A dentist has lost a First Tier Tribunal (FTT) appeal against closure notices issued by HMRC which rejected claims for tax relief for payments to a remuneration trust
The appellant, Mark Northwood, appealed to the FTT against closure notices issued by HMRC on 1 December 2016 amending his income tax returns, for the tax years ending 5 April between 2010-2013.
The amendments resulted in additional income tax and national insurance contributions (NICs) totalling £999,755.81.
Northwood argued that making contributions to a remuneration trust had the effect of reducing the taxable profits from his self-employed dentistry business and as a result his liability for income tax and NICs.
However, HMRC disagreed and amended Northwood’s tax returns to remove the deduction. Northwood appealed to the FTT against HMRC’s amendments.
Northwood qualified as a dental surgeon in 1988 and has conducted his orthodontist practice for some years as a sole trader. In 2009, he entered into discussions with Foy Wealth Ltd and law firm Baxendale Walker about setting up a remuneration trust.
On 17 September 2009, Baxendale Walker provided Northwood with an engagement letter, which he signed six days later. In October, the firm issued Northwood with a report, which detailed establishing the remuneration trust.
The Mark Northwood Remuneration Trust Deed, dated 30 November 2009, described Northwood as ‘the founder’ and Bay Trust International Limited as the ‘original trustees’.
On 11 November 2009, Marhel Management Limited (MML) was incorporated and registered in the UK, with Northwood and his wife appointed as directors and shareholders.
Loans were made totalling £525,000 by MML to Northwood during the tax year ending 5 April 2010 between January to March 2010.
The initial contribution to the trust of £450,000 was on the basis that £150,000 would be transferred to the trust and then loaned to Northwood, who then used the money to contribute a further £150,000.
This process was repeated so the trust would receive £150,000 in cash and £300,000 in the form of a promise to repay existing debts for the amount loaned.
Loans for subsequent years were £335,000 in the year ended 31 March 2011, £75,000 in March 2012, and £470,000 in March 2013.
Northwood’s financial statements for each of the accounting periods under the appeal were compiled in accordance with UK GAAP accounting rules.
In his appeal, Northwood argued that the contributions to the remuneration trust met GAAP rules under s34 Income Tax Act 2005 (ITTOIA 2005).
Section 34 ITTOIA states that ‘the profits of a trade must be calculated under GAAP, subject to any adjustment required or authorised by law in calculating profits for income tax purposes’.
Northwood argued that the contributions were correct, and that the payments formed a ‘valid expense’ of the business and were also deductible for tax purposes.
The issue between the parties was whether contributions to the remuneration trust, together with any associated fees, were deductible in calculating Northwood’s taxable profits.
Northwood stated that during the relevant period, his leased business required commitment to a new lease in four years or to find different premises, but concerns were raised during discussions with Foy that owning business premises provided a ‘potential vulnerability’ if clients, employees or others made a legal claim against him.
Foy then introduced him to a remuneration trust structure as a way of achieving his aim of owning his practice premises while overcoming some of the concerns.
The remuneration trust was partly set up as a vehicle for ‘building up a pot of money’ that would allow Northwood to invest in the business premises, which would be used as a way to give incentives to suppliers.
HMRC argued where only £150,000 was contributed to Northwood by the remuneration trust and he claimed an income tax deduction concerning a contribution of £450,000, by using a ‘leverage mechanism’ whereby £150,000 went around in a circle three times between Northwood and Baxendale Walker.
As a result, Northwood did not bear the ‘economic burden’ of the alleged contribution because he did not have the cash to contribute.
It referred to the decision in Ingenious Games LLP, where the Upper Tribunal ruled that an ‘expense will only be incurred where the taxpayers bear the economic burden of an expense’.
It also argued that the purpose of benefitting suppliers was ‘exposed as a work of fiction’ and that the money remained within Northwood’s control, with the sole purpose of the scheme being tax avoidance.
HMRC pointed out that Northwood failed to identify ‘a single person who was both a beneficiary of the arrangements, so far as Mr Northwood understood them to operate and a person who fell within the class of beneficiaries under the remuneration trust scheme’, and that the only person who was intended to benefit – and did benefit – from the arrangements was Northwood himself.
Judge Kim Sukul said: ‘I accept Mr Northwood’s evidence that he was advised that he could enter into a set of arrangements which gave him the protection that he wanted for his business, in a way that offered him a tax advantage. I do not find Mr Northwood to have acted dishonestly in an attempt to evade tax or to conceal the overall arrangements.
‘However, I find that the contributions made to the remuneration trust, together with any associated fees, are not deductible in calculating Northwood’s taxable profits because the contributions should not have been recognised as an expense in the accounts under UK GAAP and the contributions and associated fees were not wholly and exclusively for the purposes of the trade.
‘I also find that there was an intention, by virtue of the remuneration trust documentation, to make things appear other than they were and the documentation was therefore a sham. Accordingly, the appeal is dismissed.’
Northwood now faces a substantial tax bill to settle the dispute unless he decides to appeal.