Employee Benefit Trusts & Contracting Schemes (an update)
Murray Holdings Group (Rangers Football Club).
This case is now due at the Supreme Court and will be heard in the first three months of 2017 and the findings should be published by the summer. We do not believe that result of the court case will have a wider impact, as HMRC has brought in further legislation since.
EBT & Contracting Schemes
HMRC have been busy of late, so if you have been paid via a Contracting Scheme, particularly if it was involved with an EBT, then you may have received a request for Settlement on the Horizon.
If so what action should you take?
2019 Employment Income Charge
HMRC brought some urgency to settlement when they issued a White Paper on 10th August 2016, which subsequently has led to the 2019 Employment income Charge.
This essentially states that if you have any loans that remain outstanding by the 5th April 2019. This will be regarded as a Relevant Step. The employer responsible for non-payment of PAYE and NIC will now have to pay up, if the employer is still in existence they will try to pass the charge to you. If the employer has ceased to exist, then HMRC will attempt to pass the bill to you.
Mistakes have been made by HMRC in the timings and accuracy of their paperwork.
In the past, there have been, incorrect dates, incorrect names and in some cases incorrect submission and drafting of the paperwork by HMRC.
One EBT House allowed their clients to avoid all tax by mistakenly making a DOTAS submission when it was not required. So, their clients escaped Millions of pounds of tax on a technicality.
We work closely with several Tax Resolution Firms, these are normally made up of people who have worked for one of the big four accountancy firms and people recruited from HMRC.
We will analyse your paperwork and submit it to the best fit Tax Resolution Firm, so if you have no other plan on the horizon, we suggest you sit down and talk to us, and we will see if we can help.
You may incur some fees but at least you will have peace of mind knowing that you are taking the right steps in dealing with HMRC, and not making any form of Settlement unless you absolutely have too.
Naturally, if you are facing a large bill with HMRC, the last thing you want to do is to pay out further fees investigating whether HMRC is correct in their submissions and requests to you.
However, our fees are relatively modest compared to the many hundreds of thousands owed by many individuals to HMRC.
It would be quite irksome I feel sure, for you to have paid off HMRC only to find later on that part of their claim may have been invalid.
Employee Benefit Trusts – Final Demand – Since 2014 we have been advising that members of Employee Benefit Trust Schemes to do something with their outstanding loans or assets held by their Employee Benefit Trusts.
Our blogs have constantly highlighted the need to take action.
Sadly, very few have, instead many have adopted the ostrich approach, which as you can imagine leaves them in a vulnerable position!
They were often introduced to such schemes by their accountants, the tax advice being provided by a Tax Planning House (which has since gone into liquidation).
This often only leaves them with their accountant to refer to, with mixed results.
On 10th August 2016 HMRC issued a White Paper entitled Disguised Remuneration which sets out clearly the HMRC position.
If you have an EBT that still holds either assets or loans, these must now be cleared by April 2019. The loans can only now be settled using cash and PAYE and NIC must be seen to be paid.
That means that there is still a window of opportunity for people (depending on their financial circumstances) to exit their EBT’s reasonably tax efficiently.
It is a very narrow window of opportunity.
What I find surprising is that although we are often talking about very large sums of money, they are reluctant often to pay meaningful fees.
It is often quite difficult to find a solution, but we have managed to degrade and reduce the tax liabilities for many clients and in many cases, close their EBT’s down completely.
There is no magic wand.
The planning is often quite involved but often solutions can be found.
If you hold an EBT – your time is running out!
You will no doubt have heard that changes to the way dividends are taxed are being introduced in April 2016 and will apply new “Dividend Rates” of income tax to distributions made to shareholders.
However, you might not be aware that in December the Government also launched a consultation aiming to bring in supporting legislation to prevent shareholders getting around the new rules by utilising current exemptions that treat distributions as capital when a company is wound up.
Currently, in a solvent liquidation (“MVL”), any retained profits are treated as capital for distribution purposes and may qualify for Entrepreneur’s Relief at a rate of 10% if the circumstances fit the criteria to do so.
The consultation identifies specific examples of commonly utilised structures where, if the proposal is enacted, would see distributions, even in MVL treated as income rather than capital and taxable accordingly under the Dividend Rates.
- Money boxing – where funds are accumulated in a Company without dividends being declared, which are then distributed as capital;
- Phoenixes – where a Company is liquidated and another established to carry on its business, with the reserves in the “oldco” being distributed as capital and;
- Special Purpose Vehicles (“SPV”) – essentially the use of a limited company which is wound up at the end of a project with the funds remaining distributed by way of capital distribution.
The effect of this could be significant – distributions could be taxed at up to 38.1% against the 10% currently available with Entrepreneur’s Relief.
The consultation ends early February and it is proposed that the changes will take effect from 6 April 2016 in relation to distributions made after that date – including those made out of Liquidations that have already commenced.
Whilst the outcome of the consultation is by no means certain, shareholders and Professional Advisers should review their portfolios now to identify any structures that might be subject to the new rules after April 2016.
