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HMRC reclaims over £500m following crackdown on payroll tax avoidance and employee benefit trusts

Out-Law News | 13 Jan 2014 | 3:14 pm | 2 min. read

Investigations into suspected payroll tax avoidance and misuse of employee benefit trusts earned HM Revenue and Customs (HMRC) an additional £500 million in unpaid tax last year, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com.

HMRC recouped £533m from the UK's largest businesses following investigations into payroll irregularities in 2012-13, according to the figures - a 160% increase on the £205m it obtained the previous year. Tax expert Ray McCann of Pinsent Masons said that the figures shows that HMRC's crackdown on employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFURBS) had "finally started to pay off after a slow start".

"Although HMRC has already delivered a dramatic increase in yield from these investigations, we don't anticipate that the Revenue will be using this as an excuse to rest on its laurels," he said. "We expect even more activity by HMRC in the coming year as they look to close other loopholes, with the aim of bringing in even more revenue in 2014."

"For companies with EBT schemes that have been called into question, time is running out. If they do not settle with HMRC they will face direct action and, if HMRC gets its way, far more severe penalties. Almost doubling the amount of money that they take from this kind of tax investigation is further proof that HMRC is now very deliberately targeting the biggest companies," he said.

An EBT is usually a structure set up by an employer for the benefit of its employees and directors or family members. They can lower income tax and national insurance charges on remuneration to employees and directors, and can also generate a claim for corporation tax deductions. EFURBS 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.

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.

More recently, HMRC has been able to persuade large businesses to collapse artificial arrangements and pay tax and national insurance contributions following a number of successful court cases and the introduction of much stricter tax laws from April 2011. In addition, McCann said that new penalties for taxpayers that pursue appeals in 'hopeless' tax avoidance cases announced as part of last month's Autumn Statement should act as a "further spur", encouraging employers to reach settlements with HMRC at an early stage.

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).