Pronouncements by HMRC seem to indicate a newfound interest in the types of flexible share structures which some families have adopted over the years and perhaps which might lead those using them to reconsider the approach to keep ‘under the radar’.
Trusts
At the beginning of June 2023, HMRC issued a warning through its ‘Spotlight’ communications about a dividend diversion tactic it views as aggressive to fund, such as school fees, which indicates that they are taking a closer interest in the use of trusts.
There are legitimate opportunities to remove value from an estate and to direct income to grandchildren, but it is important to liaise carefully with the solicitor creating the documentation to get the establishment of trusts and related share structures on a sound footing. The increased HMRC interest indicates existing structures should be reviewed.
In recent years, the tightening of regulations and attempts to look through trust arrangements, through measures such as Companies House’s Register of Person with Significant Control and HMRC’s own Trust Registration Service, has caused the banks to make it complicated to use trust shareholdings too.
The key issue in the Spotlight 62 notice is where the shares used do not have full market value and the actual wording of the notice is as follows.
“HMRC is aware of a tax avoidance scheme being marketed as a tax planning option available to help fund the cost of education fees. The arrangements are targeted at individuals who are the directors and main shareholders of a company (an owner managed company).
HMRC’s view is that this scheme does not work.
How the arrangements are claimed to work
The arrangements seek to avoid tax by allowing the directors, who are also the main shareholders (the owners) of a company, to divert dividend income from themselves to their minor children.
The arrangements work as follows:
- a company issues a new class of shares which usually entitles the owner of the shares to certain dividend and voting rights.
- Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value.
- Person A usually gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children.
- Person A or the company owners vote for substantial dividend payments in respect of the new class of share.
- this dividend payment is paid to the trustees of the trust.
- as the beneficiaries of the trust, the company owner’s children are entitled to the dividend.
The company owner’s children pay tax on the dividend received. However, they pay much less tax than if the company owners received the dividend due to their children’s:
- £12,570 tax-free personal allowance
- £1,000 dividend allowances
- eligibility for the dividend basic tax rate
HMRC’s view is that this scheme does not work as the arrangements are caught by specific anti-avoidance legislation contained in the Income Tax (Trading and Other Income) Act 2005, from S619 onwards that prevents this type of arrangement providing the tax advantage that is sought.
Arrangements which operate in a similar way may also be caught by this legislation.
Dividend and hours worked reporting
In the November 2023 Autumn Statement, it was announced that HMRC will be given extra powers to collect information about the amount of dividend payments earned by owner managed business directors while employers will have to report the number of hours worked by individual employees.
From April 2025, the Finance Act 2024 has put in place new rules on dividend disclosure, giving HMRC the ability to ask for the information. A consultation closed on the 9th May, so it is reasonable to expect HMRC to ask anyone involved with an owner managed business to use their Self-Assessment tax return to split out the amount of dividend income received from their own companies from other dividend income, and the percentage share they hold in their own companies.
If HMRC’s systems are ready by then they are likely to request information on the SA 102 form related to the value of dividends and percentage shareholding in a close company of which the individual is a director. This would perhaps appear to be a first step towards identifying the voting of disproportionate dividends within family shareholder groups.
The legislation confirms that should HMRC be willing and able, that employers will be required to provide detailed information about how many contracted hours are worked by employees using real-time information PAYE reporting.
It is not clear why HMRC needs this level of information as companies already need to report National Minimum Wage liability and employees paid outside the minimum wage can be paid whatever rate the company wants to pay. HMRC said the data collected would ‘help improve government support for the labour market’.
It is also part of wider attempts to clamp down on tax evasion with better ‘compliance’ cited as an important objective after investigations activity levels are still recovering from the pandemic delays.
The draft legislation on the hours worked issue appears to pre-empt objections, stating: ‘PAYE regulations may include provision requiring an employer to provide any information that is specified or described in regulations made by the Commissioners (whether or not that information is also relevant to the assessment, charge, collection and recovery of income tax in respect of PAYE income).’
Finally, taxpayers who are self-employed will need to provide information on the start and end dates of their self-employment using their self-assessment tax return.
However, HMRC had to scale back their initial plans after receiving pushback from stakeholders in the original consultation in 2022. As a result, the tax authority has dropped plans to collect data on employee job titles, employees’ precise working location and details about locations of business’ offices and factories based on a geographic location, as well as details about the precise type of work undertaken by individual self-employed workers.
In the consultation outcome, the government said it would ‘look to take a measured and proportionate approach to collection of new data. The government intends to progress options where customers already hold the data, whilst keeping data collection requirements under review for other options where data is not already held, or it would potentially add significant administrative burden to provide data in the format proposed’.
Following negative feedback from respondents to the consultation, plans to collect data on the occupations of individual taxpayers employed in companies were dropped as this was described as unnecessary data which would not increase tax take and questions were raised about potential penalties as failure to comply would not affect what tax was paid.
The collection of employee location data based on working location was also criticised, particularly as more employees work on a hybrid basis or remotely, and there was no correlation between location and tax liability.
Plans to drill down into the business sector activities of the self-employed were also abandoned as this was felt to be excessive information collection which would add to red tape when these taxpayers were already under pressure with the tough trading environment.
Stakeholders stressed that HMRC already held vast amounts of data which could be used instead to build a broader picture of the self-employed sector and could not see any justification for collecting this information unless it was for use across other government departments.
There will be a penalty of £60 for failure to comply with the legislation.
Alphabet shares in themselves are not a problem as there can be legitimate commercial reasons why different shares and underlying share rights are needed within a corporate structure.
However, the Spotlight 62 trusts article and the news about the idea of dividend percentage reporting in particular would appear to warrant your prompt consideration if you are using alphabet shares within your particular structure, so we have issued a special communication to bring the topics to your attention.
