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Storm warning: APNs and EBTs

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Following the closure of the EBT settlement opportunity to new entrants in March and the final settlements in July, advisers and their clients are waiting to see what HMRC’s next move will be, with the threat of advance payment notices (APNs) in the air.
EBT planning took a number of forms from its inception in the mid-1990s to the introduction of the disguised remuneration regime, which came fully into effect from 6 April 2011. In its basic form, a company would establish an EBT and contribute assets to the EBT, which would then be ring-fenced for a named individual employee (usually by the creation of a sub-fund within the trust). Those assets would then be used to provide benefits to employees, very often in the form of beneficial loans, which could attract benefit in kind charges but would not result in the employee suffering PAYE and NICs on the whole value of the sub-fund until the assets were actually withdrawn from the EBT.
HMRC continues to argue that the earmarking of EBT assets for a named employee constitutes a payment of PAYE income to that employee. This is the basis on which HMRC’s settlement opportunity was operated.  
HMRC has, so far, not persuaded the courts to back its view. The Court of Appeal ([2004] EWCA Civ 22) held against HMRC on this point in Dextra (it was not argued before the Lords in [2005] UKHL 47); and HMRC has been unable to win this argument in the ongoing Murray Group litigation (the Rangers case, see [2014] UKUT 292 (TCC)).
The Rangers case was before the Court of Session in early July, and we will need to await the publication of that decision before being able to assess whether HMRC has been any more successful in its arguments on this occasion. However, the sums at stake and the profile of the case make it likely that we will have to wait for the case to reach the Supreme Court for a final decision.
Given this background, it seems unlikely that HMRC will issue APNs to collect PAYE until the Rangers litigation is concluded; and, in relation to years before DOTAS was in point, it will not have any basis to issue follower notices until it has a final decision from the courts. There is an exception to this, which concerns cases where loans were advanced to employees during the anti-forestalling period that ran from 9 December 2010 until 5 April 2011. Under FA 2011, such loans would be subject to PAYE unless they were repaid before 6 April 2012. 
A number of schemes were marketed that claimed to be able to circumvent these rules. Where companies have not already settled, such cases are highly vulnerable to the issuance of an APN.
The other area of vulnerability is that a number of schemes were marketed that claimed to overcome the rules in FA 2003 Sch 24 (now CTA 2009 Part 20) and allowed companies to take deductions in respect of EBT contributions before assets are distributed and PAYE liabilities arise.  
In such cases, there have been reports that HMRC has issued APNs to collect corporation tax, taking as their basis Scotts Atlantic Management v HMRC [2015] UKUT 66, in in which it was held that the secondary purpose of securing a CT deduction that motivated the EBT contributions meant that the expenses were not incurred wholly and exclusively for the purposes of the trade and were not deductible. HMRC continues to argue this case before both the FTT and UT; the advantage of doing so is that there is no need to engage with the specific details of the planning entered into by companies to secure deductions for contributions to EBTs.
In summary, there is a definite risk that HMRC will use its powers to issue an APN if a company has an unsettled EBT case, where it has taken corporation tax deductions, EBT contributions or where an EBT has made loans during the anti-forestalling period. In other cases, we expect to have to wait for the outcome of the Rangers litigation.
In the event that an APN is issued by HMRC, it is essential that action is taken promptly. Under FA 2014 s 226, the taxpayer will be subject to a penalty of 5% if, within 90 days of the date of issue of the APN, they do not make payment or make representations to HMRC under FA 2014 s 222. Additional penalties will arise on the fifth and eleventh months if no payment is made.