GAAR Panel concludes loan arrangements unreasonable

The General Anti-Abuse Rule (GAAR) Advisory Panel has published details of three opinions covering employee rewards that use loans which found that the planning used was unreasonable.

The 11 May 2021 opinions outlined the employee arrangements:

• A trading Company was owned by X and Y in equal shares.
• A trust was set up for the benefit of individuals (and their relatives) that provided finance, as part of a lending trade, to a certain group of people.
• X and Y provided a modest amount of finance to the persons specified in the trust deed such that they became beneficiaries.
• The Company made contributions equal to a significant proportion of its profits to the trust over a number of years claiming a Corporate Tax deduction.
• On the same day as each trust contribution was made, loans were requested, and paid, from the trust to X and Y.
• The amounts loaned by the trust represented the contributions it had received less arrangement fees.
• X and Y received minimal remuneration from the Company and the bulk of their monies came from the loans.

HMRC contended that:

• The loans would not be repaid.
• PAYE and National Insurance Contributions (NICs) should be applied to the total contributions to the trust, or if not, no Corporation Tax deduction should be allowed.

The taxpayer contended that:

• The Company was entitled to a Corporate Tax deduction.
• The loans were not employment income, did not represent Disguised remuneration, are not taxed as dividends and do not represent Loans to participators.
• X and Y were beneficiaries as they met the conditions, rather than by virtue of their employment with the Company, thus the disguised remuneration provisions could not apply.

The GAAR Panel concluded that neither entering into nor carrying out the arrangements was a reasonable course of action as:

• The arrangements as a whole are contrived and abnormal and appear to serve no purpose other than to avoid tax.
  • The company has made substantial contributions to a Trust without any clear link to benefit its trade.
  • The modest loans made by X and Y were contrived to allow the taxpayers to claim the loans they later received are for a reason other than their employment. 
  • The loans made do not provide a significant enough activity to mean the loans received were not related to their employment with the Company.
  • No credit checks were made by the Trust to check X and Y’s ability to repay the loans and no security for the loans was provided. This suggests loans were not independent investments of the Trust.
  • The loans to X and Y were issued at a deep discount which was abnormal.
• The arrangements were not consistent with the principle that employment earnings and rewards should be subject to Income Tax as they were a means of transferring value from the Company otherwise than by way of dividend or salary.
• While the arrangements did not seek to exploit a loophole, they sought to break the link between the loan and employment.
• It would be surprising if the value contributed to the Trust was not to remain with X and Y irrespective of whether the loans were to be repaid.
• The arrangements were not consistent with HMRC practice nor had HMRC indicated the acceptance of that practice.

Useful guides on this topic

General Anti-Abuse Rule (GAAR) (subscriber)
This guide looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013, what areas of tax it covers and what you need to know about the provisions it contains when considering tax planning.

General Anti-Abuse Rule: GAAR at a glance (freeview)
This note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013 and the basics of what you need to know about the provisions it contains when considering tax planning.

Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Disguised remuneration: At a glance (freeview)
At a glance freeview introduction to the Disguised Remuneration rules.

Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) do a toolkit for advisers. This is our enhanced version with planning points. 

Directors' loan accounts: Toolkit (freeview)
This is a freeview 'At a glance' version of HMRC's Directors' loan accounts toolkit for advisers with planning points.

External links

GAAR Advisory Panel opinion of 11 May 2021: Rewards in the form of loans for employees including contributions to a trust