Employee Benefit Trusts loans and HMRC – taking stock
13 September 2016
Employee Benefit Trust (EBT) arrangements have been widely used for many years as a way to motivate employees.
HMRC have recently issued further guidance on settlement of tax liabilities associated with EBT’s, including a deadline by which settlement is to be agreed. Additionally, many businesses will now be receiving letters from HMRC about EBT and other similar structures, especially where the EBT has lent money to employees. These letters include:
- References to Code of Practice 9 (also referred to as the Contractual Disclosure Facility or CDF), which is used in cases where tax fraud is suspected. Recipients of these notices should seek urgent professional advice.
- More typically, notification that HMRC will be challenging the EBT planning by way of litigation and that additional tax charges will arise following some changes to legislation announced in this year’s Budget. These letters will generally include an invitation to contact HMRC to settle any liabilities linked the use of the EBT.
As a result of changes which will come into force in 2019, and the imposition of a deadline for settlement of EBT arrangements on the basis currently available we believe that now is the right time for employers who have used EBT and similar arrangements to take stock of their position. There are a number of options available, including a negotiated settlement with HMRC, waiting for the outcome of litigation, and pursuing appeals on a stand-alone basis. However we would recommend that anyone who has implemented EBT planning arrangements carefully consider their particular circumstances before deciding what course of action to follow.
To our knowledge HMRC are not challenging EBTs that are used to hedge share plans or warehouse/create an internal market for shares. Similarly, EFRBS that have been used as true pension schemes (e.g. without any loans back to employees or the employer) are not being challenged.
How could it impact you?
Under the new rules which HMRC reference in their letter, distributions from an EBT or similar structure will be taxed as income from employment. The changes announced in the Budget will extend these charges to any loans outstanding at April 2019, even if there has been no distribution from the EBT.
Although it may be unlikely, at worst the Disguised Remuneration rules could result in tax being charged on the same amounts more than once. At best, employers who implemented EBT arrangements will be faced with the administrative complexity of applying PAYE and NIC to distributions for an indefinite period into the future. The rules are open-ended – they continue to apply to distributions even after the death of the beneficiary.
The decision of the Court of Session (the Scottish equivalent of the Court of Appeal) in Murray Group Holdings v HMRC (referred to as the ‘Rangers’ case) has introduced another layer of complexity. In that case, it was decided that EBT contributions should simply be regarded as a payment of earnings which employees had directed to be paid to the EBT. The Supreme Court will hear the an appeal against that decision at the beginning of next year. However, it seems unlikely that the Rangers decision will provide definitive guidance across all EBT arrangements.
Finally, HMRC will contend that Inheritance Tax (IHT) charges will apply to these structures. The nature of these charges will depend on a range of factors but there is a broad risk that significant additional costs will arise.
How we can help
With all of that complexity in mind, we would recommend that anyone who has used or benefited from EBT or similar arrangements take stock of their position as soon as they can. It may well be that, in light of the Disguised Remuneration charges, and in particular the new April 2019 tax on outstanding loans, settlement with HMRC is the best option. However, the window for doing so is relatively tight – with further proposed changes to the Disguised Remuneration rules from March 2017 likely to make settlement much more difficult for some users after that date.
If you would like to speak to one of our specialists about these issues, please call the number below.
p: +44 (0)141 355 4049