The Delta Arrangement: Disguised Remuneration
Joshua Carey appeared on behalf of the Commissioners for HM Revenue and Customs (“HMRC”) in one of the first ever DOTAS Notifiable Arrangement cases, The Commissioners for HM Revenue and Customs -v- EDF Tax Limited (In creditors’ voluntary liquidation) [2019] UKFTT 598 (TC).
EDF Tax Ltd (“EDF Tax”) offered advice to user companies on certain arrangements which were described as the “Delta Arrangements”. HMRC discovered the operation of the arrangements and made an Application to the Tribunal pursuant to ss314A and ss306A of the Finance Act 2004 (“FA04”) for an order that the Delta Arrangements were “notifiable” or should be “treated as notifiable”.
Judge Mosedale set out the steps in the Delta Arrangements which can be summarised as follows:
- An engagement letter was sent by EDF Tax to its clients which dealt with “rewarding” key employees and a payment to Defence Services Ltd should HMRC challenge the planning that was provided;
- An advice letter was then sent within a matter of days suggesting a number of different “reward packages” but placing emphasis on an Employee Benefit Trust (“EBT”) which required a deed of variation be created;
- An EBT was then created between the user company and IFM Corporate Trustees Ltd (“IFM”) based on Jersey with a settled nominal sum of £100;
- A further deed was executed a few days later which created a sub fund of £10 of the originally settled £100;
- A second advice letter was sent which sought to provide further “options”. It was suggested that EDF Tax had “… developed a mechanism alongside leading counsel” which made it possible for a user company to set aside profits to reward employees. However, the only “option” was to execute deeds of variation of existing employment contracts of those intended to benefit from the reward. EDF Tax would also provide draft board minutes for execution;
- Each user company would then execute a deed of variation for each employee that was to be “rewarded” and a stated amount was promised to be paid by the user company;
- A further advice letter was sent a number of months later. It provided express advice on the tax implications. Advice was provided to enter into a deed of covenant with the sub-fund as this would discharge its obligation under the deed of variation;
- Each user company then entered into a deed of covenant with IFM as trustees of the sub-fund;
- A “solution letter” was sent by EDF Tax to the user companies a matter of days later. The solution was said to be a tripartite deed under which in consideration of the user company paying the money to their employees, the employees would agree to take over the user company’s debt to IFM. It was then described as a loan which was not repayable for 20-years by the employee to IFM. There was emphasis on IFM not taking any “relevant step” (as defined) as this would trigger a tax charge;
- The tripartite deeds were then entered into; and
- There was no repayment by the employees despite agreeing to take over the debt of the user company. The effect of the tripartite deed was to put cash in the hands of the employee/director who were parties to them but with an obligation, in theory but not in practice, to repay the EBT sub-fund.
The Tribunal found that HMRC had demonstrated that three-hallmarks were made out:
- Premium fee;
- Standardised tax products; and
- Employment income provided through third parties.
The Tribunal found that HMRC had demonstrated that the Delta Arrangements might have been expected to enable a person to obtain a tax advantage. It also found that the main benefit that could be expected to arise from the Delta Arrangements was the obtaining of a tax advantage. It was said to be a “convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have had as a salary, save for the expected tax advantage”. The Tribunal also found that EDF Tax was a promoter for the purposes of ss307 of FA04.
The Tribunal made the order for disclosure sought by HMRC.
This case represents only the third time that the Tribunal has had an opportunity to consider whether an arrangement is notifiable or ought be treated as being notifiable. HMRC have only been successful in two of the three cases. In an age where HMRC’s powers continue to grow, it is considered likely that the use of ss314A and ss306A Applications will become more prominent in the Tribunal’s jurisprudence. A taxpayer faced with s313A – C Letters requesting information about an arrangement should take urgent advice.
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