To give effect to its obligations under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on The Payer) Regulations 2017 (“the MLTFTF Regs.”) – which give effect to the 4^th EU Money Laundering Directive – HMRC has established an online Trust Registration Service (“TRS”). In consequence, the old HMRC Form 41G providing limited information about a trust for tax purposes has been withdrawn. Existing trusts which have submitted a Form 41G must register under the new online service.

It should be noted that the scope of the TRS extends beyond that of HMRC’s own obligations under Reg 45 of the MLTFTF Regs, which apply only to a trust or company service provider acting in the course of a business in the UK, in that the TRS applies to anyone acting as a trustee of an express trust which incurs a liability to a relevant UK tax.

The TRS may be accessed through:

www.gov.uk/government/publications/trusts-and-estates-details-41g-trust

Trusts not already registered with HMRC for self-assessment and which have incurred a liability to UK income tax or CGT in a tax year must register by 5 October after that tax year or, if first liable for another relevant UK tax in a tax year, 31 January after the end of that tax year. (No penalty is imposed if, in relation to the tax year 2016-17, the registration of a trust not already registered for self-assessment and which has incurred a liability to income tax or CGT for the first time, is completed before 5 December 2017.)

HMRC published detailed guidance on the new TRS on 9 October 2017.

Registration is not required in a given tax year if:

–    the trustees do not need to file a tax return and have not incurred a liability to a relevant UK tax;

–    the trust is a non-UK express trust and has no UK source income or UK based assets but for some other reason has incurred a liability to pay any of the relevant UK taxes; or

–    the settlor or a beneficiary has incurred a liability to pay a relevant UK tax but the trustees are not so liable; or

–    the trustees are holding the trust property as bare trustees (as any liability to a relevant UK tax is that of the beneficiary).

It would seem to follow that trustees of a non-UK resident employees’ trust which is not liable to a relevant UK tax is not obliged to register, but the trustees may wish to do so voluntarily to avoid unintentionally failing to do so if such a liability should arise. Changes to the information registered may be notified at any time and, if the trustees incur a liability to a relevant UK tax in any tax year, must be so notified by 31 January next following. Curiously, details of the trust assets need only be provided once at the point of first registration and are not required by HMRC to be updated. Information on assets later added or held is to be provided in the annual trust tax return (SA900). In the case of multiple trustees, a lead trustee may be nominated to be responsible for the administrative duties in relation to the tax affairs of the trust and will be the main point of contact for HMRC. Trustees may appoint an agent to register on their behalf, but the legal responsibility remains that of the trustees.

Changes in the information provided must be notified by 31 January next following the tax year in which the change occurred if in that year the trustees were liable to a relevant UK tax. If they are not so liable, the obligation to update is deferred until 31 January after the next tax year in which they are so liable, although trustees may, and in practice are expected to, update on a voluntary basis even if not so liable. So, for example, if trustees of an employees’ trust make share awards to employees in circumstances in which the trustees are not themselves liable for any relevant UK tax, there is no obligation to notify a change of beneficial ownership, although the trustees have a duty to maintain a written record of the awards. If a beneficial interest in unquoted company shares is sold, triggering a liability to SDRT, this will normally be a liability of the transferee, not of the trustees. The trustees must register if, exceptionally, a liability to CGT arises on their part because the shares are sold otherwise than pursuant to an option and in circumstances not qualifying for a claim to be made for hold-over relief from CGT (which might be the case if the company has non-business assets or a liability to inheritance tax arises on the part of the trustees under s72 or s65 IhTA 1984).

Information which, because of shortcomings in the software, cannot be notified (such as, for example, details of more than one corporate trustee) may be provided in writing to: Trusts, HMRC, BX9 1EL.

To avoid liabilities to income tax under the ‘disguised remuneration’ rules, it is common practice for trustees of an employees’ trust to agree with the employer company that they will satisfy awards or option exercises by transferring shares without having the names of the employees disclosed to the trustees. In such a case, it is difficult to see how the trustees can provide information on the employees or ex-employees concerned until they have been given the names, typically when the awards become vested or the options exercised. That is clearly the occasion of a change in the information provided, but an obligation to notify HMRC of the change will not immediately arise if the trustees are not in that tax year liable to a relevant UK tax. That said, it is likely to be easier in practice for the trustees to update the information on a voluntary basis regardless of whether such a liability has arisen. If thereafter the trustees hold the bare legal title to the shares on behalf of the employee or ex-employee, it would seem that no further obligation to notify any change in the information provided to HMRC would arise by reason only of the beneficial owner deciding (for example) to sell the shares, as a liability to a relevant UK tax would not then arise at the trust level.

