HMRC’s ‘Employee Benefit Trust (EBT) Settlement Opportunity’ is intended to encourage employers and companies who had used EBTs and similar structures to settle early any outstanding tax and NICs without the need for HMRC to consider litigation.
The principle behind the Settlement Opportunity is that HMRC will seek to settle outstanding enquiries on the basis that payments and allocations made to individuals out of EBTs prior to 6 April 2011 will be treated as earnings from an employment and the income taxed once and for all on that basis.
In addition, and depending on the way in which any individual schemes may have been set up and implemented, to achieve clarity and closure for customers in respect of their use of EBTs prior to 6 April 2011, any such settlements might also encompass :
- Income tax (PAYE)
- National Insurance Contributions
- Corporation Tax
- Inheritance tax, and/or
- Other taxation charges on the EBTs and beneficiaries
Once the detail of any settlement is agreed it:
- allows customers to pay the tax and NICs they owe to the Exchequer
- avoids the high costs associated with complex enquiries and possibly expensive litigation
- provides certainty on the interaction of different tax provisions and regimes that if litigated, may result in additional charges
This update provides an overview of developments since April 2011 to help explain to customers more fully how their liabilities will be calculated. Taken together, HMRC believe that this will help more people to engage in open discussions with HMRC about their individual circumstances and help to achieve early closure to their EBT past affairs.
Customers with EBTs or similar arrangements which they think might be within the Settlement Opportunity should contact their professional advisor in the first instance or their HMRC caseworker or Customer Relationship Manager to discuss the position further.
New legislation enacted
Following the launch of the Settlement Opportunity the ‘disguised remuneration’ legislation was enacted in July 2011 and applies to EBTs from 6 April 2011 onwards (with certain transactions also being brought within the new legislation if they were carried out between 9 December 2010 and 5 April 2011 inclusive).
Regulations also came into force on 6 December 2011 to charge Class 1 NICs on amounts chargeable to tax under the disguised remuneration measure.
Litigation involving EBTs
HMRC has been successful in litigating cases which have involved EBTs as part of the arrangement(s) entered into by a company/employer. The most significant of these cases is HMRC Commissioners v PA Holdings Ltd  EWCA Civ. 1414 where the Court of Appeal decision upheld HMRC’s arguments that an arrangement intended to deliver a bonus through an EBT was subject to tax and NICs as earnings.
Recent Case Law – Rangers Football Club
Two out of three judges sitting as the First-Tier Tax Tribunal ruled that Murray International Holdings (MIH), the then owner of the club, had made the £47.65 million of payments in dispute as loans rather than earnings. It concluded that the company’s tax liability as assessed by HM Revenue and Customs (HMRC) should therefore be “reduced substantially”, with only some payments subject to tax.
HMRC said that it was considering an appeal.
Since the payments had been made as loans rather than earnings, as set out in the terms of each EBT, they could therefore be recovered from the member of staff or that person’s estate, the tribunal said.
An EBT is a legal structure which can be used to deliver various benefits to employees.
They were previously used to enable companies to minimise the income tax and national insurance charges on pay to high-earning employees and directors, as well as allow those companies to claim corporation tax deductions on payments into the trust. However, many of the previous tax advantages of that particular arrangement were removed as part of the 2011 Finance Act.
“HMRC has made it clear that it objects to EBTs being used to provide loans to employees and its desire to recover what it sees as unpaid tax from this structure will not go away,” he said. “It must therefore be likely that HMRC will appeal, despite this not being the first time it has failed to persuade a Tribunal that PAYE and NIC should be paid.”
Need for taking action
Clients with Employee Benefit Trusts face an uncertain future, what is certain is that if the EBT has assets and they attempt to extract them then they will suffer personal taxation consequences.
If their EBT is pregnant with loans then they will either pay interest on those loans every year OR a benefit in kind charge.
How much could you end up paying with an EBT with loans or assets of £400,000 :-
Loans – a minimum of £6400 per annum in real money (assuming a government loan rate of 4%).
Assets – a minimum of £160,000 in PAYE plus further monies payable for NIC. [As a very rough guide almost £300,000 in tax].
Off the Shelf Extraction Schemes
The tax houses that promoted EBT’s are now promoting EBT extraction schemes. We have carried out a full analysis on these schemes and taken advice from a leading tax barrister – who has advised that most of these schemes are likely to fail. So clients who pay substantial fees out could lose a considerable sum of money if they partake in these schemes for the full amount of loans or assets held by an EBT.
Bespoke Extraction Methods
In our opinion – it is essential to use bespoke strategies, rather than a one size fits all approach. We have had remarkable success in extracting clients from EBT’s.
Ray Best can help you protect your financial future. To find out more, simply click here!