Tribunal case highlights the importance of record-keeping in residence cases

The decision in the First Tier Tribunal case J Charman v RCC was released on 20th December 2018. The case illustrates some of the complexities in assessing remuneration (including restricted shares and share options) before the introduction of the Statutory Residence Test, and the Internationally Mobile Employees rules. Many of the technical points are therefore only relevant where the position with HMRC in relation to years before 2013/14 is still not final.

However, the case does shed some light on HMRC’s approach, in particular the types of evidence which they put forward. We’ve therefore summarised the points of wider relevance in HMRC investigations.

Case Summary

John Charman was a well-known figure in the underwriting business in the City of London. In March 2001, he parted company with the ACE group, and went on to set up Axis Capital, a Bermuda-based reinsurance and insurance business. He submitted his tax returns on the basis that he had taken up full-time work abroad from October 2001 and ceased to be UK tax-resident from January 2003, and therefore certain remuneration paid to him was not subject to UK income tax.

Evidence considered in relation to residence position

The tax years in the case were before the introduction of the statutory residence test, which provides more precise definitions, whereas Mr Charman argued that he had taken up “full-time work abroad” in Bermuda from January 2003. However, it is interesting to see in the case the extent of HMRC’s fact-finding.

HMRC obtained witness statements, his Bermudan work permits, the statements for his American Express card (particularly in respect of meals at restaurants in the City of London), and his bank statements. They had a copy of his 2001 work diary, but he had lost his 2002 and 2003 diaries when he moved out of the family home on his divorce. They used this information to analyse his location at various times.

HMRC put forward in evidence a message sent in response to an email from the Inspector, by an employee of the London office, saying “Mr Charman is not in the office today. He is in Bermuda but is back in the office on Friday.”. HMRC argued that this employee was Mr Charman’s London PA and that the email showed that Axis London was treated as his office.

Mr Charman was a high-profile businessman, and hence HMRC knew that he had divorced in 2005 and brought evidence from his divorce proceedings. He left the family home for the last time, with some personal possessions including his Aston Martin, in November 2003. His Counsel argued that “he had decided that his marriage was over long before he told his wife in November 2003”.

HMRC had evidence that he had told his wife that he was working in Bermuda temporarily, which he said was to avoid precipitating the divorce. Mr Charman said that his personal diary for 2001 could not be relied on.

The new statutory residence test rules require careful record-keeping, and taxpayers should note that if HMRC decide to check the accuracy of such records, there is ever-increasing information in the public domain for them to use.

Discovery assessment where the discovery is “stale”

In 2010, HMRC issued a discovery assessment to charge income tax on Mr Charman’s bonus for 2003, received in 2003/04, a year where they contended that he was UK resident. He had made a return for the year, which did not include the bonus from his Bermudan employer, on the grounds that he was not UK resident, and HMRC had challenged this. The tribunal said that “HMRC had the information to make an assessment during the usual enquiry window but failed to even open an enquiry”. HMRC had made the discovery in 2006, but had not raised the discovery assessment until 2010, and the tribunal held that a discovery assessment could not properly be made at that time.


• The court held that he was UK tax resident in the years 2001/02 and 2002/03.
• They concluded that the discovery assessment for 2003/04 was invalid, although they considered that if it had been valid, he had been non-UK resident by February 2004.
• They concluded that where he had been UK tax resident at the time when a particular share option had vested, he was then subject to UK income tax in 2007/08 when that option was exercised.
• They concluded that he had been UK tax resident when the restricted shares were acquired and he was then subject to UK income tax in 2005/06 when the restrictions were lifted.

He therefore had tax to pay of nearly £12m, plus interest.

In our view, this case demonstrates the importance of the following practical points in relation to any relevant tests in the Statutory Residence Test;

• Maintaining reliable and detailed contemporaneous records.
• Storing those records safely, possibly with an advisor, family office etc.
• Reviewing these records, and in particular their consistency with other sources of evidence open to HMRC, in a thorough and critical way well in advance of any Tribunal

In 2006, Mr Charman apparently became “extremely irritated” and told his adviser to cease co-operating and communicating with HMRC. However, this may have led to higher costs to achieve what was ultimately an unsatisfactory but, arguably, reasonably predictable outcome.