Employees’ trusts

The HMRC guidance refers to “employee ownership trusts”, but this is understood to be intended to refer to all forms of employees’ trusts and not merely those which rank as “employee-ownership trusts” (per s236H TCGA 1992). In such cases, the guidance provides that “to help keep administrative burdens to a minimum for business type trusts with large numbers of beneficiaries…the trustees will only be asked to identify the class of beneficiary if the number of named beneficiaries exceed 10”. It appears to follow that, if in the case of a typical ‘s86-type’ employees’ trust, there are fewer than 10 employees, or there are named beneficiaries but fewer than 10 of them, details of those beneficiaries must be given. Likewise, details must be given of any beneficiaries who are in receipt of benefit and can be named, regardless of how many there are of such actual beneficiaries. The guidance goes on to provide that the identity of current “key employees and Directors” must in any event be provided.

Meaning of “key employees and Directors”

This is defined in the HMRC guidance as “staff who are responsible for the operational running of the business at the top of the organisational chain by making key decisions or that have a financial ownership or stake in the organisation. We [HMRC] would also define this as key members of staff whose skill and expertise are critical to the business for which they enjoy a high level of remuneration….”

Share Incentive Plan trusts

As these are express UK trusts, the trustees are obliged by Reg 44(1) to maintain written records of the beneficial owners (as defined) and potential beneficiaries. The obligation to register the trust with HMRC, and notify the appropriate information and any changes to it, arises only if and when the SIP trustees have a liability to a relevant UK tax in a tax year. It should be noted that dividends on unawarded shares are now charged to income tax at the dividend ordinary rate (the exemption for dividends on such shares in the “applicable period” now extending only to tax at the higher dividend trust rate). If the shares are purchased in a transaction attracting a charge to SDRT or if unawarded shares are sold outside of the “relevant period” so as to attract a CGT charge, an obligation to register will arise. In practice, therefore, SIP trustees are likely to want to register voluntarily to avoid inadvertent failure to register when obligated to do so.

Details of the trust assets

Details to be given include the nature of the trust assets and the value of shares (or other assets) held based on their market value at the date the information is first provided. A formal share valuation is not required, although “[HMRC] would expect trustees acting within their professional duties to provide a good estimate of the market value of the assets” and reference is made to HMRC’s Shares and Assets Valuation Manual. If the trust was established long ago and the value was previously notified through either Form 41G or the SA return, “you should just complete “Other asset” field using the term – “Already notified”, leaving all other asset fields marked as “£1”.”

Details of advisers

The TRS requires only the details of any agent acting on behalf of the trustees in relation to their registration and not of other advisers. The information about an agent is their name, address, telephone number and customer/agent reference. The trustees, if acting in the course of business carried on by them in the UK, do however have an obligation under the MLTFTF Regs to keep written records of the full name and address of any paid advisers providing legal, financial or tax advice in relation to the trust.

The data provided to HMRC

The information given to HMRC is not on the public record and, if requested, can only be shared by HMRC with law enforcement agencies in the UK or an EEA member state.

‘In-house’ trust companies

It is not uncommon for a private company to establish a wholly-owned subsidiary to act as sole corporate trustee of its employees’ trust and/or its qualifying Share Incentive Plan. Such a trustee company would be acting in the course of business, even if it receives no consideration for acting as trustee and will be obliged to maintain written records and register the trust with HMRC pursuant to the TRS.

© David Pett, Temple Tax Chambers  October 2017

Since 2014, if all statutory conditions are satisfied, disposals of shares to an EOT, amounting to at least a 51% controlling interest in a trading company, willattract complete exemption from capital gains tax. On the face of it, this affords an extremely attractive means of allowing private company proprietors, and particularly owner-managers, to pass on ownership to a trust for employees controlled by (i.e. the power to appoint and remove trustees is vested in) the directors of the EOT-owned company and for the purchase to be paid for out of the company’s own profits and/or borrowing facilities. Furthermore, a company owned by an EOT may pay tax-free bonuses, of up to £3,600 per tax year, to all qualifying employees on an ‘equal terms basis’ – a significant benefit to smaller companies.

It is understood that some 80+ companies have so far each been sold to an EOT, although the majority of these are believed to be relatively small in value (and many of which were formerly run as quasi-partnerships distributing profits in full each year).

A description and commentary on the statutory rules governing EOTs is to be found in Chapter 24 of “Employee Share Schemes” (Thomson Reuters).

