Q&A: is a trust 'small' or have a UK connection?

ICAEW's Tax Faculty posed a series of questions on how to determine whether a trust that is an end client is 'small' or has a UK connection under the off-payroll working rules in chapter 10 ITEPA 2003. Read the questions and the answers provided by HMRC.  

1. The small business exemption

If the end client is a trust, how do you consider the “small business” exemption?

For unincorporated businesses, which would cover a trust, a slightly simplified test will be applied that only considers the turnover test and only one year’s accounts. If a trust’s financial period was the year to 31 March 2020, the turnover test would be applied to these accounts because the 31 March 2020 year end is more than 9 months before 6 April 2021.

S60E(5) ITEPA 2003 states that:

“In this section “turnover”, in relation to an undertaking, means the amounts derived from the provision of goods or services after the deduction of trade discounts, value added tax and any other taxes based on the amounts so derived.”.

HMRC’s Senior Accounting Officer (“SAO”) Manual at SAOG11232 states that:

“For the purposes of the Senior Accounting Officer (SAO) legislation the definition of turnover is taken from Section 474 of the Companies Act 2006. This states that turnover means the amount derived from the provisions of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes.”.

The SAO manual goes on to state that:

“some companies, for example those in the banking or insurance sectors, do not describe their income as turnover as not all their income is necessarily derived from the provision of goods and services. This may be because some income is derived from the investment of capital, which in HMRC’s view does not constitute turnover for SAO purposes, in accordance with the definition of turnover in the Companies Act 2006.”.

HMRC’s guidance in ESM 10006 explains that:

“Charities do not need to take into account donations when calculating turnover for the purposes of determining their size for the off-payroll working rules.”

If a trust’s income is not derived from the provision of goods or services but is derived only from the investment of capital, then, based on the definition of turnover outlined above, the trust’s combined turnover would be zero. The trust would therefore qualify as “small” and consequently fall outside the scope of the new off-payroll working rules.

HMRC’s reply

Firstly, a trust is not an entity which has a separate legal personality and cannot own property or enter into contracts. A trust cannot contract with a contractor for the provision of services. The trust itself cannot be an end client.

When we refer to a “trust”, we are referring to the relationship between a settlor, trustees and beneficiaries. This relationship is governed usually by a trust deed or governing document, which will appoint the trustees, set out the nature of the trust and its beneficiaries, the property subject to the trust and the trustees' powers and responsibilities. So, when we refer to a “trust”, we are actually referring to the trustees of that trust. They are the legal owner of the trust property and can enter into contractual arrangements.

We note that the ICAEW’s analysis takes the view that the rules that apply to an unincorporated business would cover a trust. However, HMRC would consider that trustees of a trust would be classed as a person who is not a company, relevant undertaking or other undertaking. As such, size would be determined with reference to section 60F ITEPA 2003, which states that a person qualifies as small for a tax year if their turnover for the last calendar year before the tax year is not more than the amount specified in the second column of item 1 of the Table in section 382(3) of the Companies Act 2006 (currently £10.2 million).

We agree with the ICAEW’s analysis that if the trustees’ income is not derived from the provision of goods and services, but is only derived from the investment of capital, then this is not turnover. The trustees would have no turnover, because they are not carrying on a business or providing goods or services. The trustees would therefore qualify as small for a tax year, provided the connected persons rules do not apply, which means that they fall outside the scope of the new off-payroll working rules.

2. Offshore trusts and UK connection

a) What needs to be considered to determine whether a trust has a UK connection. If the trust is non-resident does HMRC agree that having UK resident beneficiaries wouldn’t make the trust subject to the off-payrolling rules?

HMRC’s reply

Under section 60I ITEPA 2003, a person has a UK connection for a tax year if immediately before the beginning of that tax year the person is UK resident or has a permanent establishment in the UK.

A permanent establishment includes a fixed place of business which includes, amongst others, a branch, an office or a factory. A permanent establishment can also be any agent who has, and habitually exercises, authority to do business on behalf of the client.

Trustees of a trust would be classed as a person who is not a company, relevant undertaking or other undertaking under section 60F ITEPA 2003. As per section 60I, it is necessary to determine the residence of the trustees as a body of trustees or whether that body of trustees has a permanent establishment in the UK. Our guidance on the residence rules for trustees is set out in the Trusts, Settlements and Estates Manual (TSEM10005).

Whether the trustees as a single body are resident in the UK depends on considering the residence status of each of the individual trustees who comprise the body of trustees as set out in TSEM10020.

In relation to whether trustees can be said to have a permanent establishment in the UK, HMRC’s guidance on trustees operating through a branch, agency or permanent establishment is set out in TSEM10050 – TSEM10070. These are the rules that would apply in determining a UK connection.

There is no reference to considering the beneficiaries of the trust to determine whether a trust has a UK connection. The rules look solely at the residence of the trust.

However, if the trust is bare and the beneficial interest is vested absolutely in someone other than the trustees, then the person who has the beneficial interest in the trust assets is the person who should be considered under section 60F.

b) If an offshore trust has a UK connection, how do you measure whether the trust should be considered small?

HMRC’s reply

Trustees of a trust would be classed as a person who is not a company, relevant undertaking or other undertaking under section 60F ITEPA 2003. Section 60F defines when a person qualifies as small for a tax year.