Reminder Changes to Dividends – From April 2016, the notional 10% dividend tax credit will be replaced by a £5,000 tax-free dividend allowance.
Dividend income above this allowance will be taxed at:
7.5% basic rate
32.5% higher rate
38.1% additional rate
If you receive dividend income of less than £5,000 per year, or you receive income from your pension or NISA, they will not be affected by this change.
Please note, this is a very brief summary of the changes. Please refer to HM Revenue & Customs website for full details of the changes to dividends.
Reason for the Reminder
You should also be aware that under the current rules you receive a credit on top of your dividend if your trading company has paid Corporation Tax. You will not receive credits for Corporation tax from April 2016.
Your accountant should be contacting you now to ask you to consider paying dividends in this current financial year, rather than next year.
I wonder though, if that is necessarily the best way forward for you and your family.
Focussing on dividends to the exclusion of anything else may work for the accountant, as it is something they are familiar with advising upon, but is it best for you.
We have for many years now been promoting “total planning” a systemised means of looking at all of your financial arrangements and all of the assets under your control (and those assets that you are able to influence) which means you can align your remuneration strategy with your financial aims and ambitions. The result being that you pay less tax and increase your net worth.
The reason this is so relevant now is the changes to pensions that have already been announced and will take effect next year will significantly reduce your ability to make a real difference to your financial future.
No doubt you will have already have heard of the rumours that the rights attaching to pensions may significantly change in the very near future. If you are quick then this should provide a real financial opportunity of significantly more impact than the changes to taxation of dividends.
The Autumn Statement: A put down for aspiring landlords? – Chancellor George Osborne has delivered his Autumn Statement – and as intended, he sprang a number of surprises :-
No big surprises here – Osborne confirmed the introduction of a new flat-rate state pension and a small rise in the current state pension. In summary:
- The state pension age will rise
- The state pension will rise to £119.30 a week from April 2016
- The new flat-rate state pension of £155.65 a week will come in from April 2016 – but new pensioners will no longer be eligible for the additional state pension
The current additional state pension, which is earnings-related, is being abolished for those who reach state pension age on or after April 2016. The new flat-rate of £155.65 per week may leave some pensioners better off than they would otherwise have been, but many may find themselves receiving less overall. Those currently receiving their state pension will not see any change, except for the rise of £3.35 per week.
Housing and mortgages
It’s a good time to be a first-time buyer, but a bad time to be a landlord. Here are the property highlights:
- The Help-to-buy ISA will launch on 1 December – savers will receive a 25% government bonus, up to £3000, on top of their own savings.
- On top of this, there will be a new London help-to-buy scheme, offering buyers with a 5% deposit a loan of up to 40% of the value of new build homes, interest-free for 5 years.
- Bad news for landlords: a new surcharge of 3% will be added to stamp duty on buy-to-let properties and second/subsequent homes from 1 April 2016
- More good news though for first-time buyers: building new homes is high on the Chancellor’s list of priorities.
- The much-criticised tax credit cuts have been scrapped
- Everyone will have a digital tax account by the end of Parliament
A Man of Ambition :
What motivated the raising of stamp duty for purchasers of buy to let properties?
With the majority of working class and middle class aspiring to buy a second home and with some people doing very well from investing in the buy to let market, the motivation surely is a class led sneer at the aspirational classes. Which hopefully will come back to haunt this Chancellor.
Shareholders Agreements – Business owners often spend a great of time getting their business venture off the ground, then when success arrives , they bring in advisers to grow the business further. With increasing success and profits they need to spend additional time to seek tax advice.
Often, however, they fail to spend additional time on protecting the growing asset value of their business for their family.
When there are two or more directors involved they often find it difficult to discuss the nitty gritty of what happens to the business and their respective families should either of them be incapable of working at some point in the future.
It is very helpful all parties to set aside the time ( preferably early on in their relationship) to discuss and implement a shareholders’ agreement, as it will help to avoid the disruption and additional costs involved in resolving disputes.
Although a shareholders’ agreement is not a document in the public domain, it must be disclosed in share valuation negotiations for tax purposes, so is not completely secret.
A shareholders’ agreement only governs its signatories, whereas a company’s articles of association automatically govern its shareholders.
There are no rules about where these terms should be set out. If it helps to make the information public, it may be best for the terms to be in the articles so that third parties are legally ‘on notice’. If the information is private, a separate shareholders agreement can be prepared.
Here are ten typical issues the shareholders will want to regulate that might be included in your shareholders’ agreement.
- Rights to appoint and remove directors.
- Terms to protect minority shareholders so that, for example, unanimous shareholder approval is required for certain company decisions.
- Restrictions on freedom to dispose of shares and, if other shareholders have pre-emption rights, at what valuation such transactions should take place. A minority stake in a company is usually powerless, so the value of the minority shares is correspondingly reduced. This can be over-ridden in favour of treating all shares as being of equal value, rather as if the company was publicly quoted.
