Baxendale Walker/Remuneration Trusts Subject To Employment Taxes With No Corporation Tax Relief
In a landmark case (HMRC v Marlborough DP Ltd [2024] UKUT 98 (TCC)) involving Baxendale Walker remuneration trust arrangements, it was held by the Upper Tier Tax Tribunal (UTT) that these arrangements should be subject to employment taxes and in addition, no related corporation tax relief should apply. These arrangements had been utilised for tax-saving purposes on company profits. The UTT scrutinised the arrangements and held that Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) applied which led to employment taxes being incurred and, in addition, a denial of the associated corporation tax relief that had been claimed.
The dispute between HMRC and Marlborough DP Ltd centred on whether payments made via a remuneration trust constituted taxable employment income. Initially, in 2021, the First-tier Tax Tribunal (FTT) ruled in favour of the taxpayer, arguing that the payments did not qualify as taxable employment income and were merely distributions. However, HMRC successfully contested this decision on appeal to the UTT who agreed with HMRC's position that the payments were indeed taxable as employment income subject to Part 7A ITEPA 2003, triggering PAYE and National Insurance Contribution (NIC) liabilities as a result.
Furthermore, the UTT scrutinized the corporation tax deductibility of the payments made into the trust by the company. It concluded, partly based on the taxpayers' own statements, that these payments lacked a legitimate trading purpose and were primarily aimed at facilitating tax-free benefits for the director/shareholder. Consequently, the company was denied a tax deduction for these payments, resulting in a PAYE liability without corresponding corporation tax relief.
As this was an UTT judgement and was based on legal findings rather than an appeal on the facts, it sets a precedent for other such Baxendale Walker/remuneration trust arrangements. In particular, the argument historically raised on these arrangements was that such schemes were not undertaken as a reward for employment and consequently could not be subject to employment tax legislation, including that of Part 7A ITEPA 2003 i.e. the payments could not by their nature constitute “disguised remuneration”. However, the UTT found that disguised remuneration legislation under Part 7A ITEPA 2003 makes it clear that the recipient of the cash does not have to receive it “from” employment but only “in connection with” employment. In this case the recipient was a director and therefore in employment. Additionally, given the taxpayer had argued there was no employment motive for the payments, these accordingly lacked a commercial purpose and could not be deductible for corporation tax purposes either.
In a subsequent hearing, the UTT dismissed claims of procedural unfairness raised by the taxpayer, reaffirming the validity of its earlier conclusions. This decision serves as a reminder of the rigorous procedural standards upheld in tax appeals.
Upper Tax Tribunal Upholds HMRC Decision: Provisions Were Not Wholly And Exclusively For Trade
In a recent ruling (AD Bly Groundworks v HMRC, 2024 UKUT 00104 TCC), the UTT settled a dispute concerning the deductibility of provisions for future pension payments to be provided via unfunded unapproved retirement benefit schemes. Despite the various companies' efforts to account for these liabilities in their accounts and disclose them under the tax avoidance scheme regime, the UTT sided with HMRC's contention that these provisions were not deductible for corporation tax purposes.
Whilst both the FTT and the UTT preferred the technical analysis of the taxpayer over HMRC as to why relevant parts of statute permitted the relief, they ultimately upheld on the particular facts that the overriding purpose for the provision was to claim corporation tax relief and not to make retirement benefits for the key individuals. The UTT confirmed it was open to the FTT to make the findings that it did based on the evidence that had been presented to it (not least that the witness statements from two separate taxpayers were drafted almost identically and therefore were unlikely to be a genuine reflection of their respective motives at the time). It remains to be seen how other taxpayers with similar provisions will regard their facts as mirroring those considered here.
Proposal To Remove Business Property Relief And Agricultural Property Relief
The Institute of Fiscal Studies has released proposals to remove or reduce agricultural and business reliefs, including the relief for AIM (Alternative Investment Market) shares. These reliefs currently amount to approximately £400 million and £1.4 billion per year, respectively. However, any move towards abolition would undoubtedly face staunch opposition due to its potential impact on taxes levied on the transfer of family farms and businesses.
One proposed alternative is to implement a cap on the amount of business and agricultural relief at £500,000 per person, with any unused portion of the allowance transferrable to a surviving spouse or civil partner. Under this arrangement, a couple could jointly pass on assets such as a farm or business valued at up to £1 million. Notably, the majority of business relief claims originate from the largest estates, with an estimated 90% of business assets transferred as part of estates exceeding £2 million. Therefore, such a cap would not only mitigate the revenue loss resulting from complete abolition but also capture a substantial portion of potential gains.
In terms of revenue implications, it is estimated that capping agricultural and business relief at £500,000 per person could generate £1.4 billion in the current tax year, increasing to £1.8 billion by 2029–30. However, this estimation may vary depending on factors such as the prevalent use of trusts and the possibility of increased utilization of alternative avoidance strategies in response to relief removal. Adjusting the cap to a higher level would naturally result in lower revenue gains.
UK Tax Burden Projected To Hit 80-Year High By 2028: Implications For Business Owners
An analysis conducted by the TaxPayers’ Alliance indicates that the tax burden in the UK is on track to reach an 80-year peak of 37.1% by 2028. Despite experiencing a slight decline in 2024, taxpayers can expect a continuous escalation in their annual financial obligations to the Government. Notably, the current Government is poised to become the largest tax raiser in history, marking a 3.3% increase since 2019.
The CEO of the TaxPayers' Alliance has voiced concerns over the potential repercussions of such a significant tax burden, emphasizing the detrimental effects it could have on both individuals and businesses, ultimately stifling economic growth. Additionally, the Institute for Fiscal Studies predicts that while the average worker may see an increase of £340 in disposable income next year, those earning below £26,000 are likely to experience a decline in financial well-being.
How Can Qubic Help?
For more information on our tax planning services and to discuss your options with one of our team, simply click the link below:
Get in touch: If you're ready, let's talk!
Email: info@qubic-group.com
Call: 0191 232 2001
Kind regards,
QUBIC