RESULTING TRUSTS CONTRADICTORY GUIDANCE FROM HMRC
HMRC (the UK tax authority) official guidance sets out the matter clearly:
TSEM6241 - Legal background to trusts & estates: failure of trust provisions
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The terms of a trust should state what is to happen to the trust assets and their income in all circumstances. If they do not, and circumstances arise in which the trustees haven’t been told what to do with the capital and/or income, it has to be held on trust for the settlor. This type of trust is called a resulting trust. If the settlor is, by that time, dead, or the original trust was set up under a will, the money held on resulting trust will form part of the settlor’s residuary estate.
As stated in Twinsectra v Yardley [2002] UKHL 12:
98. The other problem is concerned with the basis on which the primary trust is said to have failed in several of the cases, particularly Toovey v Milne 2 B & A 683 and the Quistclose case itself [1970] AC 567. Given that the money did not belong to the borrower in either case, the borrower's insolvency should not have prevented the money from being paid in the manner contemplated. A man cannot pay some only of his creditors once he has been adjudicated bankrupt, but a third party can. A company cannot pay a dividend once it has gone into liquidation, but there is nothing to stop a third party from paying the disappointed shareholders. The reason why the purpose failed in each case must be because the lender's object in making the money available was to save the borrower from bankruptcy in the one case and collapse in the other. But this in itself is not enough. A trust does not fail merely because the settlor's purpose in creating it has been frustrated: the trust must become illegal or impossible to perform. The settlor's motives must not be confused with the purpose of the trust; the frustration of the former does not by itself cause the failure of the latter. But if the borrower is treated as holding the money on a resulting trust for the lender but with power (or in some cases a duty) to carry out the lender's revocable mandate, and the lender's object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which never ceased to be his beneficially.
FAILURE FOR IMPOSSIBILITY
The general rule is that a trust fails if the directions given to the trustees cannot be carried out. The nature of these directions is sometimes called the trust’s “purpose”.
For example, the rule is recognized in California, and other States: Schwan v. Permann (2018) 28 Cal.App.5th 678.
The impossibility rule must be distinguished from the “3 Certainties” requisite to the valid creation of a trust:
· Certainty of intention: it must be clear that the testator intends to create a trust
· Certainty of subject matter: it must be clear what property is part of the trust and property, including sum of money, cannot be separated.
· Certainty of objects: it must be clear who the beneficiaries (objects) are
The “3 Certainties” rule seems to have been first stated by Earl Eldon LC in Wright v Atkyns (1823) Turn & R 143, 157. More famously, the rule was stated by Langdale MR in Knight v Knight (1840) 3 Beav 148.
Suppose that the “3 Certainties” rule is satisfied upon the creation of a trust. But the trust’s “purpose” becomes incapable of fulfilment, or even was never capable of fulfilment: but that did not become known until later, whether by reason of a later discovery of facts or law.
Then the Trust has failed. As stated in HMRC official guidance, there is a resulting trust to the settlor.
The date at which the trust has failed is easy to determine: it is the date upon which the trust’s “purpose” became incapable of fulfilment. If the trust’s “purpose” was never capable of fulfilment, then the trust failed ab initio (at the outset).
Suppose that a trust is established to provide tax free bonuses to staff. The sum of money contributed to the trust is certain. The staff members are identifiable. The 3 Certainties are met.
But then it transpires that the trust’s “purpose” was never capable of fulfilment. As a matter of law, no tax free bonus can be given to any employee. So then the trust failed, and was void, from the very start.
As stated in HMRC guidance:
The terms of a trust should state what is to happen to the trust assets and their income in all circumstances. If they do not, and circumstances arise in which the trustees haven’t been told what to do with the capital and/or income, it has to be held on trust for the settlor. This type of trust is called a resulting trust.
That failed trust state of affairs will need to be recognized by the trustee. Practically, the resulting trust funds need to be returned to the settlor. So some administrative document should recognize the failed trust state of affairs, and the destination of the resulting trust funds.
It may be that the legal impossibility of the trust purpose also has the effect that the class of beneficiaries “employees to receive tax free bonus”, is an empty class. Then, the third type of required “certainty” is missing. So the trust is void for that reason as well.
