Taxation and trusts; Bounce Back Loan fraud and more

Contents:

• Trust Registration Service - latest news
• Taxpayer wins High Income Child Benefit Charge
• OECD favours a revamp and an increase in inheritance, estate and gift taxed
• Bounce Back Loan fraud

 

 

Trust Registration Service - latest news
(AF1, JO2, RO3)

On 17 May HMRC published its Trust Registration Service Manual (TRS Manual), providing detailed, technical information that builds on its existing TRS extension overview web page. It also published changes to the current TRS for existing trusts and announced a pilot scheme for registration of non-taxable trusts.

The new manual was announced in the HMRC Trusts and Estates Newsletter: May 2021. The newsletter also deals with an update to the TRS for existing taxable trusts and it details a pilot scheme for registration of non-taxable trusts.

Here, we concentrate on what has just been published.

TRS technical manual

The Trust Registration Service manual (TRSM) contains information on a number of areas such as registration requirements, information required to register and data retention. Additional material on subjects including deadlines, penalties and third-party information sharing provisions will be added in due course.

The Introduction section includes a very useful set of trust definitions in alphabetical order.

Most of the content of the manual is just repetition of the legislation or the previous guidance but there are some additional explanations. For example, in relation to bare trusts the manual confirms that there is no specific exclusion from registration for bare trusts. In general, if a bare trust is an express trust it should register on TRS unless it falls within the definition of excluded trusts. So, unfortunately, there is no concession for bare trusts or nominee accounts where the beneficiary is other than the bare trustee, such as a minor child, despite general acceptance that such arrangements are unlikely to be used for money laundering purposes.

Of course, bare trusts are not required to register for taxable purposes, because any UK tax liability is incurred by the beneficiaries (or the parental settlor, if relevant) rather than the trustees.

There is also an interesting explanation of what an express trust is (remember that only express trusts need to register as non-taxable trusts).

According to the manual, an express trust is a trust created deliberately by a settlor, usually in the form of a document such as a written deed or declaration of trust. However a written document is not in fact necessary as is confirmed in another part of HMRC’s manual (TSEM9510) which provides that an express trust is usually created by a declaration of trust which is made by the legal owner but this declaration can be written or oral except in the case of land.

Cleary, if there is no written document there may be problems with providing evidence of the existence of the trust. In another part of the manual, TSEM9550, HMRC states that there must be evidence of: the intention to create a trust, the beneficial interest in the property, and who holds the beneficial interest (i.e. the “three trust certainties”); as well as the date from which such a trust is said to exist.

We have previously considered the question whether a designated (nominee) account (such as one used with unit trusts investment) which involved a gift, will need to be registered. If a designation is made irrevocably with the intention that the investment is held for a designated beneficiary (sometimes designated as the “beneficial owner”) so that a bare trust is created (at least in England and Wales), then arguably this will be an express trust, even if the word “trust” is not mentioned. As such it will have to be registered.

Express trusts can be contrasted with trusts that come into being through the operation of the law and that do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangement (for example, implied or constructive trusts). Such trusts do not need to be registered unless they become “taxable trusts”. An "implied trust" is in effect a loose way of describing a trust that arises by operation of law such as a resulting trust or constructive trust and should not be confused with an express, but undocumented (e.g. oral), trust.

Changes to the registration process for taxable trusts

In preparation for opening the TRS to non-taxable trusts for registrations in Summer 2021, HMRC has made changes to the existing service.

Taxable trusts (i.e. those that need to register already because the trustees have a tax liability) are now required to provide additional data to confirm if:

• the trust is, or is not, an express trust;
• a non-UK trust has a business relationship in the UK;
• the trust has purchased any UK land or property;
• the trust has a controlling interest in a non-EEA company (and, if so, provide company details).

Users can also supply additional data about the individuals involved in the trust. Information can also be provided about:

• country of residence;
• country of nationality;
• if the person has mental capacity at the time of registration.

The TRS guidance has been updated to include information about the additional data.

HMRC has also made some changes to the way in which they check that individuals’ names, National Insurance number and date of birth are correct. The details are checked upon input and service users are given three attempts to input the correct details. After three attempts, service users will be asked for alternate details instead (name, address, passport number, expiry date, country of issue).

It is now also possible to get a PDF output from the service to demonstrate proof of registration.

Pilot scheme for registration of non-taxable trusts

From 17 May 2021, HMRC started inviting non-taxable trusts to register and make changes to their trust details.

Use of this service is only available on a limited basis at this stage, to allow for service development and enhancement, and therefore will only be accessible to those who have been directly invited to use the service.