Trident Tax are specialists in tax disputes and investigations and are well placed to advise on unresolved disputes with HMRC.

We advise clients regularly on residency issues, and provide practical advice on record-keeping, providing real-time reviews.

Many of you will have heard by now of HMRC’s Trust Registration Service (“TRS”). The TRS is anchored by the anti-money laundering provisions and requires certain trusts, both UK and overseas, to provide details to HMRC via the TRS. The TRS also replaces the old form 41g, which was used previously to notify HMRC of a new trust having been established and to enable trusts to be issued with a self-assessment taxpayer reference. Now that the TRS is into it’s second year (being 2018/19) we have a little more clarity about how it will work and the consequences for trustees if they are not fully compliant. This is all outlined below.

Who has to register under the TRS?

Well, broadly speaking trustees are only obliged to register under the TRS if the trust has a liability to UK tax. This encompasses income tax, capital gains tax, inheritance tax and stamp duty land tax and applies to UK “express trusts” and non-UK express trusts.

If, however, in any given year trustees do not have a liability, owing to claiming tax relief, then they do not have to register under the TRS. That being said, the scope of the TRS is expanding and express trusts (UK and non-UK), will need to register under the TRS regardless of whether or not they have a UK tax liability. This new law has been introduced by a new EU directive and the UK must implement the new TRS requirements by 10 March 2020.

Trusts that hold property will, like other trusts, only need to be registered if the trustees incur a liability to tax. Therefore, say the property is occupied by a beneficiary, but it is not income, then a requirement for registration will only exist when a taxable event occurs for IHT, CGT or SDLT purposes.

In line with the self-assessment filing deadlines, if the trust is already registered for self-assessment it will need to have completed the registration by 31 January after the end of the tax year in which the trustees have incurred a liability to UK tax. If the trust is not already registered for self-assessment in the UK, then it will need to have completed the trust registration by 5 October following the end of the tax year.

What is an express trust?

HM Treasury published a response to its consultation stating that “The term “express trust” should be taken to mean a trust that was deliberately created by a settlor expressly transferring property to a trustee for a valid purpose, as opposed to a statutory, resulting or constructive trust.” For the avoidance of doubt this also includes settlor interested trusts, even though the liability is that of the settlor in this instance, rather than the trust.

What information do you need to provide?

Trusts that are required to register must provide HMRC with details about the settlor, any trust protectors and beneficiaries. Some good news is that the scope of beneficiaries has been amended to only include beneficiaries and potential beneficiaries where they are named or receive financial benefit from the trust. Previously, all potential beneficiaries had to be identified so for example, if the beneficiaries included the settlor and their children all children current and future had to be identified under the TRS. This led to dispute from many, as trusts may be set up for children without their knowledge, for example.

When registering a trust, the following details must be included:

  • The name of the trust;
  • The trust address and telephone number;
  • The date the trust was established;
  • The country where the trust is resident;
  • Details of the trust assets, including addresses of properties, and an estimated market valuation of assets held at the date the assets were settled; and
  • Name, address, date of birth and National Insurance (or passport/ID number if no NI number) – of the settlor, trustees, the beneficiaries (or class of beneficiaries where individual beneficiaries have yet to be determined or identified) and any person exercising effective control over the trust, such as a protector or appointor.

The responsibility for registration of the trust lies solely with the trustees and if a trust is not registered within the specified deadlines, penalties will be charged. It is therefore crucial that trustees are up to date with their filing.

Penalties will not be issued automatically and will be reviewed on a case by case basis. If they are charged because trustees did not register or update the information of the trust, and cannot show HMRC that they took reasonable steps to do so, the penalties are:

  • £100 for registering up to 3 months after the deadline
  • £200 for registering between 3 to 6 months after the deadline
  • £300 or 5% of the total tax liability in the relevant year (whichever is higher) for registering more than 6 months after the deadline


If you have any queries about the trust registration service or would like us to assist you with the registration of a trust, then please contact us.