HMRC CONTRADICTION
All of the above is basic trust law.
It is then very strange that HMRC decided to issue in 2023 – and to repeat 3 further times – statements of opinion that contradict these basics:
Stop notice 14
Date of publication: 10 November 2023
Date stop notice issued: 3 July 2023
Details of any arrangements or proposal for arrangements promoted by the person that meet the description specified in the notice
1. An individual or company who has used a Remuneration Trust (‘the Settlor’) declares that the original trust (the ‘original Trust’ is void ab initio.
2. The contributions made to the Original Trust (‘the Original Contributions’) are claimed to fall back to the Settlor, or a company claiming to act in a fiduciary capacity for the Original Trust (‘the Fiduciary’), who claims to hold the Original Contribution on a constructive trust.
3. The Settlor assigns or otherwise contributes the Original Contributions to a new trust (‘the New Trust’).
4. By assigning or otherwise contributing the Original Contributions to the New Trust the Settlor claims that:
· the tax deduction claimed in the accounting period of the Original Contribution can still be claimed and the accounts do not need to be restated in relation to the assignment or new contribution of the Original Contribution to the New Trust
· any amounts paid, in whatever capacity, to the Director of the settlor company or to others is not chargeable to tax
This same HMRC opinion has been repeated in 3 further “Stop Notices:
Stop notice 34
Date of publication: 17 October 2024
Date stop notice issued: 13 March 2024
Stop notice 48
Date of publication: 15 May 2025
Date stop notice issued: 15 May 2024
Stop notice 49
Date of publication: 15 May 2025
Date stop notice issued: 10 March 2025
It seems strange for HMRC to be repeating the same opinion 4 times over.
SOVEREIGNTY OF OTHER NATIONS AND THEIR CONSTITUTIONS
Also, these Stop Notices appear to have been issued in relation to non-UK persons.
Obviously such a Stop Notice issued to a US entity is null and void, as the 4chan episode shows.
Any US entity has 1st Amendment protection, which cannot be trespassed on by a UK tax authority.
The entities appear to be domiciled in Belize. The Belize Constitution of 1981 expressly protects fundamental rights and freedoms. Article 3b expressly protects “freedom of conscience, of expression and of assembly and association.
Obviously, a UK tax authority cannot trespass on constitutional rights and freedoms of a Belize entity – or any foreign domiciled person.
HMRC CONTRADICTION
All that aside, the content of these Stop Notices contradicts HMRC’s own official Guidance.
It is not clear whether paragraphs numbered 1 and 2 are supposed to be a statement that what is there described is not the position in law. If that is what is intended, then clearly the statement is wrong:
· trust law says the exact opposite of such a statement
· HMRC Guidance correctly follows that trust law.
Next up, are “Stop Notice” paragraphs 3 and 4.
GAAP and IAAP both impose the Matching Principle: an entity must recognize liabilities for the year in which they arose, not when they are paid:
What is the Matching Principle?
The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month).
Example of the Matching Principle
Imagine that a company pays its employees an annual bonus for their work during the fiscal year. The policy is to pay 5% of revenues generated over the year, which is paid out in February of the following year.
In 2018, the company generated revenues of $100 million and thus will pay its employees a bonus of $5 million in February 2019.
Even though the bonus is not paid until the following year, the matching principle stipulates that the expense should be recorded on the 2018 income statement as an expense of $5 million.
On the balance sheet at the end of 2018, a bonuses payable balance of $5 million will be credited, and retained earnings will be reduced by the same amount (lower net income), so the balance sheet will continue to balance.
In February 2019, when the bonus is paid out there is no impact on the income statement. The cash balance on the balance sheet will be credited by $5 million, and the bonuses payable balance will also be debited by $5 million, so the balance sheet will continue to balance.
The IRS makes express provision for applying the Matching Principle:
Expenses
Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.
1. The all-events test has been met. The test is met when:
a. All events have occurred that fix the fact of liability, and
b. The liability can be determined with reasonable accuracy.
2. Economic performance has occurred.
Economic Performance
Generally, you cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services.
