Reviewed: 16th June 2017
Employment Benefit Trusts, or EBTs, have been in existence for several decades, and are used to provide benefits to existing/former company employees and their families. An EBT is set up in the same way as a discretionary trust, with independent trustees being appointed to administer it.
These types of trust are usually established offshore, and in recent years have been targeted by HMRC as disguised remuneration schemes. The government believes that, in many cases, the overriding motivation for setting up an EBT was tax avoidance, and so introduced legislation to deter their use via the Finance Bill 2011.
EBTs were originally intended to act as an incentive for employees, encouraging greater loyalty towards a company, and rewarding members of staff at the appropriate time. In setting up these trusts, companies were able to attract highly qualified staff, likely to remain with them for the long-term.
Other schemes originated as tax planning mechanisms whereby companies and personnel could minimise their liability for tax and National Insurance, and were often used by higher-rate tax payers.
Higher-paid members of staff may have been able to defer their remuneration via these trusts, receiving lower wages whilst working, and larger payouts when more advantageous for them from a tax point-of-view - often when a scheme member retires, or moves abroad.
The government believes the tax advantages offered by these trusts borders on tax avoidance, and has brought in legislation via the Finance Bill 2011 to encourage their demise.
When trust beneficiaries receive a minimal salary, and then the remainder of their remuneration by way of low interest loans routed via a sub-trust set up by their company, the suspicions of HMRC are raised.
In some instances loans were offered in a way that made it highly unlikely they would ever be repaid. This also alerted HMRC to the potential for tax evasion, and the consequent reclaiming of corporation tax.
Having placed a spotlight on the schemes to recover unpaid tax, some companies and individuals have been placed in an impossible financial position, resulting in burgeoning tax liabilities and ongoing issues with HMRC.
HMRC are under constant pressure from the government to increase revenue, recover unpaid tax, and close any loopholes that could be detrimental to their aims. Many of these offshore EBTs have now been closed, with HMRC citing the reason as follows,
“EBTs have increasingly been used for avoidance purposes, with the aim of providing employees and directors with benefits in ways that aim to defer, minimise or avoid liability to income tax (and PAYE) and employers’ National Insurance Contributions (NICs).”
So if your company is in this situation or you face personal tax issues as a beneficiary, what can you do if you unexpectedly owe large amounts of tax and National Insurance – in some cases running into thousands of pounds?
HMRC previously offered an employment benefit trust settlement opportunity (EBTSO), but this was withdrawn in 2015. In essence, HMRC treated payments made before 6th April 2011, from an EBT to beneficiaries, as employment income, and taxed them accordingly.
You can still settle your tax affairs in relation to an EBT, however, but the treatment of your situation will now differ since the closure of the settlement period. Under current arrangements, if loans taken from an EBT are not repaid by 5th April 2019, the outstanding balance becomes taxable as income.
Whether you should settle your tax affairs in relation to an EBT before this date depends on many factors, including your current financial position, the trust concerned, and your overall situation as an individual taxpayer.
If your company has set up an Employment Benefit Trust and you need more information on how to proceed, Real Business Rescue can help. We are a major part of the Begbies Traynor Group, the largest UK personal services consultancy, and have vast experience in dealing with EBTs and HMRC.
We can advise you in a dispute or settlement situation, With 55 offices across the UK, you’re never far away from expert and confidential advice. The initial consultation is free-of-charge, and allows you to obtain a broader view of your position and the implications as regards potential HMRC litigation.
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