Last year* alone, there were another 2,420 investigations launched into Employee Benefit Trusts (EBTs) by HMRC’s Counter Avoidance Directorate.
EBTs can be used by companies to reduce their liability for employer's national insurance, and reduce income tax bills of employees. The employer would deposit money, in lieu of wages or bonuses allege HMRC, in offshore trusts of which employees were the beneficiaries.
HMRC classifies an employer paying an employee through a third-party company or trust, including an EBT, as a 'Disguised Remuneration Scheme.' Rather than paying a salary, which would attract income tax and NICs, employees are loaned money on terms that mean it is unlikely to be repaid.
Pinsent Masons says that the investigations into EBTs reflect its strong focus on eliminating tax avoidance, especially amongst highly paid footballers and bankers. In a prominent example, the Supreme Court ruled in favour of HMRC in 2017 against Rangers Football Club. It ruled that £47 million paid to the club’s employees between 2001-10 through an EBT was liable for tax.
Pinsent Masons adds that the 5 April 2019 deadline to settle outstanding EBT cases with HMRC or face a new loan charge is fast approaching. As a result, many individuals are now coming forward voluntarily to close outstanding cases in order to settle and pay what could be a lower amount of tax compared to the new charge.
After the deadline, a new charge will be applied on any outstanding loans made through Disguised Remuneration Schemes. It essentially presents taxpayers with a very substantial tax bill based on the outstanding loans. HMRC estimates that this charge will raise £3.2 billion and could affect as many as 50,000 individuals.
Pinsent Masons explains many employees used EBTs in good faith and never thought they were doing anything wrong, assuming they were just using a legitimate arrangement. In other cases, employers are alleged to have insisted that employees be paid via an EBT.
Josie Hills, Senior Tax Manager at Pinsent Masons, says: "With the deadline fast approaching, taxpayers need to ensure they settle any outstanding Employee Benefit Trust case or risk paying a significant charge."
"The thousands of cases show just how wide a net HMRC is casting when investigating Employee Benefit Trusts. HMRC has kept strong pressure on EBTs for several years now, even after the new loan charge was first announced in 2016, to recoup what it sees as lost tax. Many have claimed that HMRC is being overly harsh on the individual taxpayers in their investigations."
"With the introduction of the new loan charge and people voluntarily settling ahead of the deadline however, HMRC may start to look to use resource elsewhere."
*Year-end March 31, 2018