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EBTs and similar 'disguised remuneration' schemes.
In this update we consider the proposed new legislation announced in the Budget and what this could mean for clients with historic EBTs and similar 'disguised remuneration' schemes.
April 2019 'D-day' for EBTs and similar arrangements?
In the Chancellor's 2015 Autumn Statement, hidden within the detail of the 'Blue Book', could be found the following statement on the Government's future plans as part of its 'war on tax avoidance'
3.87 Disguised remuneration - The government intends to take action against those who have used or continue to use disguised remuneration schemes and who have not yet paid their fair share of tax. The government will also consider legislating in a future Finance Bill to close down any further new schemes intended to avoid tax on earned income, where necessary, with effect from 25 November 2015.
At the time, HMRC sources indicated to us that the statement was a precursor to future legislation designed to close historic EBTs and similar 'disguised remuneration' ('DR') structures.
Fast forward to Budget 2016, and we can see that there's a determination to deliver on this promise.
HMRCs technical note ('Tackling disguised remuneration avoidance schemes') sets out the strategy to deal with new and historic tax schemes by April 2019. The basic message from HMRC is simple; come forward and resolve your historic tax arrangements or face the tax charge imposed by the proposed legislation (which takes effect from April 2019 - see below).
In the period between now and April 2019 we are also likely to see a gradual 'tightening of the screw' as new legislation is introduced to seek to tackle the continued use of DR and other similar schemes as well as historic arrangements. The first part of the package will be introduced in Finance Bill 2017, following a consultation this Summer. The new provisions can be summarised as follows:
- Part 7A of the ITEPA 2003 ('Part 7A') will be amended to ensure that arrangements which result in a loan or debt being owed by an employee to a third party will be caught by the DR provisions. Amendments will also be made to put beyond doubt that Part 7A applies to disguised remuneration of directors/shareholders;
- The power for HMRC to transfer liabilities within the PAYE regulations will be enhanced. The intention is to make it easier for a liability to be collected from the individual if it cannot be reasonably collected from the employer. This could impact situations where, for example, the employer is situated outside of the UK and under current provisions, HMRC can find it difficult to collect the PAYE/NIC;
- Withdrawal of the transitional relief contained within Paragraph 59 of FA 2011 ('Para 59') on the investment return in any structure (such as a trust) if the original earnings charge has not been paid by November 2016. This could have an impact on structures where, for example, the contribution by the employer to a trust has been invested by the trustees and significant investment income has been generated. If the structure is not settled with HMRC by November 2016 HMRC is likely to insist that the investment income is taxable under Part 7A. However, if settlement is reached before November this year, relief will be provided under Para 59 so that the investment income is not taxed as earnings (although tax may be due under other parts of the Taxes Acts, depending on the circumstances);
- A new charge on existing 'disguised remuneration' schemes - For clients with existing EBTs and similar structures this is likely to have a significant impact. The proposed new legislation essentially seeks to charge tax (PAYE/NIC) on the value of any relevant debt or loan outstanding at April 2019. If the loan has been repaid or the arrangement settled with HMRC before April 2019, the new charge will be avoided. Some might say this is a simple but effective way in ensuring that the tax benefit of most EBTs and similar structures is permanently lost. For many of our clients, the prospect of having to pay this tax charge in April 2019 is making them think again about their options and whether earlier certainty (at the right tax cost) could be a better way to proceed.
Bar any successful challenge to this legislation (which, based on recent experience seems unlikely), clients would appear to have two choices; open a dialogue with HMRC with a view to settling their tax arrangements or do nothing and wait for the tax charge to bite in April 2019 (assuming they do not receive an Accelerated Payment Notice in the interim).
Why should clients explore potential settlement with HMRC now?
Many clients who chose not to settle during HMRCs EBT Settlement Opportunity did so on the basis that the legal position on historic structures was uncertain as HMRC had been unable to convince a Court of its argument that the loans/distributions from the EBT represented emoluments (this is obviously no longer the case with the decision by the Court of Session in the Ranger's saga, albeit that leave to appeal has now been granted to the Supreme Court). Many clients therefore adopted a sensible 'wait and see' approach. However, given the proposed legislation this approach is likely to only be appropriate until April 2019, at the latest.
While the EBT Settlement Opportunity ('EBT') closed on 31 March 2015, the reality is that HMRC remains keen to settle historic structures. For many clients, settlement can still be achieved at an attractive tax cost (e.g. it is often still possible for the company to pay any agreed liability on behalf of the employee/director without any 'gross up', the timing of the tax deduction for any contribution to the Trust can be flexed etc.). Settlement also provides closure to historic tax enquiries and certainty around the tax position. Payment of the final liability can also be spread, in appropriate cases.
There's also a concern (or are we being paranoid?!) that HMRCs stance on the terms under which it is prepared to settle EBTs hardens as we approach April 2019. This concern is based on our experience of HMRCs general approach in a number of areas over the last couple of years. For example, HMRCs stance hardened on a number of issues during the final stages of the EBT Settlement Opportunity. Also, while not directly relevant, the position taken by HMRC on a number of issues around the LDF and offshore matters hardened as we approached December 2015 (when the LDF closed).