- Restrictions on changing the nature of the business.
- Terms regulating the raising of capital to avoid diluting existing shareholdings.
- Dividend policy and entitlement. Note that a stated dividend policy may affect the value of the company’s shares for tax purposes.
- Waiver of dividends. Certain shareholders may agree to waive dividends for an agreed period or permanently. Again this may have tax implications because it may entail a value shift from one shareholder to another.
- Limitations on directors’ freedom of action, for example to invest in a new capital project or charge the company’s assets.
- Business plan. Setting out the business plan in a shareholders’ agreement may help to ensure that all shareholders have the same vision.
- How shareholder disputes should be resolved.
Typically we find that Directors of companies that do not have shareholders agreements also have not bothered to have their wills updated. We regard these two key documents as vital for all business owners and key to preventing disputes, financial hardship and possibly emotional distress for families.
Employee Benefits Trust – latest ruling – HMRC seeking to use the latest ruling on Rangers Football Club Employee Benefit Trust to ride roughshod over all members of EBT and EFRBS that have not made settlement with them.
Regardless of the rights and wrongs of the ruling, advisers do agree the consequences are significant for those operating EBTs.
“Unless it is overturned in the Supreme Court, it essentially blows out all EBTs and EFRBS,” states one very experienced EBT practioner ,”In simple terms, the court now says that the technical arguments approved by the commissioners and the tribunal in those cases should have been dismissed by an overriding ‘substance over form’ argument.
The majority of firms that promoted EBT and EFRB structures, did so on the back of very detailed and well-reasoned counsel’s opinions.
It’s likely that HMRC will use the ruling to put more pressure on settle EBT users to make settlement, with accelerated payment notices and follower notices likely to be called upon.
“The basis of the decision was not the result of a small technicality: rather, the judges’ interpretation that ‘common sense’ should prevail and money received as a result of employee services should be taxable,” is one persons opinion.
The Rangers Football Club Employee Benefit Trust was always liable to fail as the club issued side papers to all the people participating, informing them that ” they would never have to pay back the monies owed”.
Did this affect the ruling?
We find it odd that this ruling should fly in the face of the other court cases that clearly indicate that a loan is a loan and not remuneration.
As we have consistently stated we believe all EBT holders should take action and seek advice to minimise their tax liabilities from an experienced EBT practitioner.
Aim for excellence – How do you judge success? Is it the amount of money you have or how much you earn ? We all have differing attributes and character and each of us has taken our own path in life. One way to judge success or excellence is to be the best you can be at whatever you do. The Greeks have a term to describe achieving excellence arete, we do not.
That does not mean simply because we are English that one should not strive towards being the best at what you do. No English word or phrase captures the exact meaning of arete. The nearest equivalents are ‘excellence’ and ‘virtue’. But there is something more to arete which cannot be expressed in words. There is something of the Divine in it. Perhaps the only true way to understand arete is to consider two or more examples of excellence and to contemplate what it is they share.
What does it mean when we say of an action, an artistic work, or some flawless athletic maneuver, that it is excellent? To behold what is excellent, in whatever form, brings us the same joy. We perform an action with excellence and say, “perfect!”. In the moment of excellence, something transcends the mundane and touches the Ideal.
For Plato, arete is mainly associated with moral excellence. It is superordinate to specific moral virtues of Courage, Temperance, Justice, etc.; something they all share, a special, unnamed quality, their essence. It is clearly related to Goodness, but not the same thing.
For Aristotle, something is excellent when it manifests its unique purpose or telos. The unique, defining quality of human beings, for Aristotle, what makes them distinct from other creatures, is the capacity for rational thought. Human excellence, then, involves the correct use of reason, principally in connection with moral choice.
What do you think? Is it worthwhile to strive to achieve or better not to ?
Overdrawn Director’s Loans Accounts, there appears to be some confusion over Director Loan accounts.
Some directors are taking regular withdrawals out of their company creating a negative balance on their director loan account. Let’s say they take £5,000 per month, they do this to avoid tax and NIC. The monthly payments continue and then often, six months after the year end, the accountant will issue a dividend to cancel the Directors Loan Account balance at the most recent trading year end.
There is so much wrong with this type of non-planned approach that it is almost difficult to know where to begin.
Firstly – the taking of regular monthly amounts would under scrutiny by HMRC be regarded as regular distributions and taxed accordingly.
Secondly – it would be far better to make a dividend payment at the year end, thereby clearing the Director Loan balance.
Thirdly – do not blindly continue to take monthly “drawings” out of your company, as if you continue to take monies out without a break in payment regularity then despite your trading year being passed, the balance will continue to be added to. The result being that the beneficial tax effect of the attempted clearance of the outstanding director loan balance will be ignored by HMRC.
If you are a company director and have been working hard for many years and after all the graft your company starts making reasonable profits. Then you will want to reward your family and yourself now that your company is successful.
It is perfectly natural to resist paying tax but attempting to do without a proper planned approach will undoubtedly create problems for you later on.
