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Employee Benefit Trusts, Settlement Opportunity update

HMRC's 'Employee Benefit Trust (EBT) Settlement Opportunity' is intended to encourage employers and companies who had used EBTs and similar structures to settle early any outstanding tax and NICs without the need for HMRC to consider litigation.

The principle behind the Settlement Opportunity is that HMRC will seek to settle outstanding enquiries on the basis that payments and allocations made to individuals out of EBTs prior to 6 April 2011 will be treated as earnings from an employment and the income taxed once and for all on that basis.

In addition, and depending on the way in which any individual schemes may have been set up and implemented, to achieve clarity and closure for customers in respect of their use of EBTs prior to 6 April 2011, any such settlements might also encompass :

  • Income tax (PAYE)
  • National Insurance Contributions
  • Corporation Tax
  • Inheritance tax, and/or
  • Other taxation charges on the EBTs and beneficiaries

Once the detail of any settlement is agreed it:

  • allows customers to pay the tax and NICs they owe to the Exchequer
  • avoids the high costs associated with complex enquiries and possibly expensive litigation
  • provides certainty on the interaction of different tax provisions and regimes that if litigated, may result in additional charges

This update provides an overview of developments since April 2011, and provides answers to a range of Frequently Asked Questions (FAQ) to help explain to customers more fully how their liabilities will be calculated. Taken together, HMRC believe these products will help more customers to engage in open discussions with HMRC about their individual circumstances and help to achieve early closure to their EBT past affairs.

Customers with EBTs or similar arrangements which they think might be within the Settlement Opportunity should contact their professional advisor in the first instance or their HMRC caseworker or Customer Relationship Manager to discuss the position further.

Recent developments

New legislation enacted

Following the launch of the Settlement Opportunity the 'disguised remuneration' legislation was enacted in July 2011 and applies to EBTs from 6 April 2011 onwards (with certain transactions also being brought within the new legislation if they were carried out between 9 December 2010 and 5 April 2011 inclusive).

Regulations also came into force on 6 December 2011 to charge Class 1 NICs on amounts chargeable to tax under the disguised remuneration measure. 

Litigation involving EBTs

HMRC has been successful in litigating cases which have involved EBTs as part of the arrangement(s) entered into by a company/employer.  The most significant of these cases is HMRC Commissioners v PA Holdings Ltd [2011] EWCA Civ. 1414 where the Court of Appeal decision upheld HMRC's arguments that an arrangement intended to deliver a bonus through an EBT was subject to tax and NICs as earnings. 

HMRC considers that the Court of Appeal judgment supports its view that arrangements to avoid PAYE and NICs through the use of EBT structures do not work.  HMRC's view in relation to EBTs is published in Spotlight 5 (see the link below).  For many EBTs, the allocation is the point at which the funds go into a sub-trust for the individual employee or their family but ultimately when the charging point for PAYE and NIC arises will depend on the facts of the individual case. 

HM Revenue & Customs: Spotlights 6 and 5

Operational activity

HMRC has set up an operational team to manage the settlement of cases.  The main focus of this team is the settlement of cases through engagement with customers and their agents.   Settlement terms will depend on the facts of the EBT arrangement but the framework in these FAQs will be applied consistently across all EBTs. 

A number of cases have recently settled and many more are progressing towards settlement.  We continue to encourage our customers to talk to us about their EBTs and how we might settle the tax and other duties associated with the arrangements by agreement.

The FAQs set out the only settlement approach HMRC will be taking in these cases and there is no alternative approach.

Where HMRC cannot settle cases by agreement, the team will be responsible for progressing the compliance programme for these EBT cases.  This means that customers may receive closure notices or further requests for information, with the aim of progressing EBT cases formally to litigation under the Litigation and Settlement Strategy (see the link below).

Litigation and Settlement Strategy

How does the Settlement Opportunity work in practice?

To help customers see how the Settlement Opportunity will operate in practice, HMRC have produced some FAQs.  HMRC encourages customers to consider how the Settlement Opportunity may apply to the facts of their own case and talk to HMRC about paying any tax and NICs the owe and bringing certainty to their EBT arrangements.

Interaction with IHT

Some commentators have expressed concern about potential IHT liabilities arising from the use of EBTs while they are also accounting for the PAYE and NICs under the Settlement Opportunity arrangements.

This is a consequence of the legal form of trust structures used within EBT arrangements in the past and the FAQs explain fully how liabilities in respect of different taxes interact for the purposes of the Settlement Opportunity.

Go to the Frequently Asked Questions