In the years before 2011 EBT planning was widely adopted, with the take-up rate accelerating greatly following the announcement of the 50% top rate of tax.
EBTs were used to provide a variety of tax-free benefits to employees (most frequently beneficial loans), although some wealthier employees invested their EBT funds for capital growth, many enjoying significant capital gains within their EBTs.
The introduction of the rules on Disguised Remuneration in Income Tax (Earnings & Pensions) Act 2003, Part 7A was intended to draw a line under EBT planning once and for all. Under those rules, anyone for whom assets were “earmarked” was treated as if they had received a taxable salary payment and anyone who had “earmarked” assets in an EBT would be treated as if they received a taxable salary payment if those assets were applied for their use or transferred to them.
In addition to the legislation on Disguised Remuneration, HMRC began to raise assessments on employees who had assets in EBTs, arguing that the payment into an EBT should be treated as if it was a payment of taxable employment income, subject to PAYE and NIC. This line of argument has resulted in the ongoing litigation in the Rangers Case, which is expected to be heard by the Supreme Court in 2017.
Despite these moves, many users of EBTs have chosen not to settle their cases and very large sums of money, which were loaned to employees by EBTs before the Disguised Remuneration legislation was announced, remain outstanding and untaxed.
In the Budget, the Chancellor has announced a number of changes, which fall into four categories:
Incentives to settle
When the Disguised Remuneration legislation was introduced in Finance Act 2011, a transitional relief was offered in Paragraph 59 of Schedule 2 to that Act, which allowed companies with existing EBTs to settle their liabilities and benefit from a credit against future charges under the Disguised Remuneration rules.
This relief was phrased so that if an employer settled with HMRC and agreed to treat the initial contributions to the EBT as if they had been salary payments, then the assets could be withdrawn from the EBT without further charges to income tax or NIC, even if there had been significant growth in the value of those assets.
For example, if assets worth £100,000 were put into an EBT in 2001 and grew in value to be worth £1,000,000, the employer could reach a settlement with HMRC under Paragraph 59 and pay PAYE on the £100,000 of initial value, but the growth in value would be exempt from income tax and NIC (as most EBTs were established offshore, the growth was often exempt from CGT too).
To give employers an incentive to bring their affairs up to date, the Chancellor has announced that settlement under Paragraph 59 will be significantly less advantageous after 30 November 2016: from then onwards, a settlement will not protect growth in an EBT from future income tax charges.
On this basis, anyone with assets in an EBT which have grown significantly in value, should consider settling with HMRC to protect that growth from future income tax charges.
A new targeted anti-avoidance rule was also announced and took effect from 16 March 2016. This rule prevents one of the key reliefs in the Disguised Remuneration legislation, which applied where an employee purchased assets from an EBT, from applying where a transaction is being undertaken with a view to avoiding tax. There was a perception that this relief was being used to syphon funds out of EBTs, avoiding employment income tax charges.
Broadening the legislation
It was announced that the rules on Disguised Remuneration will be broadened to catch a number of schemes that are still being marketed as falling outside the Disguised Remuneration legislation, including schemes for sub-contractors. These changes are still in the planning stage and will not be enacted until Finance Act 2017.
Introducing a new tax charge
The final, and most controversial change has been the announcement of a new tax charge on sums owed to EBTs by employees.
The Chancellor announced that anyone who has a loan from an EBT, irrespective of when it was advanced to them, will be taxed on the whole value of that loan, as if it was a payment of salary, if it remains outstanding as at 5 April 2019, irrespective of when the loan was originally advanced to the employee.
The loan will not be taxed if:
- It is repaid in full before 5 April 2019;
- The loan is from an amount that has already been taxed in full (for example, where a Paragraph 59 settlement has been made); or
- The full amount of the loan is taxed before 5 April 2019 (e.g. the loan has been assigned to the employee).
The Budget announcements also stated that, if HMRC is able to successfully argue that the original payment into the EBT constituted taxable employment income and interest is running on that original tax charge, the employer will still have to pay any difference between the new tax charge and the tax plus interest claimed in respect of the original contribution.
A consultation process will be launched into this proposal in the summer, with a view to provisions being included in Finance Act 2017.
Prior to this announcement being made, most advisors took the view that there was little point in settling EBT cases where there had not been any growth in the value of the EBT fund, at least until the Rangers Case had reached its final conclusion.
The position now is that employees who have taken loans from an EBT will have to pay tax and NIC on the value of that loan irrespective of the decision in the Rangers Case. While there are reasons to be sceptical that the proposed legislation is workable, it would be sensible for all EBT beneficiaries to consider their position once the draft legislation has been published.
For further information and help with EBT questions, please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.