Insights

Employee Benefit Trusts (EBTs) have been widely used over the past 10 to 15 years as a part of a number of tax planning strategies entered into by companies and high earning employees.

Typically these EBTs have been used as a tax efficient alternative to employee cash bonuses; the bonuses would instead be paid into an EBT established for a number of employees, and sub-trusts would then be set up in order to allocate specific amounts to specific employees.

With effect from 6 April 2011 HMRC introduced the Disguised Remuneration legislation to counter the use of EBTs in this way; however for EBTs established and used for this purpose before 6 April 2011, HMRC continue to pursue possible litigation cases.

Since 2012, employers who contributed to EBTs in this way before 6 April 2011 have had an opportunity under the Employee Benefit Trust Settlement Opportunity (EBTSO) to approach HMRC and voluntarily settle outstanding tax liabilities (mainly unpaid PAYE and NICs) without further threat of legal action. HMRC have confirmed that over 700 employer-level users and many more beneficiary employees have taken advantage of the beneficial terms of the EBTSO and settled outstanding payments; these have generated an extra £800million in Treasury revenues.

EBTSO is not open-ended; those who used such EBTs before 6 April 2011 must notify HMRC by 31 March 2015 if they wish to take advantage of the EBTSO to settle their liabilities. EBTs used after 6 April 2011 are not covered by the EBTSO and contributions made after this date will fall within the Disguised Remuneration legislation.

In addition, whilst HMRC must be officially notified before 31 March 2015, the EBTSO will then only apply to agreements that are subsequently entered into before 31^st July 2015. All outstanding PAYE and NIC payments due under the settlement agreement must also either be paid in full by that date or a signed time to pay agreement must be in place.

If an employer who is affected fails to meet these deadlines and voluntarily notifies HMRC after 31^st March 2015 that they wish to settle, the matter can still be settled by way of agreement where appropriate, but outside the beneficial terms of the EBTSO. It is inevitable however that after the March 2015 cut-off date has passed, the amount of settlement liability is likely to be greater than it would be using the terms of the EBTSO.

HMRC have been very clear about their view of the use of EBTs and recently said on their website, “Employers need to make a simple decision, either to settle with us or be prepared to litigate their use of the scheme. And they will need to make that decision soon. Withdrawing the EBTSO now is one of the ways we believe that we can encourage users to reach that decision point.”

Due to the large sums of money involved, some users of EBTs have been using the Liechtenstein Disclosure Facility (LDF) rather than the EBTSO to reduce the amount of tax payable. The fact that the EBTs are typically based offshore has enabled them to do this and the favourable terms of the LDF may have provided a more cost effective means of disclosing a tax shortfall than the EBTSO, since the EBTSO is based on HMRC’s own calculations. However, following the introduction of new restrictions to the LDF (also covered our blogs for the month) this practice has been curtailed.

As always, if you wish to use any settlement opportunity, it is important before approaching HMRC, to fully understand the potential implications of making a declaration and pursuing a settlement. Consideration should be given to a number of issues, including the likely cost of any PAYE/NIC settlement; any other taxes which could be potentially involved, such as inheritance tax and corporation tax; interest and penalty charges; timescales; and by whom the liabilities will be payable.

Using the EBTSO is clearly complicated and given the relatively short period of time still available to make a settlement, our advice is to discuss your circumstances with us sooner rather than later.

To discuss this further or obtain more information, please contact Lesley Stalker by emailing las@rjp.co.uk.