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Employee Benefit Trusts (EBTs) – Opportunity for settlement with HMRC

20th Dec
Employee Benefit Trusts (EBTs) – Opportunity for settlement with HMRC

Background

For a number of years, HMRC has taken the view that EBTs are primarily set up to avoid tax.  Whilst tax avoidance is not illegal it is clear that aggressive tax planning using contrived and complex structures is becoming increasingly morally unacceptable to HMRC and indeed the general public. You might recall the furore over Jimmy Carr, Take That etc.

Over the last decade successive governments have sought to legislate against the perceived aggressive use of EBTs to gain a tax advantage. This culminated with the introduction of the “disguised remuneration” legislation in December 2010. Whilst this will combat such future avoidance, (although there are still some unscrupulous promoters of tax avoidance schemes who believe they can bypass the legislation) it does not deal with the litany of historic cases.

It is understood that HMRC currently has in excess of 26,000 cases on its books which it believes is just the tip of the iceberg. HMRC’s publicly stated preference is to settle by agreement with the taxpayer. However, this is not always possible, not least due to incorrect and inappropriate advice provided by promoters of these arrangements in which they have a vested interest.

As a result HMRC will aggressive EBT arrangements. Of particular annoyance to HMRC are arrangements whereby monies are leant to beneficiaries or are placed in sub-trusts for their benefit, as it believes that this amounts to disguised remuneration for the individuals concerned.

You may recall that HMRC recently lost a First Tier Tribunal case it took against Glasgow Rangers for disguising remuneration by providing its players with loans via an EBT, a decision it has subsequently appealed against.; The tax and NIC at stake was in excess of £50m and whilst there is no prospect of HMRC recovering any of this money if it is successful in its appeal, HMRC is clearly seeking to make a statement of intent particularly as many other cases will stand or fall by any final decision in the case.

Settlement opportunity

Against this back drop, and in recognition of the cost and risk of litigation, HMRC issued a settlement opportunity in 2011 under its litigation and settlement strategy whereby it sought to encourage taxpayers who used or benefited from EBTs to settle. Initial take up was poor and as such further guidance was issued in August 2012. Given the number of potential cases, HMRC would appear to have ministerial backing to settle EBT cases on a favourable basis, where the circumstances permit. Clearly it is in the Exchequer’s interests to do so given the country’s poor finances.

The best way forward

There is therefore a window of opportunity whereby taxpayers can seek to settle such arrangements on potentially favourable terms.  Any settlement needs to take account of all facts and taxes at stake which can include income tax, NIC, CT, IHT and in some cases non resident trust charges. As a result, HMRC is prepared to consider settlements in the first instance on a no-names basis provided it is furnished with all the facts.  It is our firm’s experience that settlements can be as low as 17% of the value of the funds originally introduced into the EBT when all factors and taxes are taken into account.

Clearly, the weight of public opinion is on the side of HMRC which will only serve to justify its aggressive stance on cases where the taxpayer does not wish to settle by agreement. There are other benefits of seeking to settle, not least closure and certainty going forward, improving the company’s balance sheet and negating the need to pay what can be exorbitant trustee and professional fees to manage an arrangement that has no guarantee of giving the desired benefits.  Further, the existence of such arrangements can have an adverse impact on a company’s ability to raise finance and/or investment.

Given the above, now might be the time to address these legacy issues. If you wish to understand more of the opportunity please do not hesitate to contact Chris O’Hara.