All company directors would benefit from a planned strategic approach to extracting cash from their business. This not only applies to director loan accounts but also to the payment of dividends and the use of pensions as a financial planning tool for you and your business.
We were recently requested to assist a company who failed to clear a fairly small balance at their trading year end of £39,000. They waited until six months after the year end and then paid a dividend of £157,000, to clear the accumulated director loan balance at that date. Because of sloppy practice the Director now faces a larger tax bill ….
Sloppy, sloppy, sloppy!
These sort of problems arise often with small accounting firms, who generally have small business owner clients and are not familiar or up to date with current taxation. In their client bank will be one or two companies that have done well, in reality they have outgrown their accountant but due to loyalty would like to stick with them.
Of course everyone is fairly busy, the directors with the demands of their business, the accountant trying to catch up with the twin demands of Companies House and HMRC.
I would suggest that all business owner’s seek out a third party adviser who is able to provide comprehensive financial planning both for the personal planning and the business planning needs of the director and his family.
Beware however there are two types of “advisers” – the main difference is that many “talk the talk” but very few can “walk the walk”.
Any comprehensive planner of note will be able to add more value to business owner director than any fee paid.
If you have an overdrawn Director Loan Account or find yourself paying too much tax why not contact us :- http://www.paretolawrence.co.uk/contact/
Employee Benefit Trust Settlement Avoided – We were pleased to receive a letter from HMRC confirming that no further action was being taken with regard to one of our EBT clients.
To be frank, it is unusual for HMRC to make any enquiry into any of the EBT’s we advise upon, as normally we manage to resolve them without an enquiry, in any event. So to get a letter from HMRC – “case closed” on the one enquiry we have had is good news.
We have provided advice on a further 3 new EBT cases today and hopefully the clients are happy with the outcome.
If you are concerned about any aspect of advice you have had with regard to an EBT, particularly if you have been advised to make settlement please do contact us first.
If you have an Employee Benefit Trust then you really do need to take action now.
You may have received an unwelcome letter from HMRC concerning the possible Benefit HMRC say you have enjoyed? Maybe you are even being asked for a rather large sum of money – say about 50% of the EBT value to settle the issue of any benefit you may have enjoyed. And if you delay, there are penalties to be added.
If you haven’t received this unwelcome post and you are the beneficiary of an EBT, then it probably only a matter of time.
The issue is simple, EBTs used to be a tax alternative to ‘income’. Changing legislation has negated the benefits and worse the EBT in its original form represents a toxic tax liability.
Turning to your introducer may not be the best solution – He or she may well have simply passed you on to an non-connected third party providing an EBT solution (collecting an introducer fee on the way).
Given the problems that exist now for EBT Members – it would nice to find a solution to simply make them go away. But eliminating it requires significant tax knowledge plus a substantial understanding of Trust law.
Please make sure you consult someone who really understands the issues involved or you may find your problems multiplied!
We do know what we are doing and we have acted for a wide range of clients to resolve their EBT issues.
The first issue is always to properly understand the client’s position and all associated problems that has been thrown up by the creation of the EBT.
All planning to achieve a satisfactory solution necessarily has to be bespoke, as personal circumstances dictate what path of action to take.
So if you are in this position, and you prefer to ignore what is actually required to put your financial affairs in order – don’t call us.
However if you genuinely want to resolve your EBT and associated tax issues DO contact us now.
In most cases we are able in most cases to consign EBT’s to the dustbin of history.
We have resolved over 30 EBT’s and have a further 12 cases in process. We do have a rigorous process for dealing with EBT’s that works exceptionally well.
We have only given up on one EBT enquirer, as they were taking “advice” from someone who had spent 20 minutes on the web – we clearly could not compete with that!!
If you have an adviser that only knows what he knows, but does not know what we know – then you may be told things like:-
“I can assure that there is NO interest payable on loans from EBT’s” (only to be telephoned later) – “Oh yes you were right – my mistake!”
Or even better…
“Put all your assets in trust and leave the country!”
Or to have been advised by their accountant that “We have reviewed your file and (although we put you into the EBT in the first place) you now need to make a £390,000 settlement to HMRC.” A nice retirement present!!
A better option is to visit a specialist who can not only advise you on the best action regarding EBT, but also assist you in building stronger foundations for your financial future. Why because we have often found that indifferent EBTs are accompanied by poor financial planning.
All Ltd companies have a defined trading year. Like many Directors you are probably thinking that it makes little difference which year end you choose. I beg to differ.
Like all aspects for planning for Directors , everything that applies to the company is important and should be looked at for maximum tax planing effect.
Like planning a day in your diary 3 or 4 months before your year end to carry out your pre -year end planning.
In order to do that you need to ensure that you have key management information to hand.
Then you need someone who you can rely upon to interpret all of this for you, so that you can maximise tax efficiency and perhaps extract cash from your company so that you and your family can have that holiday you deserve.
Even more enjoyable if you have paid for it by doing your tax planning in advance.
