You may recall that we issued an eshot back in 2017 regarding the Glasgow Rangers FC v HMRC tax case where the Supreme Court ruled in HMRC’s favour.
A quick recap: An EBT is a trust that can be established either in the UK or offshore by a company to hold cash or other assets for the benefit of employees. The purpose of the trust is to incentivise employees and help retain quality staff by providing a benefit to them and their families. An EBT and the company that creates it are two separate legal entities; this means that once the company has transferred property into the trust, it will be run by trustees who have ultimate control over trust property. It is the job of the trustees to distribute the trust, although they will often be guided by recommendations from the company as to how they should do so. As the trust is a separate legal entity from the company, it will continue to exist even if the company has a change of ownership or is wound up and liquidated.
During the 1990s, 2000s and early 2010s it was not uncommon for employers to pay bonuses to their employees by transferring the award money to an offshore employee benefit trust. The funds would sometimes be allocated to the employees in the form of an interest-free loan which, in practice, was to be left outstanding indefinitely. HMRC consider these to be tax avoidance arrangements that seek to avoid Income Tax and National Insurance Contributions. In the Revenue’s view, the loans were never intended to be repaid and as a result HMRC introduced a loan charge to tackle such schemes on the basis that a non-repayable loan is not a loan but disguised pay.
The Government has brought in legislation, effective on 5 April 2019, to tackle certain disguised remuneration tax avoidance scheme which paid employees earnings in the form of a loan from an EBT. The charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April. The new rules allows HMRC to tax distributions from an EBT as income from employment, meaning that they will be liable for Income Tax and National Insurance Contributions.
The liability to pay the loan charge will generally fall on the current or former employer of the employee who has received the loan (unless the company no longer exists in which case HMRC can pursue the employee direct). Any outstanding loans must be repaid by 22 April 2019 otherwise interest and possibly penalties will be levied. The employer will then have to consider whether or not it can recoup the money from the employee.
This issue could well cause employers difficulties although it remains to be seen how aggressively HMRC pursues these debts. But as always, early consideration of the issues could be worthwhile and KRE CR LLP offers a free initial meeting and consultation to explore with management what restructuring options might be available.
For further information, please do not hesitate to give any one of us a call.
Robert Keyes 07500 933 022
Gareth Roberts 07979 706 392
Paul Ellison 07967 471 211
David Taylor 07855 231 103
For any further information on our services please do not hesitate to give one of us a call or visit our website: krecr.co.uk