People who have a non-taxable trust and are willing to participate in this initial registration period should contact: service_team17.digital_ddcn@digital.hmrc.gov.uk, their request will be logged and HMRC may contact them with an invitation.

HMRC stresses that this is a limited service only at this stage, and they ask that people do not contact the Trusts helpline in relation to registration of a non-taxable trust during this period. The full service will then be available on a public basis for all customers at a later point in Summer 2021.

It is encouraging that the pilot scheme has started for the registration of non-taxable trusts and that HMRC still refers to the Summer of 2021 as the date when the new TRS will go live. Interestingly, the HMRC Agent Update issue 83, from April this year, advised agents to expect the TRS service to be open for non-taxpaying trust registrations by Autumn 2021.

 

 

Taxpayer wins High Income Child Benefit Charge
(AF1, RO3)

The First-tier Tribunal (FTT) has allowed a taxpayer’s appeal against penalties for his failure to notify liability to the High Income Child Benefit Charge (HICBC) because he had a reasonable excuse.

In the case of Turley v Revenue and Customs (High Income Child Benefit Charge) [2021] UKFTT 123 (TC) (7 April 2021), Mr Turley was an employee paid through the PAYE system and in 2012/13, when the HICBC was introduced, and several subsequent years, his adjusted net income was above £50,000 and his wife had claimed Child Benefit for their children.

As he did not receive a notice to file a tax return for any of these years, he should have notified HMRC of his liability to the HICBC.

HMRC wrote to Mr Turley about the HICBC in October 2019., at which point he immediately engaged an agent. And in March 2020, HMRC issued Mr Turley with a penalty of £509.20, under Finance Act 2008 Schedule 41, for his failure to notify his liability to the HICBC for the tax years 2012/13, 2013/14, 2014/15, 2015/16 and 2017/18. He appealed against the penalty on the grounds that he had a reasonable excuse.

Note that although, HMRC announced a review of penalty cases, generally, for failure to notify liability to the HICBC on 1 December 2018, it would not include any person in receipt of a communication pertaining to the introduction of the charge. That review concluded in June 2019. Refunds were paid to those who claimed Child Benefit before the introduction of the HICBC and where their income rose above £50,000 after the introduction of the charge, and to those where the liability arose in 2013/14 and who had formed new partnerships after the introduction of HICBC. These individuals were found to have had a reasonable excuse for failure to notify.

Mr Turley’s reasonable excuse claim was filed on the basis that his children were born before the HICBC was introduced and so the claim for Child Benefit was made before the Child Benefit claim forms included information about the HICBC. Also, he never received the (SA252) letter, which HMRC’s records indicated had been sent in August 2013 telling him about the HICBC. His case for this was supported by him keeping meticulous records of his communications with HMRC.

Another notion put forward was that HMRC had also failed to provide information about the HICBC to PAYE taxpayers who had never previously been required to file a self-assessment tax return, including a failure to direct part of its advertising campaign to employers who could have ensured their employees, who earn over £50,000, were aware of the obligation to notify HMRC.

HMRC had also failed to act in a timely manner in bringing together relevant information by waiting until October 2019 to follow up on the letter their records showed they sent in August 2013.

The FTT accepted that Mr Turley had a reasonable excuse for all the periods and allowed the appeal against the penalty. So, Mr Turley only had to settle the tax liability, not the penalties

The HICBC came into effect from 7 January 2013 and is based on ‘adjusted net income.’ Generally, this is total taxable income, so before deducting any personal allowances, less any gross pension contributions which have received relief at source and gross gift aid payments.

The charge applies where a person is in receipt of child benefit and they have adjusted net income of more than £50,000. The amount of the charge is a 1% deduction of the amount of Child Benefit for every £100 of income which exceeds £50,000. Therefore, someone with adjusted net income of £55,000 would have to repay half the Child Benefit they (or their partner) received for the year. At adjusted net income of £60,000, the charge effectively wipes out 100% of the Child Benefit.

Note also that even though from 2021/22 the higher rate band is £50,270, the HICBC will still be payable once adjusted net income exceeds £50,000, and so for the first time ever it can impact basic rate taxpayers who otherwise would not have been affected by the charge.

 

 
OECD favours a revamp and an increase in inheritance, estate and gift taxes
(AF1, JO2, RO3)

A new report from the OECD has come out in favour of estate/gift taxes, but favours a structure a long way from the UK’s version

      

Rishi Sunak has been prescient – or lucky – in some of the taxes he has chosen to focus upon. His Budget announcement of an increase in corporation tax was followed by Joe Biden announcing a US hike to 28%, although reports now suggest he would be willing to accept 25% (Mr Sunak’s chosen rate). Subsequently the US President has proposed taxing capital gains as income as part of his $1.8tn ‘American Families Plan’. That idea that mirrors one of the suggestions in an Office of Tax Simplification (OTS) paper on capital gains tax simplification, commissioned by the Chancellor last year.

