Taxation and trusts; Working through an umbrella company

Contents:

• Updated guidance on the Trust Registration Service extension issued
• An interesting challenge under the Inheritance (Provision for Family and Dependants) Act 1975
• Working through an umbrella company

 

Updated guidance on the Trust Registration Service extension issued

(AF1, JO2, RO3)

HMRC has recently issued updated and revised guidance on the Trust Registration Service extension. There have been multiple changes to the original guidance to help readers understand what they need to do and how to do it.

HMRC issued guidance on the Trust Registration Service (TRS) extension on 25 January. In March, it confirmed, in correspondence with the ATT and CIOT, that the original deadline for registration, by 10 March 2022, was being postponed. The updated guidance, officially confirms that trustees cannot register trusts under the new rules until later in 2021, when the new TRS will be ready. And it says that a new deadline for registrations (yet to be announced) will give trustees approximately 12 months to register from when the new service is ready to accept registrations. 

There is nothing new in the updated guidance, and it appears to have been simply an edit, including deletion of some perhaps confusing statements (especially some examples) included in the previous version.

HMRC has promised a more detailed guidance on the TRS extension, but unfortunately the updated version referred to above is in fact shorter on detail than the previous one. However, it is definitely better written and easier to understand than the previous version. It also includes a number of links to the current TRS process, which while helpful for those who need to use the TRS now (because the trustees have a tax liability), might confuse those who are looking for the new rules to come from next year.

 

 

 

An interesting challenge under the Inheritance (Provision for Family and Dependants) Act 1975

(AF1, JO2, RO3)

A recent case has made clearer the boundaries of ‘provision’ under this Act. It also underlines the importance of making intentions clear to all parties, preferably in writing. 

The latest data from the Ministry of Justice shows 188 will-challenging cases made it to the High Court in 2019, 47% up on 2018. Many more disagreements will have been quietly settled before reaching the courts: both parties often end up choosing to accept a compromise rather than face legal costs that can negate any victory.

One case that made it to the High Court this year was Miles v Shearer. Read the transcript and the words of Tolstoy spring to mind: “All happy families are alike, but every unhappy family is unhappy in its own way.’ The basic facts behind the case were:

• Tony Shearer died at the age of 68 in October 2017, leaving a second wife, Pamela, whom he had married shortly after his first marriage to Jennifer had dissolved in 2007. There were two children from the first marriage, Juliet, now aged 40 and Laura, now 39.

• In 2008 Tony gave £177,000 to Juliet and £185,000 to Laura, making clear that he would not be providing any more support to his daughters, who were by then in their mid-20s.

• The two children were excluded from his will, which left everything to Pamela, bar two small legacies. The value of Tony’s estate was £2.2m (excluding jointly owned property).

• Tony and Pamela had drawn up mirror wills, such that on second death 25% of the residuary estate would pass to each for two of Pamela's friends, 25% to Juliet and 12.5% to each of her two daughters. In the hearing Pamela was asked whether she had changed her will, but she refused to give a detailed answer, saying that she had a right to privacy. However, she did state she had not revoked the will.

• At the time of the trial:

• Juliet had two daughters (the younger severely autistic) and was divorcing her second husband. She lived with her mother, Jennifer, in a large property in Wiltshire and was not working. Juliet’s wealth amounted to about £175,000, represented by a share of a flat in Fulham Palace Road, jointly owned with Jennifer.

• Laura had one son and was divorced. She lived in a flat in Fulham in which she held £300,000 of equity and on which there was a £414,000 interest-only mortgage. Her ex-husband retained 11% equity in the flat, but had agreed not to seek a sale until 2034, when their son reached age 18. Laura earned £70,000 a year.

• Juliet’s claim under the Inheritance (Provision for Family and Dependants) Act 1975 has three parts:

1. A housing fund to enable her to move out of her mother’s home;

1. The costs of training as a dog behaviourist, so that she could support herself; and

1. A payment to cover the costs of provision for her autistic daughter.

• Laura’s claims were for:
1. A lump sum to reduce her mortgage to £170,000, a level at which she could afford to convert to a repayment mortgage; and
2. An additional lump sum to buy out her ex-husband’s equity share in the flat.