Outstanding loans provided through Disguised Remuneration arrangements became taxable employment income on 5 April 2019. This creates a particular problem for anybody who is currently trying to settle historic liabilities with HMRC that are connected with the planning.

The loan charge legislation includes provisions that require employers to report the loans for PAYE purposes. With the advent of real time reporting for PAYE, the loans should be returned to HMRC by 22 April 2019. This in turn will create a PAYE liability that will become collectable by HMRC’s Debt Management team. It is easy to see how these steps will cause mayhem for some employers looking to settle with HMRC, especially those hoping to agree an instalment arrangement with the historic liabilities being paid over a number of years.

HMRC has confirmed that those employers engaged in negotiations with HMRC are not required to report the loans as part of their PAYE responsibilities. This is good news.

HMRC’s decision is to be welcomed since it will remove an unnecessary complication and additional stress for those looking to settle. It would have been far better had HMRC not waited until 15 April 2019 before publishing its guidance; after the loan charge liability crystallized but thankfully before any PAYE reporting failures occurred.

Who qualifies for this treatment?

The exemption from reporting the loans for PAYE is only available to those who have already engaged with HMRC to reach a settlement. The guidance stipulates that an employer must have;

  • contacted HMRC to settle the tax and duties for a disguised remuneration tax avoidance scheme
  • has provided HMRC with all the information needed by 5 April 2019
  • continues to engage with HMRC, and
  • replies to correspondence by any dates set by HMRC

This means that any employer that has previously participated in a disguised remuneration arrangement is now required to report any outstanding loans unless they have already opened negotiations and provided the relevant information to HMRC. The option is not open to ask HMRC to settle historic liabilities now in order to avoid reporting outstanding loans for PAYE and it is not an amnesty from the 2019 loan charge.

Who is affected by the loan charge?

There are many such loans in existence that were created through tax planning that involved Employee Benefit Trusts type arrangements or contractors who were engaged through intermediate companies that provided loans as part of their remuneration arrangements.

Beware false promises

A final note of caution. The 2019 loan charge is applied to loans that have not been repaid. The legislation is very precise on what this means and essentially requires a loan to have been repaid with money. We are aware of planning that was offered to eliminate loans by various steps of devaluing, selling on or writing off loans. It is highly unlikely that these arrangements prevent the 2019 loan charge. Anybody who had a loan that has since ceased to exist but did not repay it with money will have an unresolved tax problem that needs to be addressed.

The introduction of the UK Trust Register has given rise to some interesting and worrying conversations for offshore pension providers. The Trust Registration guidance makes it clear that HMRC is not looking to include pension schemes within the registration rules despite almost all pension schemes being “express” trusts per the legislation. However, the exclusion is only for UK registered pension schemes. What about non-UK resident pension schemes with UK investment assets? Quite simply, they are trusts and are within the rules.

This gives rise to a further question: if a non-UK pension scheme that is not a registered pension scheme under the HMRC definition holds UK investments, is it liable to UK income tax? The answer is “maybe” or more probably “yes”, if there are scheme members or potential members who live in the UK!

Disregarded Income rules

The UK tax legislation limits the UK sourced income on which a non-UK resident must pay income tax. The income that is exempt is known as disregarded income.  However, non-resident trusts with UK resident beneficiaries cannot rely on the disregarded income exemption if any income under the trust may be paid to or used for the benefit of a person in the exercise of a discretion conferred by the trust.

The UK resident member will be entitled to receive a pension in the future and so will be entitled to receive benefits paid out of income earned by the scheme. The critical question will be whether future potential benefits will be provided by the pension scheme as a consequence of a discretionary power being exercised. That is less clear.

Discretionary trustee powers?

A pension scheme that is open to the public to join and offers comprehensive and defined rights is unlikely to grant the scheme administrators any discretionary powers. In contrast, pension arrangements intended to provide benefits to single members and their immediate family, of the type typically seen with FURBS, EFRBS and QNUPS, are more likely to give the pension trustees powers that are discretionary in nature. For example, the trustees may have the power to decide what happens to the pension assets on the death of the principal member. If so, the ability for the trustees to decide whether and how to pay out future benefits out of UK sourced income to future potential beneficiaries will mean that the trustees are liable to tax in the UK on any UK sourced income.

