The disguised remuneration rules were announced in 2010 and fully implemented in 2011. They are designed to counteract the use of employee benefit trusts to avoid or defer the payment of tax through a variety of approaches and structures. In order to achieve this objective, the rules are drafted broadly and are highly complex. The result is that they can apply beyond the scope of tax avoidance and extend to employee share schemes.
Where the legislation applies, income tax and NICs arise on the “earmarking” of trust assets for the provision benefits to employees. Where an employee benefit trust (or employee share ownership trust) is established to support the delivery of share pursuant to an employee share scheme, this would result in the tax and NIC charge arising at the time of the earmarking which could be many years prior to the vesting of those awards and the transfer of the shares.
If this is not recognised and steps taken to mitigate the effect, the result could cause substantial tax charges at a time when no value has been delivered to cover the liability and before there is any certainty that shares will be delivered.
In practice, this would make the underlying share scheme unworkable. It might also increase the overall tax liabilities substantially due to the rules under which, if tax is due under the legislation and is not recovered from the employee within 90 days, further tax and NIC charges arise on the unpaid tax. This combination of timing and absolute tax costs can change a share scheme designed to provide incentives and help to align employee and shareholder interests to one creating unnecessary tax costs and conflict with the employees it is designed to reward.
To counteract this, there are various exclusions and reliefs from the Disguised Remuneration charges. These should ensure that a properly structured plan will not be subject to these charges. The protective legislation is also complex, however, leaving many traps for the unwary.
Recent changes have been proposed which would extend the scope of the disguised remuneration legislation. For more about these, click here.
How Pett Franklin can help
Disguised remuneration issues will be reviewed as a matter of course when advising on setting up an employee share scheme. We are also able to provide advice on specific issues arising in relation to Disguised Remuneration, either in respect of share schemes or more widely.
If you have a historic EBT which is impacted by these rules, we can provide advice on reaching a settlement with HMRC and bringing the arrangements to a close.