Revised guidance on the operation of the General Anti Abuse Rule (“the GAAR”) was approved by the Advisory Panel with effect from 30 January 2015.
The revised guidance includes a specific example involving planning that aims to circumvent the rules on Disguised Remuneration and allow cash to be withdrawn from an employee benefit trust (“EBT”) without PAYE or NIC charges arising.
Before the introduction of the rules on Disguised Remuneration, which took full effect from 6 April 2011, large sums of money had been contributed to EBTs by companies intending to take advantage of the rules at the time to allow employees to benefit from the EBT assets – either tax-free or at comparatively low rates of tax.
Many companies structured their EBTs so that all of the assets put into trust were immediately loaned out to employees, but there are still a large number of EBTs that hold valuable assets that cannot be used to benefit employees without very substantial tax charges arising.
The GAAR guidance looks at planning to access these “trapped” funds, involving the creation of ‘money-box’ companies and various parties exchanging debt obligations. The guidance states that this sort of planning is considered abusive because it is intended to frustrate the explicit purpose of the Disguised Remuneration rules (not to mention the artificiality of the transactions that support the planning). It also makes the point that HMRC would also seek to challenge the effectiveness of the planning in terms of the Disguised Remuneration legislation itself.
A number of companies entered into secondary planning after the announcement of the Disguised Remuneration legislation to eliminate debts owed by employees to EBTs (this type of planning was often called “loan cleansing”). This involved the transfer of debt obligations to a variety of entities, leaving the employee holding the assets loaned to him or her and the obligation to the trustee discharged. This type of planning has been criticised as being ineffective, because it does not satisfy the requirements in the legislation to escape charges under the Disguised Remuneration legislation, but the new GAAR guidance again makes it clear that HMRC is fully aware of this type of planning and that such planning is not going to be tolerated by HMRC.
Employers, companies or other users of these EBT arrangements can, under certain circumstances, take advantage of the beneficial terms of the EBT Settlement Opportunity offered by HMRC to settle the resulting PAYE and National Insurance Contributions without recourse to litigation, thus minimising costs. The decision to seek settlement is likely to be determined by a desire to eliminate concerns over future possible liabilities arising under the disguised remuneration legislation and have certainty in their tax affairs. However, eligible companies seeking settlement via this opportunity need to act fast as the opportunity will be withdrawn on 31 March.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.