During the 1990s and 2000s, many employers transferred substantial sums to EBTs which then lent the money to chosen employees on an open-ended basis. Initially HMRC litigated some of these loans as effectively earnings. This was not wholly successful and, in 2011, HMRC introduced the ‘disguised remuneration’ regime which effectively halted new loans by EBTs. HMRC now propose a major extension to the scope of the DR regime. There will be a loan release charge for DR loans, which will supplement the existing charges. There may be (but not until next year) a charge on third party payments to participators in close companies, who are also employees. Finally, and most importantly, EBT loans made since 1999 will be liable to income tax and NICs if they are outstanding on 5 April 2019.
During the 1990s and 2000s, it was not uncommon for employer companies to pay bonuses by transferring the bonus pool to an offshore employee benefit trust (EBT). The trustees would then allocate the funds to sub-trusts for individual employees and their families; and, in many cases, the sub-trusts then made a loan to the employee, often interest free and to be left outstanding indefinitely. In this way, the employee had immediate access to his or her bonus and paid no tax on it.
HMRC tried to litigate these arrangements but with mixed results. Eventually, in FA 2011, the government introduced the disguised remuneration (DR) regime. The most striking feature of the regime (apart from its length) was that an employee was taxed on an EBT loan as employment income and there was no refund of tax if the loan was repaid. However, the DR rules did not apply to historic loans made by EBTs before FA 2011. HMRC continued to litigate these cases and to encourage employers and employees to sign up to a ‘settlement opportunity’.
HMRC technical notes and consultation
Despite some success with litigation and the settlement opportunity, the government clearly believed that the amount of the historic loans that remained unsettled was unacceptably high. At Budget 2016, HMRC published a technical note, which was followed by a technical consultation in August 2016, on proposed changes to the DR regime. Some relatively minor changes were made in FA 2016 but the big changes – a release charge and ...