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Employee Benefit Trusts - Storm Approaching!

Often with HMRC pronouncements surrounding tax avoidance we get no warning.  An announcement is made out of the blue and tax professionals everywhere are left scurrying round trying to find the detail behind the headlines to see how it might affect their clients.

However, last year in a rare change of tack, HMRC set out in some detail their proposals to tackle, once and for all, what they regard as abusive “disguised remuneration” structures.  The most common type of structure covered by this proposed legislation will be Employee Benefit Trusts, but the wording is drafted much wider than that and can cover literally any structure where remuneration is effectively dressed up as something else (often a loan) from a third party.  Funded Unapproved Retirement Benefit Schemes (FURBS) and Employer Finances Retirement Benefit Schemes (EFRBS) are both likely to be caught too.  

To be fair to HMRC, they have consulted widely on the proposed legislation and have listened to representations made by well over 100 organisations, including most of the major accounting firms and the Chartered Institute of Taxation.  This has resulted in the Finance Bill presented in last month’s Budget looking somewhat watered down from the original draft legislation offered up for comment.  However, there is still likely to be a nasty sting in the tail which anyone involved in an EBT, FURBS or EFRBS needs to be aware of.  

The purpose of the new legislation was two-fold.  The first was to widen the net to catch new structures which would not have been caught by the previous rules.  This isn’t surprising and for some time now we have warned any clients looking to try to avoid PAYE & NIC on what is in effect remuneration to exercise extreme caution as the courts have hardly been sympathetic to tax avoiders over the last few years with the result that the prospects of success are now practically zero.  

However, there was a second part of the proposed legislation which is what is causing most alarm.  HMRC have literally thousands of open enquiries into historic EBT, FURBS & EFRBS cases, many going back ten years or more.  These enquiries are typically aimed at the employing company, with HMRC arguing that PAYE & NIC should be due.  Whilst there is a high profile EBT case currently in the Supreme Court (“the Rangers case” as it has become known) which may well determine whether HMRC will be successful in defeating these schemes, in the meantime they have decided to tackle the problem from another angle. 

The vast majority of these cases involve the employee taking a loan from the EBT/FURBS/EFRBS, often on beneficial terms.  HMRC have therefore come up with something of a master stroke in order to deal once and for all with all of these structures.  The Finance Bill includes legislation that will treat any loan from a disguised remuneration structure (such as an EBT) in existence on 5 April 2019 as a payment of remuneration on that date, with all of the associated PAYE & NIC consequences that follow.   

In simple terms then, if you have such a loan then it doesn’t matter whether or not there is an open enquiry into the scheme or not, the loan will be taxed on 5 April 2019.  You can avoid the charge by repaying the loan before this date, but this simply postpones the problem as once the loan is repaid it will then be nigh on impossible to take the money out again without triggering PAYE & NIC.   Failure to act will therefore result in a tax liability in two years’ time.  

However, what has caused most consternation in the tax community is a further proposed rule which would govern how HMRC can collect this PAYE & NIC.  Due to the time that has elapsed since these schemes were implemented (many more than a decade ago and before the last recession), many of the companies involved have either folded or do not have the funds to pay the PAYE & NIC that would be due.  HMRC therefore proposed specific legislation that would allow HMRC to transfer the PAYE & NIC liability to the employee personally in such circumstances. 

This is a massive change and would mean that no longer can employees rely on the corporate veil to protect them from the liabilities of their employer.  There will be thousands of people currently sitting with large EBT loans potentially facing a large personal tax bill if their employer (or ex-employer) either no longer exists or cannot foot the bill. 

This is controversial as it effectively drives a coach and horses through the whole concept of the corporate veil.  It was interesting to note, therefore, that in their feedback after the consultation, HMRC acknowledged that there was some further work to do in this respect and therefore this part of the proposed legislation did not make it into the 2017 Finance Bill.  However, HMRC are confident that it will be introduced later in the year in a second Bill.  We will keep a close eye on how this progresses. 

What can be done now?

As explained above, doing nothing is simply not an option, although until we know exactly what legislation will find its way onto the statute book it is difficult to make a fully informed decision as to what to do next.  At the moment, time is on our side as there are still two years before the new tax charge will bite, but now is the time to start thinking about it. 

We are therefore urging anyone who is a beneficiary of an EBT, FURBS or EFRBS to contact us to discuss their options.

Call Richard Coombs on 01332 365855 for more infrmation or email richardc@batesweston.co.uk