Having now advised on a significant number of actual and potential ‘sales to an EOT’, the following points, born of practical experience, may be of interest and assistance to those proprietors and their advisers contemplating such a transaction:

1. An EOT is necessarily restricted in how it can benefit employee beneficiaries if penal tax charges are not to be triggered on the part of the trustees. In short, any disposition of trust property must be on an ‘equal terms’ basis and only to those who are current employees. A subsequent sale of the company by the trustees will trigger a clawback charge. It might be worth pausing to consider if, rather than selling tax-free for, say, 100, a sale at a higher price of, say, 111 to a more conventional discretionary employees’ share trust might be justified, the vendor(s) presumably qualifying for the reduced 10% (entrepreneurs’ relief) rate of CGT and therefore being in no worse position. The trustees might be justified in agreeing to pay such a higher price (always provided it does not exceed the market value of the company) given the freedoms they would then enjoy to on-sell the company or pass a controlling interest into the hands of management by the grant and exercise of EMI share options and participation in a SIP and/or SAYE share option scheme.
2. In most of the cases on which I have advised, the sale has been ‘vendor-financed’. In other words, the company has insufficient funds available to pay the agreed consideration in full up-front. The question arises as to how best to protect the interests of the vendor(s) , and ensure that the company does in fact make further cash contributions to the trust, without triggering charges to tax on the part of the trustees or prejudicing the tax relief afforded to the vendor(s)? There is no reason why a vendor cannot remain on the board of the company and/or hold office as a trustee, although care is needed in addressing the obvious conflicts of interest which then arise. In practice, a more effective protection may be afforded by having the company first issue to the vendor a redeemable ‘golden share’ which carries negative control rights, and entrench those rights in the articles (i.e. making it impossible, once the sale has been completed, for the controlling trustee shareholder to abrogate the rights of the vendor as holder of the golden share until the consideration is fully funded and paid by the trustees and the share redeemed for a nominal amount). The negative control rights of the golden shareholder provide, in effect, that until the consideration is paid in full, the company is restricted in how it may apply its profits save for making contributions to the trust.
3. Vendors should bear in mind that, if the company cannot fund the consideration in full up-front, the vendors cannot take security for payment of the balance in the form of a charge over either the shares held by the trust or (although on the wording of the legislation this is not beyond doubt) the assets of the company. Remember also that, whilst the shares will have qualified for Business Property Relief from inheritance tax, the rights as unsecured creditors acquired in exchange will not – a matter which will be of concern to older vendors in particular.
4. Legal costs of the documentation and the sale are rightly of concern, especially in the case of smaller companies, the value of which will not justify substantial fees. To address this, I have developed a set of ‘standard-form’ documentation comprising the EOT trust deed, trust company articles, company governance and additions to Table A articles as well as the SPA documentation, all intended for use in the case of straightforward vendor-funded sales to an EOT. Accountants and other advisers interested in making use of such pro-forma documentation should contact me for further details and costings.
5. It has been suggested that the penal clawback charge (which falls on the trustees) arising if, for example, the trust ceases to own a controlling interest, might be avoided if the trustee is an independent offshore trustee services company so that the trust is outside the scope of the charge to UK capital gains tax. This is permitted under the legislation (although, following publication of the ‘Paradise Papers’, it may attract opprobrium….) which was prevented, by EU freedom of movement of capital rules, from stipulating that the trustees must all be UK resident. However, the use of any independent trustee – whether or not it is UK resident – rather than either a specially-formed wholly-owned subsidiary of the company being sold or individual trustees a majority of whom are long-standing directors and/or employees of the company, gives rise to a number of difficulties and, in practice, offshore trustee service providers have shown an understandable reluctance to accept office as sole corporate trustee of an EOT (although, to my knowledge, there are a number of such overseas-controlled EOTs in existence including, for example, that which now owns The Adam Smith Institute and was the subject of reports in The Sunday Times early in 2017). Not least is the duty of trustees to understand what it is they are investing in. The duties of an independent trustee company holding a relatively small proportion of the issued share capital for the purposes of giving effect to employee incentive plans are very different from those of a trustee being recommended to acquire a controlling interest in a company. The latter needs to undertake full due diligence and seek appropriate warranties and indemnities from the vendor(s) so as to ensure that the price being paid, and the funding obligations, do not leave the trustee exposed to liability if their acquisition proves to be a ‘pig in a poke’. Going forward, it is insufficient for controlling trustees to rely upon information from the directors of the company without troubling themselves to make appropriate enquiries and take an active role in overseeing the management of the company, as would any other controlling shareholders of a trading company.

