Employee Benefit trusts, settlement opportunity

HM Revenue & Customs (HMRC) is offering employers who have used Employee Benefit trusts ('EBT') (and similar arrangements) the opportunity to resolve outstanding enquiries. These arrangements seek to minimise the Income Tax and National Insurance charge on remuneration to employees and directors and may also generate a claim for Corporation Tax deductions for payments into the trust. The Finance (No. 3) Bill 2011 published on 31 March 2011 introduced new legislation to put beyond doubt that such arrangements or schemes do not work. HMRC’s view on these schemes under existing legislation was notified in Spotlight 5 and published in November 2009.

HMRC is inviting employers, companies and other users of these arrangements to settle without recourse to litigation. This will minimise costs to both customers and HMRC. Employers and companies concerned with how their arrangements will be affected by the new legislation can respond to this opportunity to obtain certainty about their tax liabilities.

Employers or companies willing to reach a financial settlement with HMRC will be invited to discuss how this might be achieved. 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.

Dave Hartnett, Permanent Secretary for Tax at HMRC, said today 'This initiative reflects HMRC’s determination to seek to resolve disputes without going to litigation where that can be done without detriment to the Exchequer and within the clear boundaries of the law. HMRC’s pro-active approach to customers gives them the opportunity to discuss their cases with us and work in partnership to establish how the facts of their case fit within the proposals. For this reason I would encourage customers to come and talk to us'.

Details of initiative

In situations where HMRC consider there is a link to employment (the majority of cases) the terms on which they would be prepared to settle will depend on whether there has already been a 'relevant step' under the new disguised remuneration legislation.

This legislation for tax is in Schedule 2 to the Finance (No. 3) Bill 2011, which was published on 31 March 2011. Once this is enacted, the bulk of the legislation will take the form of a new Part 7A in Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This legislation also allows for provision for credit to be given against Part 7A charges in cases where there has already been a settlement in respect of the remuneration which could also give rise to the Part 7A charge. The provision for this credit is contained in paragraph 58 of Schedule 2 (rather than being included in new Part 7A).

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 intention is to make corresponding Regulations to deal with National Insurance contributions.

Terms on which HMRC is prepared to settle

Where HMRC consider there is a link to the employment:

1. If the settlement is reached before a relevant step under the disguised remuneration legislation is taken:

a. recovery of outstanding PAYE and Class 1 National Insurance contributions (Earnings Basis) on contributions to the trust, with a corresponding Corporation Tax deduction where permitted under the appropriate Corporation Tax assessing provisions

b. the settlement will be an agreement for the purposes of paragraph 58 of the Finance (No. 3) Bill 2011 and the employee will be entitled to a corresponding credit against the value of a subsequent relevant step under Part 7A of ITEPA provided that the sums due under the settlement have been paid

c. where a benefit-in-kind charge has arisen in connection with the amount that has been contributed (for example on a beneficial loan), the settlement terms will give credit for the benefit-in-kind charge provided that the tax and National Insurance contributions has been accounted for

2. If a relevant step under the disguised remuneration legislation is taken before a settlement has been reached:

a. where a tax and National Insurance contribution charge arises as a consequence of a relevant step and the relevant step relates to an amount contributed to the trust before 6 April 2011, HMRC will not pursue recovery of PAYE and National Insurance contributions on that same amount for the earlier period

b. where the relevant step does not account for the whole of the amount contributed to the trust before 6 April 2011, HMRC will continue to be willing to settle the outstanding amount on the basis described above, giving rise to a corresponding settlement credit under Part 7A for subsequent relevant steps

c. where a benefit-in-kind charge has arisen on amounts (for example on beneficial loans) for periods before the charge under Part 7A arises, HMRC will not give credit for the benefit-in-kind charge

EBTs where there is no link with employment

In situations where HMRC consider there is no link to employment (anticipated to be a minority of cases):

  • HMRC will deny a Corporation Tax deduction
  • amounts will not be subject to PAYE and National Insurance contributions at the point HMRC deny the Corporation Tax deduction
  • however, this will not prevent a subsequent tax charge under section 62 of ITEPA or new Part 7A from applying at some point in the future if a later taxable event happens
  • if a subsequent tax charge does arise, provided one is due, a Corporation Tax deduction will be permitted at that time

Other practical issues

Interest will be charged on duties in the normal way.

The settlements will take into account all relevant duties. HMRC published a Revenue and Customs Brief 18/11 on 4 April 2011 that sets out the circumstances where Inheritance Tax and non-resident trust charges are due on EBT.

Resolving these enquiries will depend on examination of the facts of individual cases. HMRC will write to all employers or companies who have open EBT enquiries before the end of August 2011 to invite discussion about potential settlements and provide contact details for the HMRC officer dealing with a case. HMRC have put arrangements in place to ensure that a consistent approach is taken to agreeing settlements.

There is no deadline for the incentive 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.

HMRC will continue to enquire into open EBT cases and may open further enquiries during this period including seeking further information.

Where HMRC is unable to agree settlement proposals with employers or companies then they will, as appropriate, continue to progress cases within the terms of the published Litigation and Settlement Strategy, and the new legislation will apply to continuing EBTs, and funds held in them.

Withdrawal of the settlement opportunity

The settlement opportunity will be withdrawn from 31 March 2015. More information is available below.

Time is running out to use the Employee Benefit Trust settlement opportunity.