When the rules on Disguised Remuneration were introduced by Finance Act 2011 they included provisions to deal with companies and employees who had entered into EBT arrangements before 6 April 2011.
Two key provisions were:
- under Paragraph 59 of Schedule 2 to Finance Act 2011, where settlements are agreed with HMRC and employees agree to be taxed on the original EBT contributions as if they were payments of salary, any growth in the value of the EBT assets would be protected from employment taxes (and, in some cases, escape CGT too);
- under Income Tax (Earnings & Pensions) Act 2003, s 554Z8, where an employee gave consideration to the EBT for the transfer of an asset, the value of the tax charge would be reduced by the value of the consideration (e.g. if the employee bought an asset worth £100 from the EBT and paid £80 for it, then £20 would be treated as taxable employment income).
With effect from midnight 16 March 2016, both of these provisions have been amended:
- in order to benefit from the exemption on the growth in the value of EBT assets, employees and companies must reach a settlement with HMRC and pay over all of the tax, NIC and interest under the settlement before 1 December 2016;
- a targeted anti-avoidance rule has been introduced, so that the relief for consideration given to acquire EBT assets will only apply if the transaction is not part of a scheme or arrangement for the avoidance of tax.
100% of the assets of the EBT, a large minority have EBT sub-funds which contain assets that have enjoyed significant capital growth.
With the uncertainty generated by the decisions in the Rangers’ Case, many EBT participants are choosing not to settle with HMRC and it was announced in the Autumn Statement that steps would be taken to bring those participants into line with the Revenue’s favoured strategy of seeking to settle.
The time limit on the protection for capital growth in Paragraph 59 is intended to push EBT participators to reach a settlement quickly and to close down their EBT arrangements.
The change to s 554Z8 is aimed at preventing EBT participants from using various planning techniques to effectively withdraw assets and value from their EBT sub-funds – techniques such as purchasing assets from the trustees on deferred consideration terms had previously allowed EBT beneficiaries to benefit from valuable assets without incurring tax charges.
Now anything other than a “vanilla” purchase of assets from an EBT will be subject to scrutiny and may give rise to tax charges on the full value of the asset transferred to the EBT participant.