Employee Benefit Trust settlement opportunity will be withdrawn on 31 March 2015

The EBT Settlement Opportunity (EBTSO) was launched in April 2011 to enable employers who have used EBTs and similar arrangements, such as Employer Financed Retirement Benefit Schemes (EFRBS), the opportunity to resolve outstanding enquiries. HMRC said that over 700 employer-level users with a significantly greater number of beneficiary employees, have used the EBTSO.

Ray McCann, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: "HMRC will be concerned at the relatively low number of employers who have settled. It is believed that some 7,000 or so such cases remain and, whilst the settlement facility has much to offer, not all employers will consider that it offers generous terms. However, as many have already settled, it will be difficult for HMRC to offer an improvement on the terms."

An EBT is usually a structure set up by an employer for the benefit of its employees and directors or family members. EBTs have been used in an attempt to lower income tax and national insurance charges on remuneration to employees and directors, and can also generate a claim for corporation tax deductions. EFRBS are a type of family trust which can be set up by a company with profits that the directors or shareholders wish to extract as tax-efficiently as possible. In many of the cases that HMRC considers to be abusive, instead of paying the employee a salary, the employer makes a payment to an EBT of which the employee is a beneficiary and the EBT makes loans to the employee.

EBTs have been used by many businesses, particularly hedge funds and banks that used them to manage tax payments on bonuses. For a number of years, HMRC has been targeting the abusive use of these structures in three main areas: the circumstances in which companies can claim corporation tax deductions for their contributions to an EBT; the point at which employees should pay tax and national insurance on the benefits provided by the trust; and how employer contributions should be treated in relation to inheritance tax.

So-called 'disguised remuneration' rules took effect from 6 April 2011. They were introduced to tackle the use of trusts or other structures by employers as a way of avoiding, deferring or reducing tax liabilities. The rules created a charge to income tax where third party arrangements are used to provide what is in substance reward, recognition or a loan in connection with an employee's current, former or future employment. Where this is the case, that amount will usually be deemed employment income and is taxable through pay as you earn (PAYE).

The general approach taken under the EBTSO is to tax the amounts loaned from the trustees to the employees as remuneration, with the employer paying the income tax and NIC bill. The employer can then claim a corporation tax deduction for the amounts paid. Interest will be payable on the unpaid tax, but penalties would not usually arise where the EBTSO is used.

HMRC said that the EBTSO will now only be available to employers who have notified HMRC of their intention to settle under the EBTSO before 31 March 2015 and then only for agreements that are subsequently entered into before 31 July 2015 with all amounts due under the settlement agreement either paid by that date or with a signed time to pay agreement in place.

Employers who notify HMRC after 31 March 2015 that they wish to settle, can still settle their dispute by agreement, but not on the beneficial terms of the EBTSO. HMRC said "Our expectation is that this will mean an increase in the amount on which HMRC is prepared to settle and which, in some cases, could be significant."

HMRC said "The decision to withdraw the EBTSO will allow HMRC to redirect resources into progressing the appeals of employers who do not take advantage of the EBTSO by the cut off date". It said "Employers need to make a simple decision, either to settle with us or be prepared to litigate their use of the scheme".

Ray McCann said "Employers will need to balance what is on offer against years of further ongoing uncertainty and the possibility that HMRC will issue an accelerated payment notice or follower notice in the coming weeks or months."  

In July, HMRC was given a new power to issue a 'follower notice' to a taxpayer who has entered into a scheme where HMRC have won a ruling against a taxpayer in another similar case. A follower notice requires the taxpayer to either settle their dispute or face a large penalty if their dispute with HMRC is ultimately unsuccessful. If it issues a follower notice, HMRC can also issue an 'accelerated payment notice', requiring the taxpayer to pay the disputed tax, usually within 90 days.

Follower notices and accelerated payment notices currently apply to income tax, but do not apply to national insurance contributions (NICs). The government announced last month that they will also be extended to NIC schemes.

Although HMRC has won some cases in the Tax Tribunal concerning EBT arrangements, last month the Upper Tribunal decided that loans from an employee trust to players and employees of Rangers Football Club were not subject to income tax. HMRC has applied for leave to appeal to the Court of Session, the Scottish equivalent of the Court of Appeal

"It may be that with the introduction of accelerated payment notices HMRC is hoping to encourage a significant number of employers to decide to settle their EBTs, although the uncertainty caused by the defeat HMRC has suffered in its dispute with Glasgow Rangers may mean that some employers will hold out" said Ray McCann.