Customers, their advisers and promoters should be aware that HM Revenue & Customs (HMRC) consider the following two tax avoidance schemes to be ineffective. This means that HMRC will most likely investigate tax returns where these schemes have been used and seek full settlement of the tax due, plus interest and penalties where appropriate. You should also be aware that some ineffective schemes, such as that described in Spotlight 5, may give rise to unexpected tax consequences.
HMRC are aware of schemes where companies claim a Corporation Tax deduction for employer contributions to an EFRBS scheme on the basis that either (a) the contribution to the EFRBS or (b) a subsequent transfer to a second EFRBS is a 'qualifying benefit'. This would allow the company to secure a Corporation Tax deduction before any benefits are actually paid by the scheme to the employee. HMRC's view is that neither transaction involves the provision of a 'qualifying benefit'. Whilst it has been argued that there may be some ambiguity in the law around the meaning of the phrase 'transfer of assets' since it does not state to whom the transfer is to be made, in HMRC's view the context resolves any ambiguity.
The law defines 'qualifying benefits' and such benefits are plainly, from the context, benefits that if paid under the terms of an EFRBS might fall within the employment income charge. So in that context, a 'transfer of assets' should be interpreted as a transfer that could give rise to such a charge. This will primarily mean a transfer of assets to the employee but also includes a transfer to a member of the employee's family. Neither an employer contribution to an EFRBS nor a transfer between EFRBS gives rise to a possible employment Income Tax charge on the employee. So there is no 'qualifying benefit' entitling the employer to a deduction.
HMRC are aware that companies have been seeking to reward employees without operating PAYE (Pay As You Earn)/NICs (National Insurance contributions) 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. HMRC's 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 HMRC's 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 available on the HMRC internet site.
HMRC are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.