15 August 2011

Publications that covered this article include The Financial Times, 15 August 2011.

• Threatening letters described as ‘hot air’
• Popular tax avoidance scheme for senior executives

HM Revenue & Customs (HMRC) is writing to taxpayers who have saved tax by using Employee Benefit Trusts (EBTs) asking them to pay tax which it claims they owe or face possible litigation, according to our research.

Our research shows that thousands of taxpayers have made use of EBTs in recent years and are likely to have received letters from HMRC demanding payment.

In one such letter, HMRC is claiming that the taxpayer owes nearly £160,000 in outstanding tax. The letter says that if the taxpayer agrees to the settlement, HMRC will not seek to apply any penalties. Taxpayers who do not settle are threatened with court action.

Employee benefit trusts (EBTs), which were popular with banks and other large corporates, allow employers to ring-fence cash to pay bonuses or to buy shares on behalf of staff. EBTs have allowed thousands of bankers to avoid paying income tax and National Insurance on their bonuses, which are instead taken as loans.

Companies can claim tax relief on the cash and shares placed in the trusts, potentially running into tens of millions of pounds.

On 9 December 2010, HMRC announced that all loans from EBTS to employees would be subject to tax. The Finance Bill 2011 published on 31 March 2011 introduced new legislation to that effect.

Steve Theaker, partner at our Abergavenny office, comments: "These letters are essentially hot air. Several of the letters I have seen are wildly inaccurate estimates of the amounts of tax actually in dispute. HMRC could at least get the numbers right."

"HMRC is in effect saying, 'pay all of the tax you would have paid if you had taken your loan as a bonus, and we’ll forget all about it'. But why would anyone who has entered into this form of tax planning to pay less tax do that?"

"HMRC has litigated twice on the taxability of loans from EBTs and lost on both occasions. The courts have essentially ruled that EBTs were a legitimate form of tax planning prior to HMRC’s announcement last December. HMRC seems to be pinning its hopes on judges reversing the precedent which has already been set – but why would they do that?"

Steve says: "HMRC's case is far from watertight. Taxpayers should think very carefully about how they respond to these letters. If they chose to settle they may end up paying tax which HMRC has no legal right to. The letter actually says that if taxpayers chose to settle, but subsequent litigation finds in taxpayers' favour, the settlement cannot be reopened."

Steve Theaker