above and suggests it may still be possible: https://www.taxjournal.com/articles/...n-requirements

Sections 554Z11B–554Z11G mitigate against ‘double taxation’ if a relevant step is taken within the disguised remuneration (DR) rules, and there have been earlier unpaid DR or ‘re-directed earnings’ charges. These rules afford credit, for tax paid on that relevant step, against earlier tax charges (whether or not HMRC is in time to recover them), but only insofar as the amounts on which those earlier charges arose overlap with the amount on which the later charge arises. They are less generous than those (in ITEPA 2003 s 554Z5) which apply to relevant steps taken after settlement has been reached with HMRC or income tax on the earlier liability in respect of the same money or asset has been paid in full or is not yet payable.

I'd be interested to hear your thoughts on this specific scenario. Let me know if I've missed anything out.

Thanks.