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10th February 2012

Paying Income Tax on Expenditure

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A recent First Tier Tax Tribunal case has confirmed that it is possible for someone to be liable for income tax on a payment they have made to someone else.

 It is normally the recipient not the payer who is liable to income tax.

The case concerns the income tax provisions dealing with trusts. Where someone who creates (or adds property to) a trust (“the Settlor”) can benefit from the trust they will be subject to income tax on all the income received by the trustees. The Settlor does not have to benefit directly from the trust. The provisions also catch a situation where there is the possibility that the trust fund will pass back to the Settlor should there be no other beneficiaries in the future.

Olaf Rogge and others v the Commissioners for Her Majesty's Revenue and Customs considered two trusts where the Settlors could benefit directly from the trust. In one case the Settlor paid interest to the trustees on a loan made to him by them. In the other the Settlor and his wife paid rent on a property of which they were tenants and which was owned by the trustees. In both cases it was held that the Settlors were liable to income tax on the amounts that they had paid to the trustees.

The case highlights the fact that tax issues affecting trusts are not straightforward and that detailed advice needs to be taken when Settlors or others enter into transactions with the trustees.

For further information please contact Emma Satterly at or on 01223 532725