There may be trustees of non-UK pension schemes holding UK investments who believe that any income they receive is exempt from tax in the UK, but they will have current and historic UK tax liabilities that need to be reported to HMRC. The added jeopardy for those trustees is the Failure to Correct penalty regime that allows HMRC to charge penalties of up to 200% of any tax lost with the potential for those penalties to be increased in certain circumstances.

Action required

Trustees or scheme administrators of non-UK resident pension schemes should review their schemes for any UK sourced income in order to identify the potential for potential UK income tax liabilities. Trident Tax will be happy to help trustees to understand their UK tax position. There are straightforward solutions to prevent UK sourced income being subject to income tax in the UK to prevent future liabilities accruing.


There is a relief from capital gains tax which was introduced for shares subscribed for on or after 17th March 2016, and held for at least three years. Therefore, no-one has yet been able to claim this relief, and investors may have forgotten about it. A disposal of shares made after 17th March 2019 could qualify for a lower CGT rate of 10%, rather than 20%, if it qualifies for “Investors’ Relief”.

There is a lifetime limit on gains that can be relieved of £10m, so the rate and limit are similar to Entrepreneurs’ Relief. However, for Investors’ Relief, the individual must not have been an employee during the three year period, nor can anyone connected with him have been an employee. The relief is of no help to an individual who hoped to get Entrepreneurs’ Relief but has failed those conditions.

The shares must be in an unquoted trading company, or an unquoted company which is the holding company of a trading group.

The shares must have been acquired by subscription rather than purchase, and there are detailed conditions similar to those for an investment to qualify for Enterprise Investment Scheme relief.

A seller of shares may not have control of the timing of the disposal, but it would be worth knowing whether or not the relief is available. Trident Tax can advise you on whether your shareholding would qualify.

In the 2018 Budget, the government announced a proposal to charge an extra 1% SDLT on non-UK residents buying UK residential property. The proposed definition of a non-UK resident individual for this purpose is a person who has spent less than 183 midnights in the UK in the 12 months ending on the date of the transaction, according to the consultation document issued on 11th February 2019. (There is no date for the provision coming into effect, the consultation ends on 6th May).

Then a person who spends more than 183 midnights in the UK in the 12 months following the date of the transaction can apply for a refund. Presumably this is to allow someone who moves into the house they’ve bought in the UK to be taxed as a resident rather than a foreigner.

If two individuals buy a house as joint owners, and one of them is not UK resident at the time under the SDLT test, then the extra 1% applies to the whole of the consideration.

The 1% charge is in addition to the SDLT due in relation to other factors. So, for example, an individual who is non-UK resident and already has a residence would pay the 1% in addition to the 3% additional SDLT on second home owners.

The proposed test for an individual needs to be one which can be applied on a particular date, and it is therefore not the same as the Statutory Residence Test for income tax and capital gains tax, which applies for a tax year. This means in particular that it is perfectly possible for a person who is UK tax resident in 2019/20 to be treated as a non-UK resident when they buy a property on 5th April 2020.

The consultation document notes that these rules are intended to be “as simple as possible for taxpayers and conveyancing solicitors to apply, in recognition of the fact that most people buying a home will not engage a professional adviser.” What this means is that the rules for “non-natural persons” are even more complicated.

Where an offshore trust acquires a UK residential property, the rules which use the residence of the trustees and settlor in order to determine the residence status of the trust will apply, however where the test considers whether an individual trustee is UK resident or not, the test will be the same as for a non-UK resident individual for SDLT purposes. That is, the residence of the trustee is considered by reference to his midnights spent in the UK in the twelve months prior to the transaction.

Where a company acquires residential property, it already pays SDLT at 15% (subject to exemptions), however if the company is treated as non-UK resident for SDLT purposes, this will increase the rate to 16%. The normal test of company residence is applied to determine whether the company is UK resident or not at the time of the transaction. However, there is a further category of companies which will pay the additional 1%. The rate applies to a company which is itself UK resident, but which is a close company controlled by one or more non-UK resident individuals. This is said to be to ensure that non-UK resident individuals can’t avoid the extra 1% by acquiring through a UK company, even though that could itself result in a 15% charge.