The Judge rejected both claims, saying that neither daughter had established a need for maintenance. There was no obligation on their father to support his adult children and he had made clear with his gifts in 2008 that he would not be providing any further financial assistance. The Judge said that the fact that Juliet’s child was autistic was unfortunate, but irrelevant to the case because a grandchild does not qualify as an eligible applicant under the Act.

This case may mean that there are fewer attempts to make a claim under the Act – or threaten to do so as an opening gambit. It also underlines the importance for the would-be testator to make their intentions clear to all parties as soon as practical, preferably in writing.

 

 

Working through an umbrella company

(AF2, JO3)

HMRC has published useful guidance on working through an umbrella company. However, it doesn’t set out the position on expenses.

An umbrella company is, normally, a company that employs a temporary worker (an agency worker or contractor) on behalf of an employment agency. The agency will then provide the services of the worker to their clients 

Most umbrella companies employ workers using an employment contract which will set out their terms and conditions. This means the company must comply with employment law.

If a worker is employed by an umbrella company, the tax rules on agency workers and off-payroll working (IR35) will not apply to that worker.

The umbrella company will pay the worker for the work they do for the employment agency’s clients and deduct any income tax and employee National Insurance contributions due under PAYE from their pay.

The end client pays the agency for the worker’s services. The agency deducts a fee for placing the worker with the end client and pays the rest of the money (sometimes known as the assignment rate or the limited company rate) to the umbrella company.

This rate is different to the rate the worker gets paid from the umbrella company, because of the additional costs for the umbrella company, which include:

• administration costs (sometimes charged separately to the worker by the umbrella company);
• employer National Insurance contributions;
• employer workplace pension contributions;
• holiday pay; and
• other amounts to cover other specific costs, such as Apprenticeship Levy.

The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. An umbrella company cannot by law deduct employer National Insurance contributions from the worker’s gross pay.

HMRC’s guidance can be found here.

Anti-avoidance

HMRC points out that it does not approve or endorse umbrella companies.

The guidance warns that some umbrella companies may claim to allow the worker to keep more of their earnings than others, which means it could be a disguised remuneration tax avoidance scheme. They could also involve third parties.

Tax avoidance schemes sometimes carry high, non-refundable fees and are often provided by, or through, offshore promoters.

If the worker is asked to sign an annuity, loan or other agreement involving a non-taxable element of pay, especially if this involves someone other than their employer, it may be a tax avoidance scheme and the guidance suggests that the worker should contact HMRC as soon as possible, so HMRC “can help you get out of it and settle your tax affairs”.

Tax relief for expenses

Expenses for umbrella company employees is one area not covered by HMRC in this new guidance.

Whilst the normal rules around tax relief for employee expenses may apply to some expenses incurred by employees of umbrella companies, most employees of umbrella companies cannot claim tax relief on travel and subsistence expenses as their placement will be affected by the Supervision, Direction and Control (SDC) rules introduced from 6 April 2016.

Affected travel and subsistence expenses include for: work-related travel costs that are not normal commuting; travel from the main office to a temporary workplace; journey from home to a temporary workplace; food and drink purchased as a result of a business-related trip; or hotels and other (work-related) overnight stays.

A temporary worker is subjected to supervision if they’re overlooked when undertaking some or all of their duties. The “supervisor” will ensure the temporary workers are doing their work correctly and as per the terms of the contract.

Direction applies when somebody tells a temporary worker how to do their job, or instructions, rules, and guidelines are being handed out.

Control occurs when a temporary worker is told what they need to do and are effectively micro-managed. The temporary worker could be moved elsewhere and asked to conduct other duties – without having a say.

So, almost every intermediary worker working for an umbrella company will be subject to the SDC rules.