Is an unresolved EBT a potentially expensive bet?
HMRC’s current stance on what they regard as “abusive” tax avoidance is very well understood and publicised nowadays. HMRC are pro-actively challenging what they believe to be abusive tax avoidance arrangements and are achieving a high success rate in their use of the judicial system to overturn planning arrangements which were previously marketed widely.
HMRC have sought to use a series of court cases to encourage companies who have used Employee Benefit Trusts to accept that tax is due on amounts provided to beneficiaries in forms which case law had previously suggested were not subject to PAYE and NIC, such as loans. HMRC have now intimated that they will also challenge any arrangements using Employee Funded Retirement Benefits (EFRBs) on similar grounds.
HMRC’s approach to securing tax from the users of EBTs includes two main elements:
– They have previously offered the “EBT Settlement Opportunity” which does have some limited benefits for companies who wish to settle (in particular for EBTs that were set up some years ago)
– HMRC have made it clear that failure to settle via the EBTSO will then leave the companies subject to upcoming court decisions which may produce an outcome which is more favourable to HMRC.
Despite a series of decided cases (including Sempra Metals and Scotts Atlantic) which confirmed that loans provided to beneficiaries of EBT’s should be treated as not taxable (because the loans were legally still loans, meaning no amounts had been provided to the beneficiaries which could be classed as earnings), HMRC have pursued the Murray Group Holdings case (also known as the Rangers case) to try and put beyond doubt their argument that amounts provided to beneficiaries by way of loans are taxable as earnings.
The original decision in the Rangers case was expected to be a decided in favour of HMRC, but it went in favour of the taxpayer. However the dissenting judge in the Rangers case has delivered a detailed argument in favour of HMRC’s approach, meaning there is a reasonable probability that the argument will be followed in the appeal and HMRC will be successful, although the appeal will not be heard until January 2014 at the earliest.
This twin track approach of the EBTSO and concurrent litigation is essentially encouraging tax paying companies with unresolved EBTs to consider what is akin to the strategies seen in a high stakes game of cards. HMRC is asking the taxpayer company if they wish to settle on the basis of a technical analysis which the current decided case law does not support, but which may shortly change substantially in favour of HMRC. Of course, it is also possible that the appeal could be found in favour of the taxpayer. At this point the company has two choices:
– “fold” using EBTSO and settle any tax which HMRC are seeking under the EBTSO
– “stick” and await a decision in court which may produce a better result for the tax payer, but with the risk the if HMRC wins then the cost to the company is likely to be higher
The impact of EBTs is not confined to tax liabilities alone, if the company is subject to a sales process or a refinancing, the purchaser or lender might be put off by the risk of unsettled tax liabilities which may crystallise with the outcome of a court decision. Seeking a settlement can help to quantify and ring-fence a potential liability, or it can open up the opportunity to settle any liabilities using the disguised remuneration rules which can provide a simpler solution.
Companies with unresolved enquiries into their EBT’s may want to consider how strong they consider their hands are before deciding their next moves for their EBTs.
If you would like more information on this topic, please contact Rachel Marsdin on 01524 62801.