Although SDLT is payable only on property in England and Northern Ireland, the test applies to nights in the whole of the UK; thus a Scot who buys an English property should not be taxed as a foreigner.

The taxpayers have recently lost a First Tier Tribunal case relating to an inheritance tax liability, Nader, Dickins, Gill & others v HMRC [2018] UKFTT 294. The circumstances are described as a “death-bed avoidance scheme”, but there are likely to be many other taxpayers who are affected. The interpretation of the exemption for a disposition which was not intended to confer a gratuitous benefit taken in the case is a restrictive one. The reasoning in the case also appears to have consequences for capital gains tax.

In 2010, an individual paid £1,075,000 for an “income interest” in a discretionary trust which had been settled by a non-UK domiciled individual and was thus expected to be an excluded property trust, so the trust interest would be outside the scope of UK inheritance tax. (This was before the amendment to the legislation with effect from 20th June 2012 which prevented an acquired interest from being excluded property). The income interest was not an interest in possession, but a right to call annually for the trust income. The trustees also agreed to amend the class of discretionary beneficiaries to comprise the purchaser’s family rather than the settlor’s family, although this was not actually done until after the purchaser’s death.

The tribunal found against the individual’s executors on a number of grounds, some of which have wide application.
• They held that the purchase of the trust interest was a transfer of value, despite the fact that it was purchased from an unconnected person, because the trust interest was not worth the sum paid for it.
• They held that the exemption for transactions (including associated operations) not intended to confer gratuitous benefit was not available, because although the purchase of the trust interest was between unconnected persons, in these circumstances, it was not on arm’s length terms. Again, the fact that the income interest was not worth the sum paid was relevant. The wider implication here is that where a transaction is undertaken to obtain a tax benefit, but the transaction does not make commercial sense otherwise and the taxpayer loses value, then this can be a chargeable transfer.
• They held that the individual was a settlor of the trust. The particular circumstances here were that although the trust existed at the time when she agreed to purchase the income interest, the vast majority of the funds were settled after she agreed to purchase the interest. Thus, although she did not fund the settlement, she was regarded as the settlor when the situation was “viewed realistically”. They held that for inheritance tax there was no requirement for an element of bounty. The wider implication of this is that since she was UK domiciled, almost none of the trust assets were excluded property.
It seems to us that this “realistic” approach to who is the settlor could result in a purchaser of a trust interest being treated as a settlor for the purposes of section 86 TCGA 1992, and the settlor being assessable on trust gains as they arise. This would extend to gains in close companies whose shares are held in the trust, subject to any claim to the section 13(5)(cb) motive defence.

In our view, the following groups of UK domiciled people should review their tax position as a result of this case:
• Anyone who has acquired an interest in an excluded property trust before June 2012.
• Anyone who has undertaken an inheritance tax planning scheme where reliance was placed on a payment to a third party not being a transfer of value or being an exempt transfer of value
• Anyone who has acquired an interest in an excluded property trust, where they have not then reported taxable gains in the trust or an underlying company.
Someone in this position could have historic tax liabilities, including an inheritance tax charge on the transfer of value when the trust interest was purchased and subsequent capital gains tax liabilities.

Many taxpayers in this position will not have been able to obtain advice on this issue before the requirement to correct deadline on 30th September 2018. We recommend that specialist advice is taken as soon as possible to consider the best approach to rectifying their position.

Hundreds of multinationals will now have received a letter from HMRC, suggesting that they register for the new Profit Diversion Compliance Facility. Those who don’t register are more likely to receive formal enquiries from HMRC.

Those who receive the letter are groups that HMRC consider may have used incorrect transfer pricing in areas targeted by Diverted Profits Tax. HMRC say that they have a growing list of multinationals who could be diverting profits, and who they plan to investigate.

