MAKING SENSE OF FIDUCIARY RECEIPTS
The UK tax authority (HMRC) has issued some strange publication about Fiduciary Receipts. In order to see why they are strange, it is helpful to locate the legal concept in history.
ANTIQUITY
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Frankel states:
The roots of fiduciary law are ancient. The following materials summarize a very short, and far from complete, survey of fiduciary relationships and the rules that regulated these relations over the past three thousand years.
Frankel, Tamar T. Fiduciary Law (p. 79). Oxford University Press. Kindle Edition.
Thus, Roman law recognized situations in which ownership was held in “suspended animation.” It is ownership in the hands of persons who seem to be the owner, and may even act as owners, but who were not the true owners. Like agents, described below, these persons could deal with specific property but had to act in accordance with the requirements of the previous (and future) true owners.
Frankel, Tamar T. Fiduciary Law (p. 91). Oxford University Press. Kindle Edition.
MODERNITY
There is a useful modern case which brings together the strands of fiduciary law: Bengal & Assam Investors Ltd. v. Commissioner Of Income-Tax, West Bengal, Calcutta adjudicated by the Calcutta High Court on May 11, 1982. From this case emerges a helpful definition:
Fiduciary Receipts refer to funds received by an agent on behalf of a principal. These are not the agent's own income but are held in trust for the principal.
In this case, the insurance premiums collected by the assessee were fiduciary receipts, representing client funds meant for the insurance companies
As an Indian tax case, it also clarifies that funds received in an agency or fiduciary capacity are not to be treated as the agent's income, thereby preventing unwarranted taxation.
The Court in Bengal & Assam Investors drew on English case authority. In particular the case of Morley v. Tattersall (1938). This case established that funds received in a fiduciary capacity should not be treated as income.
The UK tax authority (HMRC) accepts the Morley v. Tattersall judgment and reasoning:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim40250
BIM40250 - Specific receipts: unclaimed balances: holding of sums that belong to someone else
Money that is not a taxable receipt when received can become a taxable receipt in the circumstances described in BIM40230. However, where the unclaimed balance does not change its character, so that it never becomes a taxable receipt, then even if it is taken to the profit and loss account it is not taxable.
The position is illustrated by the decision in Morley v Messrs Tattersall [1938] 22 TC 51.
In Elson v Price Tailors Ltd [1963] 40 TC 671, the taxpayer contended that ‘deposits’ paid by clients when they ordered made-to-measure suits (and which they did not subsequently purchase) were merely payments on account and that there was no legal entitlement to appropriate the balance to their own use.
The court accepted the Crown’s argument that the unclaimed balances were deposits in the true sense of the word and as a result, in a strict legal sense, irrecoverable by the purchaser in default. It did not matter that Price Tailors allowed customers to set the deposit against the purchase of a different, including ‘ready to wear’, suit or granted refunds when asked.
Property in the deposit passed to the company on receipt. The court found that, at the time of receipt, there was an element of profit and loss. There was no dispute that the sums were received in the course of the tailor’s trade. At page 676 Ungoed-Thomas J distinguished Tattersall on the basis that:
in these cases the balances in the traders’ hands were not theirs at all but were held for others, and this fact is fundamental to the decisions. The traders had no beneficial interest in them at the relevant time, and although it was because they were traders that they received them, they were not receipts of their trade at all…
Similarly in the Indian case Punjab Distilling Industries Ltd. v. CIT (1959), the distinction was drawn between income received as price and fiduciary funds:
“moneys which were not when received, income – could never later become income.”
The income tax position for Fiduciary Receipts is mirrored for corporation tax by section 6 Corporation Tax Act 2009:
https://www.legislation.gov.uk/ukpga/2009/4/section/6
Profits accruing in fiduciary or representative capacity
(1) A company is not chargeable to corporation tax on profits which accrue to it in a fiduciary or representative capacity except as respects its own beneficial interest (if any) in the profits.
(2) The exception under subsection (1) from chargeability does not apply to profits arising in the winding up of the company.
The US Federal Tax Code fully respects the distinction between beneficial income receipts and fiduciary receipts, which are taxed differently: https://www.irs.gov/forms-pubs/about-form-1041
COMMON FORM FIDUCIARY RECEIPT
There are no magic words which make a transfer of money subject to the laws of Fiduciary Receipt.
