Employee Benefit trusts (“EBTs”), are trusts designed to hold assets and provide benefits for employees of companies, perhaps with the purpose of encouraging employee participation in the success of the company’s business and future success.
EBTs have gained bad press in recent years from steps taken by HMRC to close down or charge taxes unpaid as a result of such schemes, which have increasingly been adopted solely for the purpose of avoiding tax. However, EBTs can be valid, providing benefits to a wider group of employees (rather than just one employee) and accordingly each EBT should be judged on its own merit.
Disguised remuneration tax schemes
HMRC are very strict when it comes to perceived disguised remuneration schemes.
The use of a tax scheme to evade tax has in the last decade led directors and senior management of companies to enter into arrangements whereby their income is instead paid to an offshore trust, an EBT, and then loaned on to the intended recipient of such income.
- this is commonly referred to a method of disguising remuneration as a loan which was never repayable and was set up solely for the purpose of avoiding income tax;
- but not all EBTs mirror or contain this structure and it is not always the case that a tax scheme using an EBT falls within these provisions;
- often, an EBT does not even exist (which is not uncommon) or the trust document has been incorrectly drafted;
- however, where a loan has been made to the appropriate trust and is not repaid, then the tax implications of a loan charge mirror that which has existed for some time in respect of the balance on an overdrawn director’s loan account.
HMRC enforcement measures
Perhaps as a result of disclosure of such tax schemes, and their increased use, legislation has been introduced over recent years to combat such schemes including the recent incorporation of loan charges.
Further steps have been taken to prevent tax avoidance by close companies and to ensure that, for example in the case of offshore or dissolved/insolvent companies, the liability is transferred to the employee.
Quite often, once HMRC is aware of the tax scheme (either as a result of disclosure or as a result of negotiations then an accelerated payment notice may be issued for payment whilst negotiations are ongoing.
Interpretation by courts
In July 2017 the legal status of EBTs was further updated in RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) (“the Rangers Case”) where EBTs provided for payment to employees had been decided in the employers’ favour by the respective tax tribunals.
However, upon appeal and finally in the supreme court it was finally decided that the funds paid and loaned to employees via the EBTs was subject to tax, and the EBT as a scheme to mitigate or avoid liability for such taxes was not able to do this.
Obviously, this has other consequences as – if income is considered (some years later) as subject to income tax rules (including the liability for NICs) – then the liability will be considerably increased following the application of interest, penalties and surcharges under the various tax legislation. Indeed, where an EBT is invalid, then this can result in the tax scheme being considerably more expensive to the company.
Am I liable for tax under an EBT I entered into?
There are existing rules on disclosure of any such tax arrangements and the Finance Acts 2017 provide that you may be liable for a loan charge if such arrangements are not declared by December 2018.
- however each and every EBT has a different purpose and it may also be the case that your circumstances are different and, despite the scheme being described as an EBT, you may not be a party to a disguised remuneration arrangement;
- it is important that you seek advice as soon as possible. At Francis Wilks & Jones we are able to assist with understanding your personal circumstances and negotiating any claims with HMRC or any other claims against you personally, whether they be arising out of insolvency or claims for breaches of your fiduciary duties.
Please call any member of our tax disputes team for your consultation now and we can help. Don’t delay. Early advice can often make all the difference.