Opportunity knocks for EBT users

7 January 2015

The EBT Settlement Opportunity (EBTSO) is scheduled to close on 31 March 2015 and HMRC and advisers have started a kind of ‘buy now whilst stocks last’ campaign. The EBTSO allows users of Employee Benefit Trust (EBT) arrangements and users of Employer Funded Retirement Benefit Schemes (EFRBS) to approach HMRC and agree a settlement under better terms than maybe available if the arrangements are enquired into and litigated.

I’ve received a number of e-mails from specialist tax advisers looking to generate work from advising companies about EBTSO. The main selling point seems to be that taking advantage of EBTSO will bring certainty and, perhaps, some monetary benefit over continuing to fight HMRC. Without doubt, going to HMRC and settling the tax they believe is due brings certainty, in terms that the liability will be no larger than the amount agreed, and, equally, that it will be no smaller than the amount agreed.

My experience of EBT and EFRBS users, especially the earlier adopters, is that they are risk-takers and, as such, certainty isn’t a commodity that they value that highly, so I can see the EBTSO being of only limited attraction. However, some EBT arrangements were entered into many years ago and circumstances and attitudes can change.

Very broadly, it’s likely that HMRC will look to treat amounts paid via EBTs as remuneration and collect PAYE and NI on these amounts, whilst allowing a corporation tax deduction for the amounts paid and the related tax. Of course, each case will be judged on its facts, but that is likely to be HMRC’s default outcome. Case law in respect of EBTs has shown that loan arrangements are not taxable as remuneration, although corporation tax deductions for the loan payments have been restricted. So settlements under the EBTSO regime may turn the previously decided position on its head, although, of course, legislation has been changed since many of the case law decisions were made.

The stick that accompanies the certainty carrot is in the form of the Accelerated Payment Notice (APN) regime that will seek to obtain payments of tax from EBT and EFRBS users, which will sit in HMRC’s coffers until enquiries into the particular arrangements are settled. HMRC has indicated that it will seek to issue a slew of APNs to scheme users shortly after the EBTSO closes. One way or another, it’s likely that EBT and EFRBS users will be paying some tax during 2015. It’s still not clear how big the stick will be, but it seems unlikely that HMRC will be happy to settle for less than would have been realised under the EBTSO. Perhaps they will go for a punitive regime that aims to collect tax equivalent to the PAYE & NI that would have been chargeable had the payments in question been salaries, but without allowing a deduction for corporation tax purposes. This approach would mirror HMRC’s tough talking on tax avoidance, but would also considerably upset the accounting and tax communities.

So why would any EBT or EFRBS user not avail themselves of the EBTSO?

Well, it’s by no means certain that HMRC will be successful in its arguments about the tax effectiveness of EBT arrangements and, ultimately, once cases are settled, taxpayers may be much better off than they would be under the EBTSO. Some of the best tax and legal minds in the country were behind some of the EBT and EFRBS arrangements and these are likely to be defended stoutly because there is a lot of money at stake and there are some reputations to be maintained and gained. Anyone who utilises the EBTSO will not have their day in court, so to speak, but will, of course, avoid the cost of that activity as well.

Any EBT or EFRBS user who has a concern about whether or not to take up HMRC’s EBTSO should take action sooner rather than later and get appropriate professional advice well before the 31 March 2015 deadline.

If you would like to discuss the details of this blog post further, please contact John Sheehan from our Letchworth office or a tax adviser at your nearest location.  Alternatively, you can complete our online contact form.