A typical Fiduciary Receipt instrument may be of the form:
Parties [the Principal and the Fiduciary]
Whereas the Parties declare that the Fiduciary holds the sum of $000 as Fiduciary to the order of the Principal.
The Principal may be happy for the Fiduciary to administer the fiduciary fund. So a Clause might add wording such as:
The Fiduciary shall have all the powers of a beneficial owner, subject to the overriding obligation to account to the Principal for the said sum and and accruals thereto.
The “accruals thereto” words address any (say) interest income that might arise on the fiduciary funds.
It should be noted that: since the fiduciary money by definition does not belong beneficially to the Fiduciary, the result is the same under the law of implied trusts, whether or not such an instrument is signed.
STRANGENESS
Over in the UK, their tax authority (HMRC) have issued statement of opinion which:
· Apparently is written in ignorance of thousands of years of fiduciary law
· Is contrary to fiduciary law in modernity
· Contradicts their own HMRC Manual.
HMRC is aware of a tax avoidance scheme often marketed as a wealth management strategy that attempts to disguise income and other taxable profits as loans or fiduciary receipts.
This scheme claims to provide remuneration or profits free of tax, and is different to the scheme used by contractors referred to in Spotlight 33.
HMRC’s strong view is that this and similar schemes do not work. We will challenge the promoters and users of this scheme.
How the scheme claims to work
The scheme user contributes to a remuneration trust, with trustees based offshore. The scheme user could be a:
· self-employed individual
· partner in a partnership
· company or a company director
The remuneration trust is set up in a contrived manner and is claimed to provide benefits to individuals (beneficiaries), other than the scheme user.
The alleged beneficiaries are individuals employed in the trade or profession of lending money.
The trustees take no action to identify or reward the alleged beneficiaries, because the trust contributions are always intended to be used by the scheme user.
As part of the scheme arrangements a personal management company is set up and controlled either by the scheme user or connected party supporting the scheme.
The money contributed to the remuneration trust is actually paid - often minus the 10% scheme fee - to the personal management company. This allows the scheme user full access to the funds.
How people are paid
The scheme user accesses the contribution to the remuneration trust through unsecured loans or fiduciary receipts from the personal management company.
It is claimed to be tax free and on terms not available from high street lenders.
Interest and capital repayments on the loans are rarely made. The receipts from the personal management company are often used by scheme users as living expenses. In some cases, the scheme user decides how the money is invested by the personal management company.
The scheme is marketed by firms offering wealth management strategies. HMRC understands that scheme users are told that they will always remain in control of the funds.
Strange Ideas
It is immediately strange that “loans” are referred to as if in the same legal category as “fiduciary receipts”. There is 3,000 years of legal principles in antiquity and modernity which demonstrates that these are entirely opposite categories of legal matter.
It is then strange that the UK tax authority seems to be suggesting that a Fiduciary Receipt is not tax free. Nothing is said to justify such a notion. Which would contradict HMRC’s own guidance based on Morley v Messrs Tattersall.
The ultimate strangeness is that the UK tax authority is publishing such material about a state of affairs which is – and always has been for 3,000 years – a legal non-event:
· A company places funds in the fiduciary custody of an individual director.
· Companies do that always and everywhere, the moment that a director signs a bank mandate on behalf of the company.
The profits of the company are in the fiduciary receipt of the director, in that bank account. Nowhere in the world does that state of affairs create a tax event.
Taking the model published by the UK tax authority:
· A company places funds in the fiduciary custody of a Trust
· The Trust places funds in the fiduciary custody of an individual director.
There is no taxable event.
The UK tax authority does not explain or justify how inserting a Trust into Bullet Item 1 above changes anything in the world of tax.
That is clearly because no statute or case authority does explain or justify such a strange proposition: which contradicts HMRC’s own guidance based on Morley v Messrs Tattersall.
In fact, there has never yet been a UK Tax Court (Tax tribunal) case about Fiduciary Receipts, except for the Morley v Messrs Tattersall authority.
There are various authorities about what is an item of trading income and not therefore a Fiduciary Receipt. These cannot be relevant as in this HMRC “Spotlight” publication, since the UK tax authority clearly and repeatedly says these are indeed Fiduciary Receipts.
As pithily expressed in Punjab Distilling Industries Ltd. v. CIT (1959): “moneys which were not when received, income – could never later become income.”
That which is a Fiduciary Receipt is not taxable income. Neither in the UK, India, the US, nor anywhere else in the world.