UK and International Tax news
FTT Finds In Favour Of HMRC In Disguised Remuneration Case
Wednesday 8th May 2019
The FTT has recently found in favour of HMRC in a disguised remuneration avoidance case with potential tax recoveries of £40m.
In HMRC v Hyrax Resourcing Ltd and others [2019 UKFTT0175], the FTT considered an appeal by HMRC in relation to an application served under s.314A and s.306A FA2004 on the three respondents that, in HMRC’s view, they were promoters of certain arrangements which arose when person became employed by Hyrax. These were notifiable to HMRC under three prescribed descriptions being premium fee, standardised tax products and employment income provided through third parties.
The arrangements were similar to those of a contractor loan scheme previously known as K2/Lighthouse, and implemented in 2014/15. Under the arrangements, a director/contractor is employed by Hyrax Resourcing Limited as trustee of Hyrax Resourcing Trust. The services of that director/contractor are then sub-contracted to an end user being the entity wishing to engage the contractor/director. HRT invoices the end user for the services of their employee. HRT pays the employee a national minimum wage (‘NMW’) and gives him/her interest-free loans. The benefit of repayment of the loan is assigned to an offshore employer-financed retirement benefits scheme. The loans are, in reality, never expected to be repaid. The employee declares the wage for PAYE and NIC purposes. The interest free loan is declared as a beneficial loan on the employee’s tax return. The tax on the beneficial loan is far lower than if the loan was taxed as employment income.
The Tribunal Judge Mosedale had to consider the facts including lawful evidence, documentary evidence, witness evidence, and the law on disclosure of tax avoidance schemes and whether the arrangements were notifiable.
The Tribunal agreed with HMRC that the Hyrax arrangements were tax avoidance as defined in case law, that they ‘might be expected to enable any person to obtain a tax advantage’, and confirmed Hyrax was the scheme promoter under DOTAS rules. As such, Hyrax accepted applications from users, created employment contracts, signed service contracts, paid employees and transferred loan agreements to offshore trusts. Scheme users paid Hyrax 18% promoter fees to allow them to access the scheme.
There is no right of appeal against the Tribunal decision, although Hyrax can seek a judicial review.
There are various penalties for failing to disclose a scheme to HMRC depending on whether the person is a user or promoter. These can range up to £5,000 per employee/client, as well as daily penalties if the failure continues after initial penalties have been imposed.
If you would like more information on the above case, please contact Keith Rushen on 0207 486 2378.Contact Us