Referring to a number of vehicles used to avoid Income Tax liabilities and National Insurance contributions by replacing employee salaries with loans, the government announced that it was finally closing the loopholes in tax law which allowed these practices to happen.
What is more, it declared that, as of 5 April 2019, any payments already received through such schemes would be subject to tax and NIC retrospectively. In other words, as of April this year, anyone who has previously been paid via one of the listed schemes may well find themselves in debt to HMRC.
At the centre of this controversy are Employee Benefit Trusts (EBTs). EBTs have been around since the 1980s and nominally make use of trust laws to hold assets from a company – be it shares, bonuses or other forms of capital – on behalf of employees. Buffered by the tax regulations relating to trusts, the main benefit is that they provide a tax-advantageous means for companies to reward staff, for example through deferred bonuses, and therefore offer incentives to the best performers.
However, HMRC has long complained that EBTs are often used in lieu of standard remuneration in order to avoid tax, especially in cases involving high-earning individuals. Whereas the beneficiaries of a trust might usually expect to have their access to assets deferred for a period of time, the allegation is that companies have been getting round this by instructing trustees to make loans to their employees – effectively using a third-party to pay people whilst taking advantage of a tax loophole. It is these loan payments that the government says will be liable for tax and NIC from April.
Critics argue that while ‘disguised remuneration’ would constitute an abuse of EBTs, the main purpose, to reduce tax liabilities on bonuses and rewards, is in keeping with tax law. The decision to levy a blanket charge across all payments made under EBTs is therefore seen by many as disproportionate.
So what will happen come April if your company has used EBTs at any time in the past 20 years? The issue will come down to whether your particular scheme is interpreted as a disguised remuneration arrangement or not. Every EBT is unique in its set up and purpose, so it may be possible to argue that it is not.
HMRC’s default position, however, is that it will apply the charges across the board and litigate in cases where payment is not forthcoming – although it has announced a ‘settlement opportunity’ for companies to come forward and negotiate.
Legally speaking, the opportunity to argue that EBTs represent legitimate tax efficiency on rewards rather than tax avoidance seems to have gone – the Supreme Court ruled as much in a key case involving loans from a trust in 2017. However, if loans have not been paid out of your trust, you may still have a case. It is imperative to seek legal advice as soon as possible as the clock ticks down towards April. Get in touch to speak to our Tax Advisory team to find out more.