- HMRC’s ‘Settlement Opportunity’ provides opportunity to agree outstanding tax due and unwind an employee benefit trust without risking litigation
- But recovering tax liabilities paid by the employer on behalf of others in the ‘Settlement Opportunity’ may be difficult
- And if the employee benefit trust is robust, it may withstand litigation, says KPMG
HMRC’s “Settlement Opportunity” under which employers with Employee Benefit Trusts (“EBTs”) can pay the tax authority’s assessment of outstanding tax liabilities and unwind the arrangement without recourse to litigation may not suit all circumstances, according to KPMG in the UK.
Many employers have EBTs in place as they have been widely used over the last 10-15 years. Where they have been used as a tax efficient alternative to cash bonuses, often using “sub-trusts” to provide long term benefits to employees and / or their families, the employer faces an issue with the tax authorities.
HMRC has introduced legislation to counter the use of EBTs in this way in the future but it has also said that it will continue to litigate cases where EBTs have been used in this way historically. This approach is based on HMRC’s published view that money paid to a “sub-trust” is taxable earnings of the employee at the time it is paid in.
At the same time as taking this stance, HMRC has published a “Settlement Opportunity” to allow employers who have EBTs to approach them with a view to reaching a settlement and ultimately avoiding the risk of litigation.
But the decision to settle or not is complex. Jayne Vaughan, tax partner at KPMG in the UK, comments: “The threat of litigation is clearly not something to take lightly. However, employers with an EBT need to seriously consider whether the EBT Settlement Opportunity is something which is of interest to them, as this is a complex area of law and will require input from tax and legal specialists to determine the viability of settlement.”
“Upon review of their circumstances, it may be that the ‘Settlement Opportunity’ is simply a costly and unattractive option for employers,” Jayne Vaughan continued. “For example, whilst the ‘Settlement Opportunity’ is a corporate settlement in the first instance, it is likely that companies will look to the Trustees and/or beneficiaries to ultimately fund the tax liabilities which are due. In practice, this may prove difficult to recover (especially in the case of former employees or where for example assets have been loaned from the EBT) leaving the employer facing a potentially unwanted additional cost or having to undertake a ‘partial’ settlement with HMRC i.e. reaching settlement in respect of certain beneficiaries only.”
According to KPMG, sometimes the best course of action may be no action.
Jayne Vaughan explains: “In some cases, the best option may be to do nothing and continue to operate the EBTs as before (with benefits from their EBTs being subject to tax under the relatively new Disguised Remuneration rules). However, if employers with EBTs choose to do nothing, they could well face litigation as part of HMRC’s published strategy (as noted above). But if an EBT arrangement has been correctly implemented, it could withstand a litigation challenge from HMRC and so this is also something to assess before considering the ‘Settlement Opportunity’”.
But how to weigh up the options? KPMG has been talking to a number of clients with EBTs. Some of the most ‘frequently asked questions’ are listed here:
What is the time scale for using the Settlement Opportunity?
There is no formal deadline to enter the Settlement Opportunity, and it does not suit all situations. The decision to enter the settlement is not straightforward and will depend on a trust’s specific circumstances.
What are the terms of the Settlement?
Broadly speaking, the settlement would see employers accept HMRC’s tax analysis and to pay the PAYE/NICs on contributions made to an EBT. The main incentive to enter the Settlement Opportunity is to provide certainty over the liabilities in relation to the EBT and to allow the employer and employee beneficiaries the opportunity to ‘exit’ the arrangement without recourse to litigation.
How is the amount owed in the Settlement calculated?
There are a number of tax and legal considerations that employers need to take account of, to correctly calculate the amount due under the Settlement - for example: is HMRC within the statutory time limits to be able to collect PAYE/NIC; the corporation tax position on contributions; the inheritance tax status of the EBT; the tax treatment of income/gains within the EBT; the risk of successful litigation; and what disclosure has been made to HMRC in respect of the EBT and what are the alternative options to the Settlement Opportunity (e.g. to do nothing)? HMRC has recently issued an “FAQ” document which sets out the way in which the settlement is intended to operate – this runs to some 43 pages.
Which stakeholders (if any) need to be involved?
There are other interested parties who will inevitably need to be consulted as part of these considerations. EBTs are typically administered by independent third party trustee companies and so they would need to be involved (as they have control over the EBT assets) and also the employee beneficiaries of the EBT, some of whom may no longer be employees of the employer.
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: firstname.lastname@example.org
KPMG Press Office: 0207 694 8773
Notes to editors.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 11,000 partners and staff. The UK firm recorded a turnover of £1.7 billion in the year ended September 2011. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 152 countries and have 145,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.