Although this tax was described as “the Google tax”, I know from my work leading KPMG’s response to Diverted Profits Tax back in 2015 that it has potential applications to a much wider group of companies than just technology companies. There are issues for retail groups selling high-tech products to industry and to individuals, fashion groups, investment funds, captive insurers etc. (The facility does not apply to groups where non-UK resident companies deal in or develop UK land).

The disclosure process

The opportunity to register is open until 31st December 2019 and registering immediately in response to a letter may not be a good idea. A group which registers will discover that it has 6 months to produce a report in the specified format, which includes calculations of tax, interest and penalties. The taxpayer is required to pay the tax due when they submit the report, while HMRC aim to respond to the report within 3 months. The breadth and depth of the required report makes 6 months to prepare it an extremely challenging target.

Before the Requirement to Correct deadline, we saw trusts and individuals making protective registrations where they were unsure of their technical or factual position, using the time before the disclosure report was due to finalise their analysis. But the amount of work which is required to make a disclosure under this new Facility is so extensive with such a tight time limit that this seems to be inadvisable here.

Which accounting periods would a disclosure under the Facility cover?

Diverted Profits Tax is an unusual tax, because amending your corporation tax computation to transfer pricing agreed by HMRC generally means that no Diverted Profits Tax is payable. This is referred to in the HMRC guidance. Since the DPT rate is higher than the corporation tax rate by 6%, most groups opt to amend the corporation tax return. However, this means that the group may end up having to amend returns or make voluntary disclosures for periods before the introduction of Diverted Profits Tax in 2015, because if they have used the same Transfer Pricing policy in earlier years’ computations, then these too may be regarded by HMRC as incorrect.

Because of the various assessing time limits, a group needs to establish how HMRC will characterise its behaviour before it can decide which accounting periods the report needs to cover- HMRC can assess earlier periods if the behaviour is “careless”, as that term is interpreted. The guidance specifically says that taking transfer pricing advice is not, of itself, sufficient to demonstrate that reasonable care has been taken.

Investigating your own transfer pricing

The most significant benefit of registering for the Facility is that any penalties should be calculated on the basis that the group has made an unprompted voluntary disclosure, i.e. at a lower level than would have been charged on penalties arising as a result of an HMRC investigation.

There is also a benefit in that HMRC will not launch an investigation. However, this in effect means that the group is required to investigate itself, to the same depth as HMRC would have investigated it. The Facility sets out the extensive scope of the report which is to be prepared, and the extent of the factual research which is required to support it; the scale of work required should not be under-estimated.

HMRC set out some of the areas where they have found groups’ transfer pricing policies and implementation to be inadequate. These include the following;

  • Transfer pricing that is out of date in relation to the group’s current business and functions. (This can occur in particular where a transfer pricing analysis relied on UK individuals working in another country, and they drift back to working in the UK).
  • Transfer pricing that is “old-fashioned” in relying on contractual allocation of risk to low-tax jurisdictions, rather than looking at significant people functions.
  • Transfer pricing analysis that is built on an incorrect factual foundation.

The guidance says that the action required includes interviewing staff and checking contemporaneous emails, not just producing the transfer pricing documentation.

The scale of the report which is required

In order to submit the required report, a group will need to;

  • Establish the accounting periods which it must cover
  • Undertake a review of facts and evidence
  • Provide the detailed transfer pricing analysis and quantify the tax adjustments
  • Include a detailed section of the other international tax matters HMRC require, including company residence in the UK, permanent establishments in the UK, deduction of withholding tax, treatment of CFCs, and indirect tax, which will withstand HMRC scrutiny.
  • Quantify any tax adjustments arising from this, again establishing which accounting periods HMRC can assess
  • Determine how HMRC will characterise the group’s behaviour for penalty purposes and calculate any penalties due, including failure to notify re Diverted Profits Tax

All these workstreams will have to be project managed carefully to produce the report within 6 months of registering.

Risks not covered by registering under the Facility

HMRC list certain actions which they may still take against a group which registers for the Facility but does not make a full and accurate disclosure, i.e. where HMRC consider that the disclosure report is inadequate or inaccurate. This includes launching a CoP 9 enquiry or making criminal charges.

