In Oco and another v HMRC [2017] UKFTT 589 (1 July 2017), the FTT found that a scheme involving the use of a trust to avoid income tax and NICs on directors’ remunerations failed under the Ramsay doctrine.
Oco had implemented a scheme designed to provide benefits to key employees without incurring income tax (under PAYE) and NICs. The scheme involved setting up an employee benefit trust (EBT), and the subsequent creation of sub-funds for the benefit of particular employees and their families. Benefits were provided mainly by the trustees advancing interest free loans to the employees. The issue was whether these amounts constituted earnings.
The first question was whether at the time or before the payment was made to the EBT, the directors had some form of rights in relation to the sums so that they amounted to earnings capable of being redirected. If the sums were earnings when paid into the EBT, the FTT observed that what the directors chose to invest their earnings in was irrelevant. However, the FTT found that the directors had no legal interest in the sums, which had not been earmarked or allocated.
The second issue was whether the approach in Autoclenz/Antoniades [2011] UKSC 41 and [1990] 1 AC 417 (which concerned bilateral agreements) could be applied to a document which had been unilaterally executed, such as a trust. The FTT found that the approach of searching for the true agreement between the parties did not make sense in the context of a trust. The terms of the trust could therefore not be disregarded and it was not possible to treat the sums as held in bare trusts at the discretion of each of the directors.
In case the tribunal was wrong in relation to the second issue, it considered the operation of the trust. HMRC argued that the trustee’s behaviour was inconsistent with any intention to exercise an independent discretion. The recitals to the trust deed mentioned that the settlor wished to ‘establish a trust fund for the benefit of its employees and dependants and the employees and dependants of any group company’. In those circumstances, the ‘clear purpose of the trust’ was to provide a means to benefit certain individuals connected through employment or persons connected to such individuals; and it was not unreasonable for the trustee to take account of the views of the settlor and to carry only summary due diligence when considering a request for a loan.
However, on a ‘realistic appraisal of the facts’, applying Ramsay, the tribunal found that the scheme would not serve the purpose intended by the company and its directors, if there was any real question of the trustees acting in a way which was contrary to the directors’ wishes. The amounts received were therefore earnings. Similarly, on a realistic approach, the scheme only made sense if the repayment of the loans could not be demanded.
Why it matters: The appeals were lead appeals and several hundreds of appeals stand behind the lead cases. The scheme was similar to the scheme implemented by the Ranger Football club in RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45 (see Tax Journal, dated 5 July 2017). In the Ranger case, however, side letters (entered into at the time salaries were agreed) determined the amount to be contributed to the sub-trust and the terms of the trust, whereas no such agreement existed at the time of the payment to the trust in the present case, so that the directors had no entitlement to the monies received by the trust. However, on a ‘realistic appraisal of the facts’, the sub-trusts were money boxes which the directors could assess as they wished. The monies they received were therefore earnings.
In Oco and another v HMRC [2017] UKFTT 589 (1 July 2017), the FTT found that a scheme involving the use of a trust to avoid income tax and NICs on directors’ remunerations failed under the Ramsay doctrine.
Oco had implemented a scheme designed to provide benefits to key employees without incurring income tax (under PAYE) and NICs. The scheme involved setting up an employee benefit trust (EBT), and the subsequent creation of sub-funds for the benefit of particular employees and their families. Benefits were provided mainly by the trustees advancing interest free loans to the employees. The issue was whether these amounts constituted earnings.
The first question was whether at the time or before the payment was made to the EBT, the directors had some form of rights in relation to the sums so that they amounted to earnings capable of being redirected. If the sums were earnings when paid into the EBT, the FTT observed that what the directors chose to invest their earnings in was irrelevant. However, the FTT found that the directors had no legal interest in the sums, which had not been earmarked or allocated.
The second issue was whether the approach in Autoclenz/Antoniades [2011] UKSC 41 and [1990] 1 AC 417 (which concerned bilateral agreements) could be applied to a document which had been unilaterally executed, such as a trust. The FTT found that the approach of searching for the true agreement between the parties did not make sense in the context of a trust. The terms of the trust could therefore not be disregarded and it was not possible to treat the sums as held in bare trusts at the discretion of each of the directors.
In case the tribunal was wrong in relation to the second issue, it considered the operation of the trust. HMRC argued that the trustee’s behaviour was inconsistent with any intention to exercise an independent discretion. The recitals to the trust deed mentioned that the settlor wished to ‘establish a trust fund for the benefit of its employees and dependants and the employees and dependants of any group company’. In those circumstances, the ‘clear purpose of the trust’ was to provide a means to benefit certain individuals connected through employment or persons connected to such individuals; and it was not unreasonable for the trustee to take account of the views of the settlor and to carry only summary due diligence when considering a request for a loan.
However, on a ‘realistic appraisal of the facts’, applying Ramsay, the tribunal found that the scheme would not serve the purpose intended by the company and its directors, if there was any real question of the trustees acting in a way which was contrary to the directors’ wishes. The amounts received were therefore earnings. Similarly, on a realistic approach, the scheme only made sense if the repayment of the loans could not be demanded.
Why it matters: The appeals were lead appeals and several hundreds of appeals stand behind the lead cases. The scheme was similar to the scheme implemented by the Ranger Football club in RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45 (see Tax Journal, dated 5 July 2017). In the Ranger case, however, side letters (entered into at the time salaries were agreed) determined the amount to be contributed to the sub-trust and the terms of the trust, whereas no such agreement existed at the time of the payment to the trust in the present case, so that the directors had no entitlement to the monies received by the trust. However, on a ‘realistic appraisal of the facts’, the sub-trusts were money boxes which the directors could assess as they wished. The monies they received were therefore earnings.
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