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GAAR advisory panel opinion on second EFRB scheme

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The GAAR advisory panel has published a new opinion concerning an employer-financed retirement benefit scheme (EFRBS). The panel reached the same conclusion as in its previous opinion involving an EFRBS, which was that these were ‘abnormal and contrived’ arrangements to which the GAAR applies.

The scheme was set up to reward two key employee/directors. The employing company funded the scheme through two deeds of covenant providing for payment of a percentage of the estimated profits for specified accounting periods. The company and employees entered into loan agreements and subsequently tripartite agreements with the scheme trustees, which released them from certain repayment obligations. These arrangements resulted in the employer company crediting a total of £220,000 the employees’ loan accounts, with the employees owing a corresponding amount to the EFRBS. The panel considered these arrangements to be, in substance, loans to the employees.

The scheme was intended to avoid an immediate charge to income tax on the funds provided to the employees under both the general charge and the disguised remuneration provisions, and obtain an immediate corporation tax deduction for the full amount contributed to the EFRBS.

The panel noted that its conclusions on these arrangements were the same as in the earlier similar case involving an EFRBS, decided on 26 January 2018. In the panel’s view, the scheme was:

  • not consistent with the principles and policy behind the employment income provisions, that is, to tax rewards once they were available to the employee, or the corporation tax deduction provisions for employee rewards, that is, to allow a deduction at the same time as the employee suffers the tax;
  • designed to exploit a perceived shortcoming in the disguised remuneration provisions, which focused on employee trusts advancing money to employees, but not on economically equivalent transactions; and
  • abnormal and contrived, seeking to achieve the result of the EFRBS not making a payment direct to the employees by means of complex tripartite arrangements.

Although the EFRBS in the latest case was established shortly before the GAAR came into force in July 2013, the panel concluded that the post-commencement date arrangements were ‘capable of being abusive arrangements on a standalone basis’, and steps taken prior to the commencement date were either ‘preparatory in nature’, or could be ignored entirely. In reaching this conclusion, the panel referred to section C10 of the GAAR guidance and noted that the taxpayer could not rely on the specific safeguard in paragraph C10.6 (C10.7 in the current version of the guidance).



Issue: 1393
Categories: News