The quality of the disclosure is important in protecting the Senior Accounting Officer given that the group may admit careless behaviour: HMRC say that the business is required to make a full and accurate disclosure and co-operate fully.

Use of advisors

Groups who use a team from their auditor for their transfer pricing advice may find that the audit firm cannot represent them in relation to the disclosure because of independence requirements.

Apart from the transfer pricing and Diverted Profits Tax analysis, a group would also require an advisor who brings the expertise to advise on:

  • The scope of the transfer pricing investigation necessary to prepare the report
  • The scope of the investigation into the other international tax issues necessary to prepare the report
  • The characterisation of the group’s behaviour for assessment and penalty purposes
  • The risks in relation to fraud and the position of the Senior Accounting Officer
  • Negotiation with HMRC

Once a group has registered, HMRC say that they are willing to meet with them to discuss in advance their plans for the review and report. Would you want to walk into such a meeting without an experienced investigations specialist by your side? Trident Tax would be happy to help.

Article written by Christine Hood of Trident Tax

On 4 December 2018, the House of Lords Economic Affairs Committee published its report ‘The Powers of HMRC: Treating Taxpayers Fairly’ (‘the report’).

 The report included a series of conclusions, recommendations and some stinging criticisms of HM Revenue & Customs (‘HMRC’) which were widely reported at the time (see for example: Tax Journal, ICAEW, BBC).

This article focuses on one key aspect of the report, the 2019 Loan Charge. In particular, a recommendation to change the current legislation. This recommendation, in our view, has been under-reported to date and requires HMRC and the Government to clarify their intentions urgently.

It is worth quoting the recommendation here in full:

We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been ‘closed’.

(Source: the report, paragraph 17, page 4, ‘Summary of Conclusions and Recommendations’).

This recommendation was made in the context of broader criticisms of both the 2019 Loan Charge legislation and HMRC’s approach to dealing with ‘disguised remuneration’ cases.

These included:

  • The retrospective effect of the legislation which undermines normal time limits for tax assessments and diverges substantially from established principles (notably those in the 2005-2012 Powers Review).
  • HMRC’s disproportionate approach to pursuing taxpayers (including inappropriate threats of bankruptcy) and failure to communicate its position in a clear or timely manner.

(Source:  the report, paragraph 75 et seq, page 29 et seq, Chapter 4: ‘The 2019 Loan Charge’).

The following simple example, which is not uncommon in our experience, illustrates why urgent clarification is required.

An individual entered into a ‘disguised remuneration’ arrangement in 2008. The arrangement involved the individual’s employer making a contribution into an Employee Benefit Trust (‘EBT’) the proceeds of which were then allocated into a sub-Trust specifically for the benefit of the individual. The sub-Trust then made a loan to the individual.

The law, as it was understood at the time, would prevent the employer deducting the contribution in calculating its taxable profits for the period but neither the contribution nor the loan would be taxable as the individual’s earnings from employment (although if the loan was interest free there would be a taxable benefit arising equal to notional  interest at HMRC’s official rate).

The arrangements were fully disclosed in the employer’s accounts and tax returns, and in the individual’s tax returns. However, HMRC failed to make an assessment on either the employer (for PAYE) or the individual (for Income Tax) within the statutory time limit for doing so.

 The loan remains outstanding and the individual is unable to repay the loan before 5 April 2019.

Under the 2019 Loans Charge legislation the unpaid loan is treated as becoming employment income on 5 April 2019, in respect of which the employer must account for PAYE & NIC. If the employer does not pay, it is expected that HMRC will issue a Regulation 80 Determination for the PAYE. If it becomes clear the employer cannot pay, HMRC will seek a Direction under Regulation 81(3) to make the individual borrower personally liable for the Income Tax. If the employer entity no longer exists, the individual must declare the unpaid loan as employment income on their 2018/19 personal tax return.

