Where HMRC has missed an opportunity on disguised remuneration

After the Rangers decision in July and the hints made in September, HMRC this month had the best opportunity in decades for a sensible and reasonable response to a problem largely of its own making, writes Graham Webber of WTT Consulting.

That’s because on November 7^th, the department updated its stance to contractors in a paper entitled ‘“Disguised remuneration; detailed settlement terms."

Using this update to make a single sensible and real decision could have meant the difference between collecting a significant amount of money with the minimum of fuss or -- collecting perhaps a slightly higher amount but at the cost of lawyers, barristers, insolvency actions and most crucially of all, faith in the system and its keepers.

That decision was not made.

Instead we have a continuation of a policy that has already absorbed 15 years of enquiry, countless hours of professional time, eroded all trust in HMRC at least on the Disguised Remuneration (DR) front, and has produced a hugely uncertain amount of money.

But on top of simply missing the opportunity, HMRC have created a number of problems with the settlement proposed. Space here does not allow a full examination of them. Instead I will focus on some of the more baffling exclusions and inclusions.

First, there is absolutely no mention of the Rangers decision. It’s as though that victory for HMRC never happened and has been erased from the history books. Now we all know that the winners write the histories but in this case, such a clear and concise (and sensible) decision that being paid as an employee results in taxable income, has to be the mainstay of the HMRC analysis, surely? Perhaps the clue here is that the “inconvenient” element of that decision, i.e. it’s primarily an employer liability, is the reason for the absence? To admit that part of the decision, leaves the HMRC analysis (and this settlement) in ruins.

Second, we now have in play HMRC’s analysis that transfer of assets abroad works in earlier years; the Contractor Loan Settlement Opportunity for years to 2010/11, APNs, the Rangers decision, the DR charge in 2019 and now this settlement proposal. 

The analysis of where any individual might be will depend on how the statute and extra statutory rules work together. I confess that we have studied the position. Discussed it. Studied it again and are not yet ready to make our analysis public. If the combined 70 years of tax experience in our firm cannot understand the implications, how is the average contractor?

Third, we have the extraordinary and new position from HMRC in the paper that unless you volunteer to pay an amount for closed years (said to be legally enforceable), then no settlement is possible. HMRC is saying that the protection granted taxpayers in the statute can be overridden by an extra statutory agreement that is not subject to any judicial oversight. We are used to HMRC interpreting law as is convenient (a position that has attracted judicial criticism), but here, they are simply refusing to admit the law exists.

Fourth, the position outlined in the paper on Inheritance Tax is just untenable. HMRC has not arrived at a position on IHT that is coherent with the income tax position. The income tax position is based on a factual analysis to which the law is applied, a so-called ‘purposive’ interpretation. The IHT position appears to be based on a literalistic view of what the documents say, which as we know is often at odds with the facts. HMRC is cherry-picking the arguments to suit themselves.

I could carry on but will not. Suffice to say that we will struggle to advise clients to settle on the basis of this settlement plan. Furthermore, until HMRC actively realises that they are answerable to a higher authority and are merely instructed to give the courts and the statute book due weight, we suspect takers for this plan will be those who succumb to the rather unsubtle bullying we see displayed in this HMRC paper.

We regard this development as a deep wound inflicted and the manner of delivery is rubbing salt into it.