By doing the planning in proper time, you will be more relaxed when you go on holiday won’t you? Particularly if HMRC has paid for it!
What is that you normally go on holiday the month before your trading year end ?
Boy, have we got our work cut out with you !
Look I am sure as a successful company director that you have already looked into all of these small steps and you are probably so profitable that you do not care about the £5,000 to £20,000 additional cash you can make by bothering about this small stuff.
That is OK, it takes all types ….
If you were interested though we could talk , we offer a 30 minute coaching programme for directors who want to grow their companies and increase their personal wealth.
There is a catch of course, we don’t offer this to all and sundry, you have to qualify by providing answers to seven questions . If we like the answers then we are happy to provide 30 minutes coaching at our expense …..
We have a pretty unusual approach (different) to most coaching people who make claim to your time and money and end up wasting your time and money.
We get you to do all of the work.
We believe that you are perfectly capable, it is just that you do not know how to start AND you are currently under utilising your BRAIN.
You are just scratching the surface and using about 10% of the brains capacity, let’s face it you have been winging it for years, haven’t you?
So you are thinking is this some sort of Personal Improvement Course we are selling – NO it ain’t – not in the normal sense of the words.
I have been using the “system” for years and it has helped me out of some pretty dark corners. It has also helped me to become pretty successful.
It is quite simple to put into practice, you are most likely to say – is that all it is !
Because something is simple does not mean it isn’t profound.
You have to work at it to make it work.
We will hope to motivate you additionally but you know the old saying you can take a horse to water but you can’t make it drink.
Of course you may be pretty happy with your life but would’ it irritate you to know that you have not achieved the maximum success you could have, if only you had taken the time.
If you are looking for professional tax advisors, business coaching, Reading and surrounding areas of Berkshire are served by Pareto Lawrence http://www.paretolawrence.co.uk/. From basic financial services through to thorough tax planning services, we do more than it says on the tin.
The end of the tax year can prove stressful for some, but this annual deadline focuses the mind on financial matters and forces us to get things in order.
The end of year accounts provide valuable information on the health of your business. Knowing we have to get things straight makes us take action on things which may have been put to the bottom of the pile, seek professional support and take time to reflect on the past year. It makes us allocate time to taking stock of areas which are going well and reaping rewards, areas which need addition investment to reach their potential and areas which are weak and could be cut.
In taking time to understand our financial position, we have the foundations on which we can build realistic financial plans for the coming year. We can look at income, expenditure and cash flow to understand where cuts need to be made, what money we have money to invest and where that is most likely to generate a return.
If you’ve felt the pain of getting everything in order for the end of the tax year, it may also be the ideal time to engage the services of a professional accountant. With their support it can be far easier to develop effective systems for managing your business accounts, tax payments and getting your annual returns to Companies House.
A good accountant will not simply complete your accounts; they will also provide advice on how to reduce your tax bill within legal restrictions. They can provide information on where to hold money that is being set aside for future investment, so it generates the most tax efficient returns and provide advice to ensure that your business is compliant with financial regulations.
Employee Benefit Trusts
Financial regulations are constantly changing, so an accountant will be able to provide the most current advice that is relevant to your business. One of the issues that has to be resolved before the end of this tax year are Employee Benefit Trusts (EBT). Until 2011, these were seen as a way to set aside money that could be used by employees for training, social events, loans etc. However many companies used EBT as a tax avoidance scheme.
Since the Finance Bill 2011, HMRC have been clamping down on companies who were believed to be using EBT for tax avoidance. EBT are no longer seen as an acceptable financial arrangement for any business. If your company is still using EBT, or have yet to close an EBT that was used in the past, it is at risk.
Until 31 March 2015, HMRC are offering a settlement opportunity to those who have used EBT. If tackled before this deadline, a financial settlement will be agreed and no litigation will be made. You can deal with the issue directly with HMRC, or you can talk with a specialist accountant who can help you work through the process and find the best option for your particular case.
Pareto Lawrence http://www.paretolawrence.co.uk/employee-benefit-trusts/ have expertise in EBT resolution. We not only advise on the best action for EBT compliance, but also assist with other aspects of your financial management, to ensure your money is working effectively for your business.
Most of us work incredibly hard to earn an income and although Britain is seeing a stronger economic recovery than many other European countries, finances still feel a bit tight. For the majority of people, there are opportunities to make improvements to their financial situation, by taking greater control over their money management.
If you are self-employed, you should be used to filing your financial paperwork and keeping things in order. You should also be well aware of the dates when the self-assessment documentation has to be submitted. These factors make it far less daunting to complete the necessary paperwork each year. In turn, this reduces the chances that you will miss the deadline and therefore have to pay an additional fine.
This same philosophy applies to all of us. If we can organise our finances, file them in a logical way and keep a dairy of essential payment dates, we can help ourselves to keep on top of our income and expenditure. With a simple filing system in place, we should be easily able to look up the latest statement regarding our mortgage, utility bills, insurance cover and pension payments. This can help to reduce the risk of overspending, fines and missed payments.
