The UK’s First-tier Tribunal (“FTT”) has denied a taxpayer a deduction for contributions to a remuneration trust on the basis that such payments did not give rise to an expense under generally accepted accounting principles and were not made “wholly and exclusively” for the purposes of a trade. In addition, the FTT also held that the arrangements were a sham.

In M Northwood v HMRC [2023] UKFTT 351 (TC), the appellant, a dentist, was advised to establish a “remuneration trust,” the rationale for which was described as being for providing benefits to present suppliers and customers and future employees. The appellant made contributions to the remuneration trust in respect of which deductions were then claimed in the appellant’s tax returns. However, the FTT found that the appellant made a series of contributions to the trust with loans then being advanced back to the appellant (albeit that the FTT held that the loans were not genuine loans). Moreover, the FTT found little evidence of payments being made to present suppliers in any meaningful amount. As such, the FTT found that the control over the contributions to the remuneration trust remained with the appellant. 

Whilst the decision of the FTT in holding that the contributions made by the appellant were not deductible is wholly unsurprising, the finding that the scheme was a “sham” is more interesting.

HMRC contended that the scheme documentation made “things appear other than they were.” The FTT agreed with this, and rejected the suggestion of the appellant’s counsel that a sham required proof of dishonesty. In this regard, the FTT noted that, based on the decision in Hockin,[1] that it was not necessary to establish “dishonesty” in order to establish that an arrangement was a sham. Whilst this was an important point from a procedural and evidentiary perspective in this particular case, it is also important as regards the threshold applicable to establishing when arrangements constitute a sham. It is not uncommon to see tax avoidance arrangements being challenged before the UK’s tribunals and courts. It is far less common to also see such arrangements being challenged on the basis of being a sham. To this end, the case provides a salient reminder of the threshold required to establish a transaction as a sham and that this lesser-used tool remains at the disposal of HMRC.    

[1] The Brain Disorders Research Limited Partnership and Neil Hockin v Revenue and Customs [2017] STC 1170.