Example.
You are a calendar year taxpayer. You buy office supplies in December 2020. You receive the supplies and the bill in December, but you pay the bill in January 2021. You can deduct the expense in 2020 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2020.
Your office supplies may qualify as a recurring item, discussed later. If so, you can deduct them in 2020, even if the supplies are not delivered until 2021 (when economic performance occurs).
HMRC similarly recognise the Matching Principle:
BIM42201 - Deductions: timing: date allowable
The treatment of any transaction in the accounts of a trader is followed for tax if:
· it is consistent with generally accepted accounting practice (GAAP), which includes the admission of hindsight to the extent permissible by FRS 102 Section 32 Events after the End of the Reporting Period and IAS 10 Events after the Reporting Period, and;
· it does not violate any specific statutory rule or a more general principle developed by the courts to give effect to the statutory requirement that the charge to tax is on the ’full amount’ of the profits.
HMRC Guidance adds:
BIM31095 - Tax and accountancy: timing of receipts and expenditure: accountancy practice and case law developments
Over the years the Courts have been concerned with the time at which profits are to be brought into charge to tax, and a number of judge-made principles have emerged. But in more recent years they have become increasingly reluctant to discern judge-made tax principles which override generally accepted accounting practice. This trend began even before the introduction of the statutory requirement for taxable profits to be computed in accordance with GAAP, subject to adjustment for tax rules or principles which differ from the GAAP treatment.
MORE HMRC CONTRADICTION
So, it is impossible to reconcile HMRC “Stop Notice” objection with HMRC’s own official Guidance which does accept the matching principle for expenses.
The “Stop Notice” appears to object to the following statement:
“4. By assigning or otherwise contributing the Original Contributions to the New Trust the Settlor claims that:
the tax deduction claimed in the accounting period of the Original Contribution can still be claimed and the accounts do not need to be restated in relation to the assignment or new contribution of the Original Contribution to the New Trust.”
But that statement must be correct, where the “New Trust” is a vehicle for recognizing the same expense liability as the “Old Trust”.
· The “Old Trust” has failed in trust law: for lack of one (or more) of the 3 Certainties, or for legal impossibility.
· But the purpose of a trust is to give something to someone, not to comply with trust law. Such compliance is merely the means to that gifting end, not the end in itself.
· So, if a way has been found which is compliant under trust law, to make effective that gift, all that is left to decide is what the Matching Principle requires.
It was the decision to make the gift – or the economic circumstances which dictated that decision – which fix the Matching principle date. As the IRS puts it “a. All events have occurred that fix the fact of liability”.
If the failed trust was set up in say 2000, and a contribution was made in 2001, then it is that 2001 date which is fixed by the Matching Principle.
STOP TALKING
These UK tax authority “Stop Notices” are trying to stop talking about:
· Trust law and Accountancy principles
· which HMRC’s own Official Guidance agrees with.
It is difficult to make any sense of all this.
On top of that, the legislation on Stop Notices (UK Finance Act 2014, § 236A(4)(b) says that a Stop Notice requirement is that:
it is more likely than not that arrangements of that description are not capable of enabling that advantage to be obtained.
It is difficult firstly to see what “tax advantage” exists here.
- Either the “Old Trust” failed or it did not.
- If there was “Old Trust” failure, then the “New Trust” simply puts all matters back where they were before the failure.
Returning to a previous state of affairs is by definition not an “advantage”.
Applying HMRC’s own Official Guidance – and basic trusts and accountancy law – must win out.
In other words, it cannot be “more likely than not” for HMRC’s own Official Guidance – and basic trusts and accountancy law – to be wrong.
It is also hard to see what is motivating HMRC to issue these strange Stop Notice statements.
Presumably, HMRC would prefer that the affairs of any trust and its assets are documented in good order, rather than being left in uncertainty. HMRC needs to have certainty as to whether the contribution to the trust has or has not been made. Absent the “New Trust”, the matter is left up in the air.
The UK tax authority needs to respect the sovereignty of other jurisdictions, particularly in the matter of fundamental rights and freedoms. The UK tax authority also needs to try harder not to issue self-contradictory statements.