Getting the Best Deal
From switching energy providers, to checking the interest rate on bank accounts and the returns on investments, it takes a little work to get the best deals. If you leave your money sitting in the same pot for years, it is unlikely to be reaping you the best rewards. An annual check is advised so you can see if you have your money in the best place, and search for the best alternative if not, can help reduce costs and increase income.
Tackling Financial Issues
Finances are seldom straight forward, so nearly all of us have some financial issues, which it could be highly beneficial for us to seek professional support to resolve. Pensions and investments and wills are some common examples where professional assistance can be sought to ensure everything is working to your advantage and legally binding.
Other issues include the settlement and solution for Employee Benefit Trusts (EBT), also known as Business Trust Funds. Once used as a form of reward for employees, the use of EBTs for tax avoidance has resulted in them no longer being seen as acceptable and action needs to be taken if you have received income via an EBT.
The deadline is approaching, but until 31 March 2015, HMRC are offering a settlement opportunity, so if you declare your EBT income, no further action such as litigation to be taken. For independent advice on the best ways to resolve your EBT issues, you can also seek support from financial specialists such as Pareto Lawrence http://www.paretolawrence.co.uk/employee-benefit-trusts/. Failing to take action is likely to lead to an unwanted brown envelope.
No matter what steps you need to take to gain greater financial control, make 2015 the year when you see more of your well-earned money.
Until recently, Employee Benefit Trusts (EBT) were used by a wide range of companies as a way to provide financially based rewards for their employees. They were promoted as tax efficient discretionary trusts in which to hold assets for employees. They were a popular choice in mergers and acquisitions, where a lump sum could be allocated to existing employees to prevent Directors using it for other means.
EBT were established and funded by the employer for the benefit of their employees. They became a holding vehicle for internal share schemes, a method of the company providing tax free loans to their employees and also provided a source of funds for social purposes. Although there were UK based schemes, the majority were held off-shore.
The issue was that many companies and providers of EBT made use of financial loopholes and so used and promoted them as a corporation tax avoidance scheme. Since the introduction of the Finance Bill in 2011, legislation has been tightened up and companies that were suspected of using EBT for tax avoidance were investigated by HMRC. Some high profile cases, negative press about EBT and the new legislation have led to the collapse of some EBT companies.
For employers who had committed to these schemes and employees who may have been paid a basic level salary, with additional remuneration coming via an EBT, the changes has left them without the financial security that they had expected.
Whether the scheme was genuinely set up to benefit employees or as part of a tax avoidance scheme, the fact is that EBT are no longer acceptable and employers and employees that have used them need to take action.
Until 31 March 2015, HMRC are offering a settlement opportunity to those who have used EBT. This temporary option allows the change for a financial settlement to be agreed and no further action such as litigation to be taken. Much like a weapon’s amnesty, this invites people to come forward and take positive action without reproach. The aim is to come to an agreement that will save both the HMRC and the individual costly investigation and intervention.
Another option is to visit a professional tax specialist who can provide independent advice on the best ways to resolve your EBT issues. Experts in EBT resolution, including Pareto Lawrence http://www.paretolawrence.co.uk/employee-benefit-trusts/ can not only advise you on the best action regarding EBT, but also assist you in building stronger foundations for your financial future.
There are also a number of companies providing an ‘off the shelf’ EBT solution. These may initially seem like the easiest and most affordable option, but they are unlikely to provide the best outcome. Both HMRC and independent tax experts are highlighting the fact that each case is unique. They were all set up and run in different ways and the financial implications will vary.
Taking the time to speak with the HMRC or independent adviser in person will allow for a bespoke resolution to be agreed. This can include repayment options that you can realistically manage, as well as the best route forward to avoid financial issues in the future.
The settlement opportunity for EBT’s was to remain open until 9 January this year but we understand that this has now been extended to the end of March.
The HMRC view is that it will allow eligible individuals to pay tax and interest to resolve open years of use of the arrangements and have certainty.
Our view has always been that there is nothing to be gained by making a settlement and that one should either enter into a defence arrangement or simply extract the value of the loans or assets from the EBT.
In July 2014 HMRC published a list of Scheme Reference Numbers (SRNs) where Accelerated Payment Notices (APN)’s could be issued. This includes a number of Employee Benefit Trust schemes including those of Premier Strategies.
The APN tax legislation in Finance Act 2014 allows HMRC to issue an APN to demand payment from clients who used planning with listed SRNs. An APN does not conclude the argument but it does oblige taxpayers to make payment up front. If clients made such a payment and then eventually won litigation on the planning then the tax paid under an APN would be refunded with interest.
Before issuing APNs for EBTs HMRC are waiting for the equivalent National Insurance Contribution (NIC) legislation to be enacted – probably later this month.
We understand around 25% of EBT holders have “taken advantage” of the Settlement procedure so far. If that is correct then 75% of EBT holders are either sitting on the fence or are engaged in a defence scheme.
