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Understanding Employee Benefit Trusts (EBT) including the 2019 loan charge

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Understanding Employee Benefit Trusts (EBT) including the 2019 loan charge

Reviewed: 10th April 2019

Employee 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 were established both offshore and also in the UK, and in recent years have been targeted by HMRC who are claiming they are a form of disguised remuneration scheme. 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.

What is the purpose of an EBT?

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 and were particularly popular with contractors.

An EBT affected the way these contractors and other trust beneficiaries were paid. Rather than receive all money as traditional earned income, they were instead paid 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 which significantly limited the associated burden of tax and national insurance. 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.

Falling under suspicion by HMRC

The government believes the tax advantages offered by these trusts borders on tax avoidance, and brought in legislation via the Finance Bill 2011 to encourage their demise. 

Known as the 2019 loan charge, loans going back as far as 1999 came under scrutiny by HMRC, who were demanding that these loans either be paid back, or else declared as income and the appropriate level of tax paid. HMRC allowed those affected by the loan charge a chance to settle the amount they owed by spreading the cost over a number of years depending on their current salary. This was known as a ‘settlement opportunity’ and closed at the end of the 2018/19 tax year.

As the 5th April 2019 deadline for settling has now passed, any outstanding loans that fall under this type of scheme will now be added up and taxed together as income for earned in the year of charge. Individuals will have until 31st January 2020 to pay this amount. As loans from as long as 20 years ago are impacted, the sums involved for some are vast with six-figure bills not being uncommon.

Unexpected financial burden on businesses and personal taxpayers

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).”

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. Although HMRC have promised no one will be forced to sell their homes to pay the tax owed, many are understandably worried about how they will be able to afford to pay the potentially huge sums demanded of them in time.

Unfortunately some will have little alternative but to consider a formal insolvency arrangement in order to deal with these unmanageable retrospective tax debts. As these debts belong to the individual rather than any associated limited company, any insolvency process will have to be one which deals with personal debts such as an IVA or bankruptcy, rather than a corporate process such as liquidation.  

Seeking professional advice is key

If you have received a 2019 loan charge bill you simply cannot afford to pay, Real Business Rescue can help. Our licensed insolvency practitioners are adept at dealing with both business and personal HMRC debts. We can talk you through the options available and suggest the most appropriate course of action based on your personal situation and ability to make repayments towards your tax bill.

With 75 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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