HMRC has published a Settlement Opportunity for employers who have used Employee Benefit Trusts (“EBTs”) to pay HMRC’s assessment of outstanding tax liabilities and unwind the arrangement without recourse to litigation. Many insurers have EBTs in place, as they have been widely used over the last 20 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, HMRC may seek to challenge the arrangement.
HMRC has the Disguised Remuneration legislation to counter the future use of EBTs in this way, but it has also said that it will continue to litigate in 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 Jayne Vaughan, Employment Tax Partner 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. For example, while 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 that are due (as a result of the Settlement). 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.”
Accordingly, in some cases the best course of action may be to do nothing and continue to operate the EBTs as before -with benefits from an EBT being subject to tax under the Disguised Remuneration rules. However, if employers with EBTs choose this course, they could well face litigation as part of HMRC’s published strategy. Although if an EBT arrangement has been correctly implemented, it could withstand a litigation challenge. Therefore, careful assessment of the ‘Settlement Opportunity’ is required.
You can read more about the EBT Settlement Opportunity on our dedicated webpage by clicking here.