EBTs: Tax avoidance schemes
Employment Benefit Trusts (“EBT”s) have been successfully pinned down by HMRC as tax avoidance schemes. HMRC’s stringent approach to EBTs was bolstered by the recent Supreme Court Rangers tax case decision . In summary, the Supreme Court agreed with HMRC’s contention that any payments made through EBTs should be considered taxable income. This is a major test case result in favour of HMRC.
Even if the Rangers' case had been found against HMRC, it was likely to have little impact on HMRC’s long term approach to EBTs. By virtue of the Finance Bill 2017, any disguised remuneration loans (including EBTs, EFRBS and other similar planning) outstanding as at 5 April 2019 will be treated as remuneration and will be subject to a PAYE and National Insurance contribution charge (“the Loan Charge”).
HMRC can go back to 1999 for any outstanding loans so as to impose the Loan Charge, so the power is far reaching and likely to have significant consequences on taxpayers.
Next steps for EBT participants
As a result of the Loan Charge, all participants of EBTs (whether they have an open enquiry or not) need to consider their position.
EBTs and tax avoidance planning is, in general, sophisticated and usually implemented upon the advice of a professional adviser. However, advisers who implemented, recommended and/or suggested tax avoidance schemes are, in our experience, failing to advise clients on the significance of the Loan Charge and what options are available to their clients. The Rangers' decision, specifically the purposive approach, makes it clear that planning once considered “vanilla” or non-aggressive will not guarantee favourable treatment from HMRC.
Therefore, some difficult conversations between clients and advisers need to take place. Those advisers involved in the establishment of the tax planning will now have to tell their clients that the planning has failed and a (likely significant) tax bill will be forthcoming absent action in the interim.
Professional negligence claims
This begs the question, were employers and employees correctly and adequately advised on the potential adverse tax implications? This is really the elephant in the room. In some instances appropriate advice will have been given and this retrospective implementation of the Loan Charge is not something advisers could have predicted. However, there are equally occasions where advisers did not give any health warnings and positively endorsed the risk free nature of EBTs.
If employers and employees were advised and/or encouraged to operate EBTs by professional advisers such as solicitors, accountants, financial advisers or tax advisers, a professional negligence claim may exist. In our experience, clients were given over-positive or no advice at all on the risks of EBTs.
The most substantial issue for professional negligence claims is likely to be limitation. You can read more about limitation here . For many participants limitation will have expired or will very soon expire, it is therefore extremely important that advice is sought without delay. If participants wait until the Loan Charge to look at this issue, limitation will almost certainly have passed in the vast majority of cases.
The formal (and now apparently favourable) HMRC EBT settlement opportunity has lapsed. For those with an open enquiry, HMRC is likely to contact them requesting payment, with follower notices and accelerated payment notices at HMRC’s disposal where appropriate. Even where there is no open enquiry HMRC will invite voluntary restitution prior to the Loan Charge coming into effect.
Taxpayers still have a number of options available to them and appropriate advice can assist in planning any liability that exists as a consequence of historic tax planning.
Our EBT recommendations
If you or your client participated in an EBT, we recommend that:
- Advice is sought in respect of the Loan Charge. You should plan for the Loan Charge and consider whether settlement now is preferable. Every case is different; it is important that you receive tailored advice on your position.
- Legal opinion is sought on any potential professional negligence claims. In light of limitation issues, this should be done without delay.