HMRC has announced that the settlement facility for employee benefit trusts (EBTs) will be withdrawn from 31 March 2015. The facility was offered from April 2011 for employers who set up EBTs that HMRC considers are caught by the “disguised remuneration” legislation introduced in the 2011 Finance Act. This was aimed at the use of EBTs to provide benefits to employees under arrangements intended to avoid PAYE and/or National Insurance contributions. HMRC published FAQs about the facility in August 2012 and reports that 700 employers have used it so far.
There are exemptions in the disguised remuneration legislation to allow the use of EBTs for normal employee incentive awards, such as share options, provided various criteria are met. These include, for example, specified periods or conditions to be satisfied before the award can be exercised or vest. However, the best advice when operating an EBT in conjunction with share incentives is to avoid the trustee “earmarking” the shares in any way before an award is exercised/vests, to ensure that the tax liability doesn’t bite before the expected time.
There have been some high-profile cases on disguised remuneration provided by EBTs, such as the one involving the trust that made loans to Rangers footballers. However, as reported in our previous post, HMRC doesn’t seem to be having much luck in making the case that these benefits are taxable. Nevertheless, the Revenue is putting a brave face on it with reported fighting talk from Jennie Granger, HMRC’s Director General of Enforcement and Compliance – “we win around 80% of avoidance cases heard in the courts”.
The risk, according to HMRC, is that the withdrawal of this facility “will mean an increase in the amount on which HMRC is prepared to settle and which, in some cases, could be significant”. So employers who operate EBTs other than for run-of-the-mill employee incentive arrangements should consider carefully and take advice on whether to try to settle with HMRC before the end of next March.