In recent years the issue of disguised remuneration has gained notoriety as individuals use small and medium-sized companies to extract income without accounting for the tax which may properly fall due on such income.
The difference between tax planning and tax avoidance has become more and more difficult to distinguish over the years, both as a result of increasingly complicated tax schemes and as a result of the reactive legislative changes.
This is of course gravely concerning for HMRC, which has a duty to collect the taxes due on Income and National Insurance, which make up 27% and 18% of UK tax receipts respectively (total 45%)*.
- the changes to tax legislation in recent years targeted circumstances where loans are made via employee benefit trusts and employer financed retirement benefit schemes;
- this has led to the implementation of legislation to impose loan charges on directors loans and on all disguised remuneration schemes to combat these specific loan arrangements as part of HMRC’s anti-abuse measures.
However, more recently (as of writing), it has been slowly realised that the use of small owner-managed, or close companies, has led to alternative arrangements being set up whereby income or assets have been advanced to individuals not as loans.
What is a close company?
A close company is essentially a small owner-managed company (often referred to as a “quasi-partnership”) with 5 or less “participators”, who are basically a combination of directors and/or shareholders.
To satisfy the requirements of a close company the directors / shareholders must
- have control, or a material interest, in the company; and
- must not only have control but also possess or intend to possess most of the company’s assets.
The definition of participators can also include loan creditors with convertible debts (for example debenture holders) but will not include
- public limited companies (subject to the percentage of public shareholding);
- industrial and provident societies;
- building societies; or
- companies controlled by the crown.
Accordingly, most private companies are defined as a close company.
The “relevant transaction” and “employment” requirements
The “relevant transaction” is a similar transaction as is referred to in the disguised remuneration legislation i.e. whereby a transaction is made benefiting an employee or participant in the close company.
For such participants there is the question of employment, which is satisfied by their position within the company as director within a specified period of time preceding the relevant transaction. It is this question of “employment” which has led to the legal amendments to prevent owner-managers of SMEs seeking to rely on their status as non-employee to avoid the charge to income tax on earnings.
- with close companies the use of the company’s funds is not necessarily that clear as the company is often operated as, for example, a family business and part of a wider estate;
- it is often the argument when approaching a disguised remuneration scheme that the income paid out was not in connection with an individual’s employment but part of the wider close company arrangements.
The legal changes brought in by the Finance Acts 2017 provide for these circumstances and also where the liability is sought to be transferred as a result of the employer’s status.
At Francis Wilks & Jones we are able to assist with any claims arising from HMRC or any other aspect of the above matters, and particularly with regard to claims out of insolvency or for breach of a director’s fiduciary duties. Please call any member of our tax disputes team for your consultation.