We wonder if that is wise as in many cases they are liable to pay both trustee fees and BIK charges for some years to come anyway. We have successfully dealt with the extraction of numerous EBT’s using our bespoke planning ….so why play sitting duck?
We may be able to turn your EBT problem into a planning opportunity.
Ray L Best
Many accountants will be relieved to hear of a recent Court of Appeal ruling that general accountants are under no obligation to advise clients to enter into aggressive tax avoidance schemes.
The Court of appeal overturned the previous ruling that “accountants had a positive duty” to offer “specialist tax planning”.
The case concerned was that of a Mr Mehjoo who was born in Iran and moved to the UK at the age of 12 as a refugee. After being granted asylum in 1982 he later became a professional squash player.
Later on in life he set up a highly successful fashion company. The sale of that business generated for him a £850,000 capital gains tax bill. So he sought advice from his accountants.
The accountancy firm provided information on various tax planning schemes. The sale of the company took place in April 2005, and Mehjoo realised a gain of £8.5 million.
Mehjoo and HB continued to pursue tax schemes to wipe out the CGT liability, but the question of Mehjoo’s potential non-UK domicile was not raised until a meeting with Barclays Wealth in June 2005.
A DOM 1 form was submitted for Mehjoo in March 2006 and HMRC confirmed he was non-UK domiciled in April 2006.
Mehjoo took up a tax scheme which cost £200,000 and was supposed to wipe out all the CGT due, but it was subsequently found not to work.
Mehjoo was advised that as a non-dom he should have used a different tax scheme known as the bearer warrant scheme (BWS), which may have eliminated all the gain before the sale by changing the shares into offshore assets.
Our view is this, when you give advice you should be qualified to do so either in terms of a tax qualification or in terms of experience. So it beggars belief that his residential status was not noted or taken into account, either by the accountants or the tax house concerned.
Ray Best can help you protect your financial future. To find out more, simply click here!
Budget 2014 proved to be something of a surprise for many in the pensions industry. The industry has been calling for pensioners‘ income flexibility and choice at retirement to be widened, however the scale of the announcements in Budget 2014 could not have been anticipated.
It is unprecedented for changes of this scale to be implemented, particularly in such short timescales, without consultation.
So why such drastic changes, one of the reasons is politicians are disappointed with the failure of pension providers to provide consumers with full transparency and choice AND value on annuity choices.
Another is that these changes will mean that many people will extract funds from their pension and this will produce tax revenue for the government.
Finally an election is looming…
All pension scheme providers will have to make immediate changes to their systems to account for the changes to the pension regime effective from 27 March 2014. These include:
- a reduction in the amount of guaranteed pension income, or minimum income requirement, people need in retirement to access their pension savings flexibly, from £20,000 per annum to £12,000 per annum;
- an increase in the capped drawdown limit from 120% to 150%;
- an increase in the size of a single pension pot that can be taken as a lump sum, from £2,000 to £10,000;
- an increase in the number of pension pots of below £10,000 that can be taken as a lump sum, from two to three;
- an increase in the overall size of pension savings that can be taken as a lump sum, from £18,000 to £30,000.
The potential impact of the reduction in the minimum income requirement to £12,000 per annum is likely to result in many more people taking their whole pension fund early, this is likely to increase the tax paid to HMRC and is likely to mean that consumers will make uninformed choices and his will lead to increased reliance on state benefits at a later date.
Whilst these reforms appear to be the bedrock of a new, more flexible pension system in the UK it will take some time for the industry to fully digest their impact.
We are currently reviewing the detail behind these changes and will provide further guidance in due course. In the interim, all immediate changes will be implemented.
Although we welcome the fact that the chancellor has removed the shackles from pensions, we would urge people to take time to fully consider all options and to take proper advice….
The sure beneficiary is HM treasury as tax receipts will increase significantly; HM treasury will also benefit from an increase in Stamp duty and land tax as people are bound to funnel money from their pensions into property.
As a consequence the housing boom will be resurgent AND the subsequent collapse in property prices that will follow be even greater. More fuel to the fire and a solid return to financial boom and bust handling of the economy.
Ray Best can help you protect your financial future. To find out more, simply click here!
TACKLING MARKETED TAX AVOIDANCE – the consultation document above which was issued on 24 January 2014.
There is absent a lack of an appeal process before the issue of “failure notices” and also the proposed extension of the accelerated payment regime to potentially all DOTAS registered schemes back to 2004.
Point 3.19 of the consultation document states that:
“It is important to note that this will simply be a form of payment on account and not a payment that determines the amount of the final liability…[if] the taxpayer continues to pursue their claim and is successful then they will get their money back with interest.”
However, as far as I can see the taxpayer has no right of appeal so how is he supposed to “pursue” the claim?
The “failure notice” requires the taxpayer to amend their return and give HMRC a notice to say they agree the tax case is relevant.
