Tax Avoidance Scheme Update

HMRC have recently published 'Employee Benefit Trust (EBT's), Settlement Opportunity Update' which provides an overview of developments since April 2011 and provides answers to a range of FAQ's to help explain more fully how taxpayers' tax liabilities will be calculated.

In turn, HMRC hope this will encourage taxpayers to enter into open discussions with them about their circumstances and bring about early closure to their EBT past affairs.

The EBT Settlement Opportunity gives employers and companies who had used EBT's and similar structures the chance to settle any outstanding tax and NIC's early with HMRC and avoid the need for the Revenue to consider litigation.

The principle behind the Settlement Opportunity is that HMRC will conclude outstanding enquiries on the basis that payments and allocations made to individuals prior to 6^th April 2011 will be treated as earnings from an employment and income tax applied on a once and for all basis. Additionally, depending on the way individual schemes have been set up and implemented prior to 6^th April 2011, any settlement may also include:

• PAYE;
• NIC's;
• Corporation Tax;
• Inheritance Tax; and/or
• Other taxation charges on the EBT's and beneficiaries.

Final agreement on the settlement will:

• allow taxpayers to pay over the tax and NIC's owed; and
• avoid an expensive complex enquiry and potential expensive litigation; and
• provide certainty on the interaction of different tax provisions and regimes that, if litigated, could result in additional charges.

Anybody with EBT's or similar arrangements who think they may be able to take advantage of the Settlement Opportunity should initially contact a professional advisor.

Recent Developments

New Legislation Enacted

Following the launch of the Settlement Opportunity the 'disguised remuneration' legislation was enacted in July 2011 and applies to EBTs from 6 April 2011 onwards (with certain transactions also being brought within the new legislation if they were carried out between 9 December 2010 and 5 April 2011 inclusive).

Regulations also came into force on 6 December 2011 to charge Class 1 NICs on amounts chargeable to tax under the disguised remuneration measure.

Litigation Involving EBTs

HMRC has been successful in litigating cases which have involved EBTs as part of the arrangement(s) entered into by a company/employer. The most significant of these cases is HMRC Commissioners v PA Holdings Ltd (2011) where the Court of Appeal decision upheld HMRC's arguments that an arrangement intended to deliver a bonus through an EBT was subject to tax and NIC's as earnings.

HMRC considers that the Court of Appeal judgment supports its view that arrangements to avoid PAYE and NICs through the use of EBT structures do not work. HMRC's view in relation to EBTs is published in Spotlight 5 .

Operational Activity

HMRC has set up an operational team to manage the settlement of cases. The main focus of this team is the settlement of cases through engagement with customers and their agents. Settlement terms will depend on the facts of the EBT arrangement but the framework in these FAQs will be applied consistently across all EBTs.

A number of cases have recently been settled and many more are progressing towards settlement. The Revenue continues to encourage taxpayer's to talk to them about their EBTs and how to settle the tax and other duties associated with the arrangements by agreement.

The FAQ's set out the only settlement approach HMRC will be taking in these cases and there is no alternative approach.

Where HMRC cannot settle cases by agreement, the team will be responsible for progressing the compliance programme for these EBT cases. This means that taxpayer's  may receive closure notices or further requests for information, with the aim of progressing EBT cases formally to litigation under the Litigation and Settlement Strategy.

Litigation and Settlement Strategy

How does the Settlement Opportunity work in practice?

To help taxpayer's see how the Settlement Opportunity will operate in practice, HMRC have produced Employee Benefit Trust (EBT), Settlement Opportunity FAQ's (PDF). HMRC are encouraging taxpayer's to consider how the Settlement Opportunity may apply to the facts of their own case and talk to HMRC about paying any tax and NIC's the owe and bringing certainty to their EBT arrangements.

Any contractor who has been involved in a tax avoidance scheme that utilised EBT's and is currently suffering enquiry because of this, should talk to their scheme provider to ascertain if the Settlement Opportunity is appropriate to their case.