Employee Benefit Trusts
Don’t forget that 31 March 2015 is the deadline for approaching HMRC for settlement of potential EBT liabilities under their Settlement Offer. If you are incurring ongoing costs of administration, benefit in kind charges, tax under the disguised remuneration regime or simply want to know whether settlement would be advantageous to you please get in touch for further advice.
EBTs (employee benefit trusts) have been subject to intensive review and challenge by HMRC.
Where used to facilitate tax planning with long term family deferral/mitigation of tax and NICs (often referred to as Family Benefit Trusts or FBTs), HMRC’s publicly stated view (set out in their Spotlight 5 article) is that the planning is ineffective. Tax and NICs arise at the point when assets within the trust are allocated by the Trustees, often but not necessarily into family sub-funds, notwithstanding that the access to such assets remains at the discretion of the Trustees.
This is on the basis that at point, the employee has “unreserved access” to the allocated assets and such access is sufficient to result in an immediate income tax and NIC charge. In addition, HMRC believe that the assets held within such a structure are subject to inheritance tax charges arising under the general tax regimes for discretionary trusts, notwithstanding the exemptions for employee trusts.
Most advisers would challenge this analysis where the trust is properly established and operated with the Trustees exercising their fiduciary duties rigorously.
Equally, the position for employers and participants in these plans has been further complicated by the Disguised Remuneration legislation. This legislation is complex with many events giving rise to possible tax charges on assets remaining within the trust due to the concept of tax arising on an “earmarking” and certain other events.
The main thrust of the legislation, however, is to impose full tax and NIC charges in respect of assets held within an EBT on the provision of benefits to participants. For many people, this makes the continued operation of EBTs unattractive.
The combination of these factors has resulted in some participants and their employers seeking to resolve challenges from HMRC by way of reaching an agreed settlement based on the principles in Spotlight 5. Depending on the specific facts relating to the EBT and the participants in question, this can offer a range of benefits, including:
- The single most important point is that where a full settlement is reached, further employment tax and NIC charges on distributions from the EBT should be prevented as credit will be given for the tax settlement (known as a “Paragraph 59 credit”).
- This means that on payment of the settlement amount, the trust can be wound up without further employment tax charges or can continue to be run with the trust assets being invested.
- Where corporation tax relief was not given at the point of funding (which will be the case with most EBTs), a credit can be given for the loss of corporate tax relief where it could have been claimed and used on a current year basis if, instead of funding the EBT, the amounts had been used to pay a taxable bonus.
- There is often flexibility in negotiations with HMRC in relation to determining the point at which tax is recognised. This may lead to lower settlement amounts due to reducing the level of interest chargeable or reducing the amount of tax payable due to the effect of lower asset values.
- Where it was clear that the amounts in the EBT would have been reduced on payment any related employer NIC amount, this can also reduce the settlement amount.
Equally, the issues arising when seeking to settle EBT issues are complex. This resulted in HMRC issuing a set of Frequently Asked Questions which provide detailed guidance on the settlement terms which HMRC will be prepared to accept which are also detailed and complex and need to be considered in the wider context of the tax treatment EBTs if they are to be fully understood and properly applied.
EBT settlements have been sought and agreed extensively, but as reported in our news section (News) the EBT settlement offer is being withdrawn from 31st March 2015. As a result, if a settlement is to be sought, the benefits should be assessed and an approach made to HMRC quickly.
How Pett Franklin can help
We help with EBT settlements in a number of ways:
- Evaluating whether seeking to settle is likely to be beneficial through an analysis of the facts and circumstances relating to your EBT.
- Through this, assessing the likely settlement amounts which will be required to achieve settlement.
- Discussing and explaining settlement proposals with beneficiaries
- Negotiating the settlement with HMRC and agreeing and formalising the detailed terms.
- Discussing the settlement position and approach with Trustees and obtaining their co-operation.
- Ensuring that the full Paragraph credit is obtained and applied.
- Advising on the future operation and/or winding up of the trust.