There is no right to appeal against the failure notice even if the taxpayer doesn’t agree that the tax case, that HMRC say is relevant, applies to his case. The taxpayer can ask HMRC to reconsider its position but cannot appeal their decision. If they do not amend the return as required they will be subject to a penalty (the amount is not specified).
To make matters even worse, the taxpayer is not even allowed to appeal against a closure notice giving effect to the amendment he/she was forced to make as a result of the “failure notice”!
A taxpayer could get in front of a judge if he deliberately fails to comply or pay and has a penalty imposed on him. Inevitably the appeal against the penalty will become the platform for the taxpayer to argue the substantive point but this is a very difficult procedure for a client to exercise his right to his day in court. Worse – it also forces normally law abiding (avoidance is legal – both Cameron and Osbourne have confirmed it) citizens to deliberately default in order to be heard.
The only other alternative will be to go for judicial review of the issue of the failure notice and have the argument as to whether the case is actually relevant to the tax payer at that hearing.
HMRC state that the reason for wanting this new legislation is to stop clients from pursuing claims where there is no prospect of success, however they refuse to allow appeals and want to rely on First Tier Tribunal decisions which do not create a legal precedent. Inevitably, by trying to cast their net too wide they will certainly in the short term increase the amount of litigation and I suspect on a significant number of cases will end up no further forward than they are today and in fact much out pocket due to having to fight these extra cases.
To be clear, we have no issue with HMRC arguing that a particular case applies to certain taxpayers’ planning. No doubt there are some taxpayers that fight on regardless of their chances of success but I think these are the minority. The problem is that, HMRC are by definition biased and are likely to see similarities where an unbiased court would not.
Accelerated payment for DOTAS schemes
The proposed rules now involve making taxpayers that have worked with “compliant” promoters pay any disputed tax up front. The clients of promoters who HMRC say do not comply with DOTAS will be unaffected. This seems totally at odds with HMRC’s stated aim to go after high risk promoters.
The other obvious effect that this proposed legislation will have is that it will mean the effective end of the DOTAS regime. If the downside of disclosing is that your clients will have to pay up front then why would you disclose? The DOTAS rules are not very well drafted (hence why HMRC keep wanting to change them) and I understand that I it is not difficult to get a respected QC’s opinion that a scheme is not disclosable. HMRC have only taken one case to court for failure to comply and they lost it so presumably promoters will be fairly comfortable with those odds?
Even if they do eventually get taken to court and lose, all this means is that they may (under the proposed high risk promoters’ rules) get a “consent order”.
All that these rules will achieve is to send all tax avoidance back underground where it was before DOTAS came in, making detection much harder. This seems to be a totally illogical step for HMRC.
Finally, I would question HMRC’s comments on the impact of the proposed rules. Given they can go back to cases implemented as far back as 2004, many thousands of clients will need time to pay. The man-hours HMRC will have to expend on agreeing the terms will inevitably be enormous. In addition, many clients, unable to borrow from banks, will go to the wall leading to no tax being collected and thousands if not tens of thousands of ordinary lower and basic rate taxpayers losing their jobs.
So although we welcome and applaud HMRC’s recent success in tackling largely artificial tax avoidance schemes, such as those recently highlighted in the press. The impact of pushing the proposed legislation through will inevitably cause damage to many business owners who accepted advice to undertake tax avoidance that was legal at the time, so to now re-write the rules and back date them is not only unconstitutional but not “British”.
The impact on a business and therefore ultimately the employment of staff will surely be considerable….
Ray Best can help you protect your financial future. To find out more, simply click here!
In 1984 the Government introduced the “quoted Eurobond exemption”, this little-known regulatory loophole intended to make UK companies more attractive to foreign lenders looking to minimise their tax bills.
When a UK company pays interest to an overseas lender it would normally have to send 20 per cent to HMRC. The exemption allowed banks and other investors to receive the interest without the deduction if they lent their money through a “recognised” stock exchange such as the Channel Islands or the Cayman Islands.
Almost 30 years on, the tax benefits are being enjoyed not only by third-party investors, but by the owners of UK companies, who are using it to spirit profits through tax havens, while minimising – sometimes eliminating completely – the company’s UK tax bill.
The loophole is popular with private equity firms, which manage money given by pension funds and others to buy companies and then sell them off at a profit.
Instead of investing their money in the shares, or “equity”, of the companies they buy, they lend the money, often at very high interest rates through offshore stock exchanges.
Their newly acquired companies then take the yearly interest off their profits before they have been taxed in the UK, and reduce their tax bill accordingly. Often, the interest is not paid to the owners immediately but is accrued and added on to the original loan, increasing the amount taken off the next year. If the owners had invested the money in shares, any dividends they received would be paid after the tax had been calculated.
Many companies which use the loophole – and there are lots of them – say this is a legitimate form of investment; and there’s no doubt it is legal. HMRC considered restricting the exemption last year.
On wonders how serious the UK Government is on Tax Avoidance, or is the case as our previous blogs infer that large companies can get away with it as HMRC believes it can pick up the slack from SME companies and their owners.