13th September 2012
This news item looks at the statement and frequently asked questions (FAQs) published recently by HMRC explaining its views on the settlement of tax liabilities arising under some employee benefit trust (EBT) arrangements.
These cover EBTS that have been used for remuneration planning and do not affect those whose purpose is limited to the acquisition of shares for ownership succession or any other purposes.
The FAQs set out the circumstances in which HMRC might consider reaching a settlement with taxpayers regarding tax liabilities arising under EBT arrangements. There is considerable detail on obtaining an agreement under paragraph 59 of Schedule 2 to Finance Act 2011. The advantage of such an agreement to the taxpayer is that it provides relief from further charges under Part 7A of the Income Tax (Earnings and Pensions) Act 2003, thereby avoiding taxation on the same amount more than once. The attractiveness of an agreement will obviously depend on the precise circumstances of each situation, and in particular whether HMRC would succeed in any legal action in the absence of a settlement.
While HMRC does not limit the applicability of its statement, it is worth noting that the arrangements it refers to are those used for the payment of bonuses, particularly but not exclusively by financial institutions, and not those EBTs used in connection with normal share plans.
HMRC also makes some points which are of general application, and which might deserve further consideration:
- Many EBTs rely on their status as “employee trusts” under section 86 IHTA 1984 for the purposes of inheritance tax to ensure that no periodic or exit charges will arise. The FAQs, however, put forward the HMRC view that a sub-trust within an EBT will fail to satisfy the requirements for a section 86 trust even if it is revocable. It is worth noting that this view is not shared by all practitioners and is, at the very least, open to question
- HMRC takes the view that allocations to sub-trusts are taxable events for income tax and NIC purposes. This approach does not seem to be entirely consistent with the decided cases in this area, and it should be viewed in this light.
- The allocation by a trustee of an EBT of an amount to a sub-fund is also treated by HMRC as a “notional payment” by an intermediary to which section 222 ITEPA 2003 will apply, if the employer does not make good the income tax and NICs within 90 days of the liability arising. Again, this view is not necessarily accepted by all practitioners and might be challenged in the Courts.
- In the main case that HMRC quotes in support of its views, the taxpayer happened to use an EBT, but this was a minor part of an attempt to convert bonuses into dividends (which the court rejected). Many practitioners question whether the case, which did not involve sub-funds, is relevant to the matters that HMRC is offering to settle.
The FAQs are relatively extensive, running to 44 pages. They do not, however, include a great deal in the way of helpful substantive guidance. In place of objective guidance, they contain a summary of HMRC’s interpretation of the legislation, without acknowledging that there could be other equally valid opposing views.
The FAQs can be found by clicking on the link http://www.hmrc.gov.uk/news/ebt-news0812.htm