To be continued…..

© David Pett November 2017

The former Rangers Football Club Plc has lost its appeal to the Supreme Court in its long-running litigation with HMRC concerning the proper tax treatment of payments made to a discretionary trust as part of the package of agreed payments for securing the services of players and employees.

Amounts paid by the club to the trustee were then re-settled onto sub-trusts each in accordance with the wishes of the employee who, whilst not within the class of beneficiaries, would be appointed as a ‘protector’ with power to change the trustee(s). The employee would then be made a loan on which interest would be rolled-up and which he would not normally expect to repay until after his death. The club argued that payment to a third party, of money arising from the performance of duties, does not amount to the payment of earnings unless the employee already has a legal right to receive it and it is paid at his direction to a third party. On the facts, the players and employees never had a right to receive the sums paid to the trust; the loans were just that, and were not ‘earnings’ subject to income tax under PAYE.

HMRC argued that the contributions made to the principal trust were taxable earnings as, although not paid to the employee, they were paid as remuneration for the work done by the individual and the individual had requested or agreed that the remuneration be re-directed to a third party.

It was not in dispute that what is taxable is the remuneration or reward for services. The central issue was whether, for it to be taxable, it is necessary that the employee should receive, or at least be entitled to receive, the remuneration.

Lord Hodge (giving the judgement of the Court) stated that, if an employee enters into a contract with an employer which provides that he receives a salary of £X and that, as part of his remuneration, the employer will also pay £Y to his Aunt Agatha, the court could discern no statutory purpose for taxing the former, but not the latter. The charge to tax on employment income extends to money that the employee is entitled to have paid as his remuneration whether it is paid to the employee or a third party. It is not necessary that the employee himself receive it.

However, not every payment to a third party falls within the general charge:

• “perquisites” (or “perks”) are not taxable unless the benefit is received by the employee and is capable of being converted into money or something of direct monetary value to the employee (per s 62(2)(b) ITEPA 2003);
• if an employer spends money to confer a benefit-in-kind which the recipient cannot convert into money, that payment is no taxable under the general rules – although it may fall to be taxed under the “benefits code” in Part 3, Chapters 2-11 of ITEPA (living accommodation; cars; loans; expenses, etc.);
• Part 6 of ITEPA has special rules for ‘employer-funded retirement benefits’ and Part 7 has special rules for the taxation of employment-related securities;
• a situation in which the person entitled to receive the sums paid by the employer does not acquire a vested right to those sums until the occurrence of a contingency (per Edwards vs Roberts CA 1935) – this being the situation addressed in the recent Supreme Court decision in Forde vs McHugh, and a situation with which many employer-funded deferred bonus arrangements are concerned.

Earlier cases, such as the Special Commissioners’ decisions in Sempra Metals v Revenue & Customs Comrs (2008) and in Dextra Accessories vs Macdonald (2002) had focused on the question of whether funds paid by an employer into a trust belonged to the employee or was at the absolute disposal of the employee. Lord Hodge stated that Sempra Metals was wrongly decided, and the Special Commissioners in Dextra were not presented with the arguments advanced by HMRC in the Glasgow Rangers’ appeals.

In short, the Court held that (i) income tax on earnings is due on money paid as a reward or remuneration for the employee’s exertions; (ii) the relevant statutory provisions (except those relating to ‘perks’) do not provide that the employee must receive the remuneration; (iii) references in the PAYE Regulations to making a payment “to an employee” or other payee” should be construed as meaning payment to either the employee or the person to whom it is made with the agreement or acquiescence of, or as arranged with, the employee; (iv) the specific statutory rules governing gratuities, profits and incidental benefits (i.e. perks), in s62(2)(b) ITEPA, apply only to such benefits;  and (v) the Special Commissioners erred in the Sempra Metals and Dextra cases.

Comment

At last, HMRC has the decision it has been craving for so many years and which, had it been handed down a decade ago, would have largely obviated the need for the 36+ (and growing!) pages of ‘disguised remuneration’ legislation. It is a ‘moot point’ for many a gathering of advisers as to why it has taken so long for the basis on which earnings are taxed to be so clarified. Of course, there will no doubt be arguments to be had over whether, in any particular case, an employee has ‘agreed, acquiesced in, or arranged with the employer’ for a payment to be made to his Aunt Agatha, a trustee, or any other third party.

© David Pett July 2017