Facing a Tax Demand Because of an Employee Benefit Trust? Insolvency Practitioners can Help

HMRC is Aggressively Collecting Tax on Companies with Employee Benefit Trusts. 80,000 Accelerated Payment Notices Have Been Sent Out. Act Now!

The Insolvency Practitioners at Antony Batty & Company LLP predict a spike in corporate failures and individual bankruptcies as HM Revenue & Customs appear to have finally won the battle to make companies pay tax due on monies paid into Employee Benefit Trusts (“EBT”).

HM Revenue and Customs (“HMRC”) are now aggressively collecting tax on Employee Benefit Trusts (“EBTs”), through the use of Accelerated Payment Notices, following the Supreme Court decision, in the matter of Rangers Football Club which found in favour of HMRC, resulting in a demand for £46.1 million.

It is estimated that c.80,000 Accelerated Payment Notices have been sent out by HMRC, containing unexpected bills, inflated by penalties and interest, that could force the recipients into insolvency/bankruptcy.

In this article we look at what EBTs are, how HMRC are behaving, and suggest that insolvency practitioners can help when advising companies or individuals who are struggling to pay the tax they owe. Above all, our advice is if you or your company has received an APN from HMRC, act now and take advice.

What are Employee Benefit Trusts?

EBT’s became a popular method of tax planning by companies between c.2008 to 2015. Any such planning had to be disclosed at the time to HMRC under the Disclosure of Tax Avoidance Scheme rules (“DOTAS”).

An Employee Benefit Trust is a trust which can be established either in the UK or offshore and which is set up by a company to hold cash and other assets, for example shares, to provide benefits to employees and their families for the purpose of attracting and retaining quality staff.

A number of such schemes were marketed to companies, which were based on legislation and advice at the time, and appeared to allow companies to pay money into such a trust, which could then be loaned to employees without a tax charge. Such schemes were particularly attractive to owner manged businesses, whereby a company paid funds into an EBT, for the benefit of the owner manager (often a Director), who then borrowed monies out of the trust on favourable terms.

HMRC Challenged the Legality of EBTs by Tribunal

HMRC always stated that these schemes were not legal, as they effectively resulted in funds being loaned tax free to the beneficiaries. A number of schemes even attempted to make the loans non-repayable. The process for HMRC to challenge such schemes was by the Tribunal process, which, given the huge number of such schemes meant that it could take well over 10 years, before HMRC could get a case heard.

HMRC’s Powers Have Been Significantly Increased

The Accelerated Payment Notice (“APN”) and Partner Payment Notice (“PPN”) Legislation, introduced in 2014, significantly increased the powers of HMRC. The legislation allowed HMRC to issue APNs which required companies that had used a tax planning scheme to pay a sum of tax, assessed by HMRC, pending a Tribunal hearing, on the basis that if the tax payer won the Tribunal any monies paid under an APN would be returned with interest.

This meant that rather than the tax payer retaining the tax until a Tribunal could be heard, HMRC could issue an APN and hold the assessed tax on account until any hearing.

APNs can Seriously Affect Cash Flow

Clearly APNs could have a serious impact on cash flow, as it will be the employing company who owes the tax where an EBT had been set up, rather than the “beneficiary” – the employee; it is the company which has the cash flow problem. Difficulty in paying tax owed, leading to cash flow problems, are two of the key signs of a business in distress, as our restructuring and insolvency guide shows. Cash flow problems can often lead to insolvency if not addressed quickly.

The Legality of APNs has been Challenged. But the Outcomes have been in HMRCs Favour

A number of tax payers, both individuals and companies, have challenged the legality of the APN Legislation by requesting a Judicial Review. The Judicial Reviews have meant that HMRC have found it difficult to enforce APNs, where a tax payer had requested a Judicial Review. Early Judicial Reviews found in favour of HMRC, however further delays resulted from the decisions being Appealed. The Appeal Court Ruling in the Rowe and Vital Nut cases, handed down on 12 December 2017, supported the earlier decision in favour of HMRC.

It is now difficult to see how payment of APNs can be further delayed.

Non-Compliance with Follower Notices Can Lead to a 50% Penalty

In the meantime following the Glasgow Rangers decision, HMRC have started to issue Follower Notices to companies which set up EBTs. Whilst many tax professionals argue that the Rangers decision was case specific and that not all EBTs would be covered by the decision, HMRC have used further legislation which allows them to issue Follower Notices to other tax payers using the “same scheme”. Follower Notices offer recipients the opportunity to agree and settle the disputed tax under the Settlement Terms offered by HMRC in November 2017.

If taxpayers do not comply with Follower Notices and they subsequently lose their case, HMRC can apply a penalty of 50% of the tax found to be payable. Given HMRC’s recent successes in the Courts, many tax professionals are advising their clients to settle Follower Notices rather than run the risk of paying a 50% Penalty.

HMRC is Winning the Day with EBTs and APNs

In summary, HMRC seem to be winning the day. However many owner managed businesses will not have the resources to settle the tax demanded by an APN or Follower Notice. Whilst HMRC have indicated that they will allow companies “Time to Pay”, there will be many who cannot pay, under any circumstances.

Time will tell if further Legislation is introduced to pursue the beneficiaries (the employee) of EBTs when the Employer fails to pay and enters an Insolvency Process, or if HMRC will argue existing Legislation allows them to do this anyway.

What to do if You Cannot Pay Money Due Under an EBT? Our Insolvency Practitioners can Help

If you are a company – or have a client – with an EBT, and cannot pay an accelerated payment notice or follower notice, although our insolvency practitioners cannot advise on the merits of paying APNs or Follower Notices, we can advise companies who are struggling to pay the tax owed.

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