HMRC has written to a number of businesses that entered into tax planning arrangements promoted by Clavis Tax Solutions Limited that involved the creation of a Special Purpose Trust (‘SPT’) via an employment reward consulting firm (often referred to as ‘Clavis Herald planning’). HMRC’s letter invites these businesses to reach a financial settlement of the disputed liabilities.
HMRC has warned that anyone refusing the proposed settlement terms risks being pursued for higher penalties on the basis that any tax lost is due to deliberate behaviour (which would trigger a penalty of at least 35% of the tax and NIC instead of 15%) and being ‘named and shamed’. HMRC also gives heavy warnings that failure to settle the planning will mean that individuals with any outstanding loans will be taxed under the new 2019 loans charge.
Any business in receipt of HMRC’s letter wanting to settle and avoid the 2019 charge must register their interest with HMRC before 1 June 2018 (note that this deadline applies to all EBT type arrangements and not just Clavis Herald).
The settlement terms being offered to these selected businesses include the following:
- The company must agree that PAYE tax and NIC is due on the employment income paid through the scheme;
- The company must accept that it failed to take reasonable care and is liable to a penalty of 15% of the tax and NIC as well as interest for years where HMRC has issued valid assessments (‘protected years’);
- Employees who are Directors must reimburse any income tax paid by the employer for protected years or otherwise undertake that the tax paid by the employer will be shown as a benefit on a P11d for the Director in line with s223 ITEPA 2003 (‘secondary charge’).
- Other standard EBT settlement terms will apply e.g. credit will be given for tax paid by employees on loans if within time to make a claim, the employer will receive relief for any additional NIC in the earliest open year.
- The offer from HMRC states that in cases of voluntary restitution (i.e. where no valid assessments are in place and HMRC is now out of time) there will be no penalty, interest or a secondary charge on the Director. HMRC’s technical rationale for this is unclear but appears to be that the tax liability being settled is voluntary, not legally enforceable and not therefore within the secondary charge legislation.
In principle we would welcome any reasonable proposal from HMRC to resolve disputed liabilities without litigation. However, some questions are likely to arise in connection with the recent approach, including the following:
- HMRC are proposing to settle these cases on the basis of an acceptance of carelessness with a warning that an allegation of deliberate behaviour may follow if the offer to settle is not taken up. Will this offer also be made to other users of the Clavis Herald arrangements who have not received the letter and if not, why not?
- Is it sustainable to view a tax planning arrangement as automatically involving careless behaviour if clients were given tax advice from a qualified professional and completed tax returns in line with that advice?
- What about those clients who believed they acted in good faith and took particular care to ensure the transaction was completed correctly?
It is worth noting that the 2019 charge is based on outstanding loan balances, so the same amount of tax and NIC is not necessarily in play. In cases where HMRC has failed to protect its position and no loans are outstanding, there will be no requirement to settle any liabilities. The funds held in the SPT will be subject to PAYE only to the extent they are paid out in future.
The fact that HMRC is offering standardised settlement terms will be a relief for many because it will avoid the need to go through an enquiry and remove the threat of more significant penalties. The far more generous terms for voluntary restitution may make the terms attractive where HMRC has failed to protect its position in all or some years. Others may well be wondering why they should accept a degree of culpability when they believe they have done nothing wrong (even if there is more tax to pay). There will be many who continue to feel frustrated that guilt by association will cost them more than those settling on standard EBT settlement terms.
Trident Tax acts for a number of Clavis Herald scheme users and if you would like to discuss your options, please contact us.