Employee Benefit Trusts, the Loan Charge and HMRC’s Hard Line
Employee Benefit Trusts – Can we Really Expect the Government to Respond Positively to the House of Lords Economic Affairs Committee’s Recommendations?
The thorny issue of HMRC’s on-going pursuit of those businesses and individuals who have benefited from employee benefit trusts (or similar disguised remuneration loans) rumbles on, with those involved seeking clarity from HMRC. There are thought to be c.80,000 EBTs and HMRC is aggressively pursuing them via Advanced Payment Notices and the April 2019 Loan Charge Legislation. Clearly this whole arena is coming to a head now and we fear a spike in bankruptcies as a result. A recent House of Lord’s Committee heavily criticised HMRC’s approach and made strong recommendations for some EBTs to be excluded from the Loan Charge.
In this article we look at the House of Lords Economic Affairs Committee’s Recommendations, which whilst reasonable are, we believe, unlikely to see a change in HMRC’s approach, and almost certainly not by April 2019. With the Government continuing to refer to employee benefit trusts as ‘aggressive tax avoidance structures’ the central question remains: if HMRC continues its hard-line approach, what can those affected do to mitigate the tax repayments that HMRC is demanding?
The House of Lords Economic Affairs Committee’s Report
The Committee’s report – ‘The Powers of HMRC: Treating Tax Payers Fairly’ – was published on 4th December 2018. It contained many criticisms of HMRC, along with several recommendations. However, the specific recommendation we wish to highlight here relates to requesting a change in the 2019 Loan Charge legislation:
“We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where tax payers disclosed their participation in these schemes to HMRC, or which otherwise would have been closed.”
The Committee also criticised:
- “The retrospective effect of the Loan Charge legislation, which undermines normal time limits for tax assessments and diverges substantially from established principles.”
- “HMRC’s disproportionate approach to pursuing taxpayers (including inappropriate threats of bankruptcy) and failure to communicate its position in a clear or timely manner.”
What the Lords Committee’s recommendation is stating is the Loan Charge legislation should be changed so that individuals in similar circumstances will not face a 2019 Loan Charge, either because the period in which the EBT contribution is now closed or because a full disclosure was made at the time, or both.
Will the Government ACT on This Recommendation? Our Comment
Whilst we applaud this recommendation, from a practical point of view we cannot see the Government acting on it anytime soon (if at all), especially with the uncertainty over Brexit and the reports that many HMRC staff have been seconded to work on Brexit preparations. There is also this comment by a ‘Government Spokesperson’, responding to the report, that:
“…. On the loan charge in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”
This is not the comment of a Government that is considering changing the Loan Charge legislation in light of the House of Lords Committee’s report.
Given that the loan charge comes into effect on 5th April 2019, it seems, therefore, practically impossible for anything to change before then (or even in the months afterwards). This will mean that:
A loan charge WILL apply if by 5 April 2019:
- the loan has NOT been repaid in full
- the loan has NOT been taxed in full under the disguised remuneration rules, as updated in 2016
- no exclusions apply
- the loan is NOT from an amount on which income tax has already been paid
In other words, thousands of businesses and individuals who have not contacted HMRC before 5th April to settle any liabilities that might result from Employee Benefit Trusts will continue to be pursued for payment. The amounts involved could mean bankruptcy for many.
If Your Business Has an EBT, What Are Your Options?
Assuming no change in Government legislation, there are three main options a company with tax owing on an Employee Benefit Trust can take:
- Attempt to reach a negotiated settlement with HMRC
- Wait for the outcome of the litigation that could well follow and contest it
- Make an appeal
In our view it makes sense for businesses to seek professional advice and seriously consider the circumstances surrounding their case before they decide which course of action to take. Click here to see some of out other articles on EBTs.
As Licensed Insolvency Practitioners we have long experience of working with HMRC, especially in negotiating settlements for our clients with them. However, if the settlement opportunity is not taken, the loan is still outstanding by 5th April 2019, and tax has not been paid, then we also have expertise in agreeing time to pay agreements with HMRC. Both options could help mitigate the impact of repaying the tax on Employee Benefit Trusts, avoiding the threat of insolvency.