Another tax with an OTS report in Rishi’s in-tray has now attracted favourable comment from the Organisation for Economic Cooperation and Development (OECD). The OECD has published a report ‘Inheritance Tax in OECD Countries’, which examines inheritance, estate and gift taxes in the 24 of its 36 members which levy such tax(es). As the above graph shows and the OECD says, inheritance taxes ‘have typically played a limited role in raising revenues. In 2018, only 0.5% of total tax revenues were sourced from these taxes on average across the countries that levied them’. The UK was above the norm at 0.7%.

Looking forward, the OECD believes inheritance taxes could have a greater role to play in ‘in raising revenues, addressing inequalities and improving the efficiency of tax systems’. The report notes the wide variance in estate tax design globally, with the level of wealth that parents can transfer to their children tax-free ranging from about $17,000 in Belgium (Brussels-Capital region) to more than $11m in the United States. There is a similar disparity in rates, although a third of countries apply a flat rate, of which the UK (and USA) have the highest at 40%.

The OECD puts forward a reform structure with echoes of the proposals that emerged from the Intergenerational Commission’s 2018 report and were subsequently ‘borrowed’ by the Institute for Public Policy Research.

The main recommendations of the OECD are:

• Tax the recipients, not the donor The OECD sees this as the more equitable approach, allowing progressive tax rates to be levied and, at least in theory, encouraging wealth to be spread more widely. However, it acknowledges that taxing multiple recipients involves more administration than taxing a single donor.
• Tax throughout lifetime The OECD favours the lifetime cumulative approach, subject to a lifetime tax exemption for each recipient. It sees renewable gift tax exemptions (e.g. nil rate band gifts every seven years) as encouraging tax avoidance, particularly for wealthy families with liquid assets.
• Use progressive tax rates The OECD prefers progressive tax rates over a flat rate because the result is more redistributive and such rates encourage spreading of wealth. It suggests that progressive inheritance tax rates combined with taxes on personal capital income ‘can be powerful tools to prevent build-up of excessive wealth over generations’.
• Scale back tax exemptions The OECD singles out pensions and life policies as two areas where it believes exemptions produce regressive results, primarily benefitting wealthy households.
• Exemptions for businesses should be carefully designed and alternatives considered, e.g. 10-year instalment payments The OECD view is that business reliefs ‘predominantly benefit the very wealthy and…have sometimes been unnecessarily generous’. Ironically, the OECD uses data from the OTS inheritance tax simplification report to show the distorting effects of such reliefs. It also notes that business relief encourages the acquisition of eligible assets (think AIM shares), distorting investment decisions.
• Trust rules and those for similar structures should be revised to prevent avoidance. The OECD accepts that trusts can have a legitimate role in succession but sees them as too often used to avoid taxes.
• Automatic uplift for capital gains on death should be scrapped This has been the topic of the OTS report on inheritance tax and the later capital gains tax report. The OECD makes the point that the uplift has lock-in effects and favours the wealthiest taxpayers who generally have the most unrealised gains.

  

 

Bounce Back Loan fraud
(AF2, JO3)

According to Government statistics published in March, businesses across the UK have to date benefited from 1,531,095 Bounce Back Loans worth £46.5billion. The scheme closed to new applications on 31 March 2021.

The new measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to tackle directors who have inappropriately wound-up companies that have benefited from Bounce Back Loans. The legislation will cover England, Scotland, Wales and Northern Ireland.

At present, the Insolvency Service has powers to investigate directors of live companies or those entering a form of insolvency. Under the new measures, the Insolvency Service will be given powers to also investigate directors of companies that have been dissolved. Extension of the power to investigate also includes sanctions such as disqualification from acting as a company director for up to 15 years. More information about director disqualification can be found here: Company director disqualification.

The new measures will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.

This Bill also rules out COVID-19 related material change of circumstances (MCC) business rate appeals. This is due to the fact that market-wide economic changes to property values, such as from COVID-19, can only be properly considered at general rates revaluations.

According to the Government, allowing business rates appeals on the basis of a ‘material change in circumstances’ could have led to significant amounts of taxpayer support going to businesses who have been able to operate normally throughout the pandemic and disproportionately benefitting particular regions like London.

                                                                

 

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