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Tax advisers urge caution over EBT ‘settlement opportunity’

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HMRC have offered employers who have used employee benefit trusts and similar arrangements, designed to defer or avoid tax and NICs, an ‘opportunity’ to settle tax liabilities in an initiative that one professional body has described as ‘messy’.

Deloitte observed that there is no invitation to settle on ‘compromise’ terms. ‘Consequently, it will have no attraction for employers who continue to believe they have a strong or arguable case,’ the firm said. PwC described the settlement opportunity as ‘not particularly attractive’.

The current Finance Bill puts it ‘beyond doubt’ that such arrangements do not work, HMRC said. ‘The disguised remuneration legislation, once enacted, will have effect from 6 April 2011 and, in some cases, will apply to transactions that took place on and after 9 December 2010.’

HMRC announced last week that employers or companies willing to reach a financial settlement will be invited to discuss potential settlements for transactions that are not caught by the Finance Bill measures. The department’s view is that such schemes were ineffective under existing legislation.

The arrangements have been ‘a long-running sore’ for the government, and the initiative ‘could result in some investment banks declaring one-off hits to their profits, if they have not made provisions’, The Guardian reported today.

‘Any settlement will depend on the facts of the case, in particular whether the contributions to the trust have a link to employment or not,’ HMRC said.

The settlements will take into account ‘all relevant duties’. Revenue and Customs Brief 18/11, published earlier this month, sets out HMRC’s current view on the inheritance tax issues associated with EBTs and includes material on ‘various matters not previously addressed’.

HMRC will write before the end of August 2011 to employers or companies who have open EBT enquiries, inviting discussion about potential settlements. There is no deadline for the ‘incentive’, HMRC said, but if employers or companies do not respond by 31 December 2011, HMRC ‘will assume that they are not interested in engaging with them and will look to progress enquiries formally’.

'A distinctly messy solution'

The Institute of Chartered Accountants of Scotland said it had sight of HMRC’s announcement 24 hours before it was released. ‘We expressed concern that this seems to be a way of collecting PAYE on contributions to an EBT by the back door, albeit by agreement with the taxpayer,’ ICAS said in a note published on its website. 

‘We know that HMRC have tried and failed in the courts to show that PAYE is in fact due on contributions to an EBT. This new route seems a distinctly messy solution. What would happen, for example if HMRC later take a case on this point to the Supreme Court and lose?’

PwC said: ‘On the face of it, the terms offered by the facility are not particularly attractive, requiring payment of PAYE and NIC, which would appear to require complete concession on the part of taxpayers, despite favourable Special Commissioners decisions supporting the treatment which many have adopted.’

Spotlight 5

HMRC’s ‘Spotlight 5’ was first published in August 2009 (not November 2009 as stated in last week’s announcement). As Tax Journal reported on 31 August 2009, HMRC said:

'We're aware that companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a corporation tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.

'In addition our view is that an inheritance tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to inheritance tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief.

'Participators affected by this may need to self-assess a liability to inheritance tax. There is further technical advice on inheritance tax on contributions to employee benefit trusts on the HMRC internet site.

'We are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.’