To avoid the 2019 loans charge arising and within the terms of HMRC’s settlement guidance, the individual must agree to make ‘voluntary restitution’ of the Income Tax on the original amount allocated to the sub-trust as if it were earnings (even though HMRC cannot collect the tax in law) before 5 April 2019, otherwise a charge to Income Tax will arise on that date (possibly at higher rates). Additionally, although there is no legal mechanism to transfer the liability, HMRC’s settlement terms also require the individual to settle the Employers’ NIC.

The Lords Committee recommendation (above) clearly states that in their view the legislation must be changed so that an individual in these or similar circumstances will not face a 2019 Loan Charge: either because a full disclosure was made at the time; or that the period in which the EBT contribution was made is now ‘closed’; or both.

In light of the above some key questions arise, including the following:

  1. Should an individual in these or similar circumstances agree to make ‘voluntary restitution’ to prevent a 2019 Loan Charge which the Lords’ Committee states should not arise?
  2. Is it appropriate, in these circumstances, for HMRC even to enter into agreements for ‘voluntary restitution’ until the position is clarified?
  3. If the Government accepts the Lords Committee recommendation and changes the legislation to exclude these and similar cases from charge, what happens to those cases where individuals have already entered into ‘voluntary restitution’ agreements e.g. should HMRC repay the amounts to the individuals?

 At the time of writing this article, the only Government response which could be identified was reported by the BBC to be as follows (from a ‘Government Spokesperson’):

“On the loan charge in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”

(Source: BBC)

The ICAEW reports that Mel Stride, Financial Secretary to the Treasury, did not give evidence to the Lords Committee but will respond to the Committee formally in writing: at the time of writing this article, no such response has been made public.

We therefore call on the Government and HMRC to make the position clear urgently to provide certainty for advisors and taxpayers in this difficult and controversial area.

If you would like help with any of the issues raised in this article, contact us here.


HMRC guidance on cryptoassets means that all 2017/18 profits should be shown on the tax return and tax paid at the end of next month

HMRC have issued updated guidance, and presumably this means that they expect 2017/18 returns to be submitted on this basis, and capital gains tax liabilities to be paid on this basis on 31st January 2019. This tax is due even where one currency was exchanged for another in 2017/18 and the currency acquired has fallen dramatically in value, so the individual may not have cash proceeds to meet the tax. Crypto losses in 2018/9 cannot be set against the gains to reduce the tax payable.

The most significant statement in the new guidance is “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”. Their previous guidance said “Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.” This had led some owners to believe that they did not need to report gains.

The new guidance makes it clear that most gains are subject to capital gains tax, and “only in exceptional circumstances” will a gain be subject to income tax. Both gains and income need to be reported, and there is no de minimis. This then means that losses will be capital losses, and so in particular, losses realised in 2018/19 may be difficult to use, as they can only be carried forward against gains in later tax years or offset against gains on other assets in 2018/19.

The guidance repeats HMRC’s previous comment in the Capital Gains Manual that gains on cryptocurrencies should be calculated on a “pooling” basis. Owners may not agree with HMRC’s comment that this “allows for simpler Capital Gains Tax calculations”. It requires that all transactions in one currency are calculated by pooling all of the acquisition costs, and then each sale or gift of currency is treated as a part-disposal of the pool. In particular, this means that owners who held a currency at 6th April 2017 will need to calculate the pool for earlier years in order to complete their 2017/18 return. Online “Crypto calculators” may well not use this method and thus cannot be used for UK returns.

There is a section on record keeping as follows.
“Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.
The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include:
• the type of cryptoasset
• date of the transaction
• if they were bought or sold
• number of units
• value of the transaction in pound sterling
• cumulative total of the investment units held
• bank statements and wallet addresses, if needed for an enquiry or review”

“Value of the transaction in pound sterling” may be a difficult calculation. HMRC say “If the transaction does not have a pound sterling value (for example if bitcoin is exchanged for ripple) an appropriate exchange rate must be established in order to convert the transaction to pound sterling.

Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. They should also keep records of the valuation methodology.”

The key point here is that capital gains tax is due even where one cryptocurrency has been exchanged for another, and the owner has received no cash.
On normal rules, where a gain is taxed on the basis of the value of the new currency, there is no deduction in this calculation for the further transaction costs that could be incurred in actually receiving this value into a UK bank account.