HMRC offers chance to avoid court and settle EBT enquiries

Tuesday, May 24, 2011 | Posted by: Dave Jennings
Categories: Personal, Protecting your wealth | Tags: tax, tax planning, HMRC, Dave Jennings, tax avoidance, Protect Your Wealth, investigation, EFRBS, Employee Benefit Trusts, EBT settlement opportunity, litigation, EBT, personal tax, tax changes

High-earning taxpayers who have avoided or deferred tax and national insurance contributions through the use of Employee Benefit Trust (EBT) arrangements are the latest targets of the taxman, following the announcement by HM Revenue & Customs (HMRC) of a new EBT settlement opportunity on this type of tax planning.

With the hole in the public finances still to be plugged, the Government is on a quest to bring in extra funds by cracking down on those who seek to minimise their tax liabilities.

My previous blog posts have discussed some of the tactics that HMRC has employed in bringing non-compliant taxpayers in from the cold, such as the LDF, Plumbers Tax Safe Plan, targeting of High Net Worth individuals and, more recently, a project to tackle tax evasion in the restaurant trade.

The EBT settlement opportunity
For its challenge to EBTs, however, HMRC has taken a different approach, and is offering a negotiated settlement opportunity for those with an open enquiry into their arrangements. Businesses currently subject to an HMRC enquiry into their EBT arrangements can expect a letter from HMRC before the end of August, inviting them to enter discussions about reaching a settlement.

Get closure without going to court
So what is HMRC hoping to achieve with this initiative? Put simply, it wants to avoid costly litigation at a time when the department’s budget is tight. Similarly, for taxpayers keen to obtain closure, the opportunity to avoid the cost and inconvenience of litigation could be the carrot that encourages them to engage with this new settlement opportunity. The problem for HMRC, however, is that many taxpayers who have used EBTs will not regard themselves as having done anything wrong, and instead see themselves as having used legitimate planning to mitigate their tax liabilities.

It’s not a tax amnesty
It is important to note that this is neither an amnesty nor a ‘one-size fits all’ attempt to settle open enquiries and HMRC has made it clear that each case will be settled on the basis of its individual facts. It has, however, stated that steps have been taken to ensure that a consistent approach is taken in agreeing settlements. Settlements will be reached in respect to all duties, and HMRC has made clear its view that any sub-trusts are relevant trusts for inheritance tax (IHT) purposes, and potentially liable to the 10-year and exit charges provisions.

What happens if you ignore the offer?
So what are the dangers of ignoring HMRC’s offer? For those unable to reach a negotiated agreement, or who do not wish to take part in the EBT settlement opportunity, HMRC has made clear that its cases will be subject to a full enquiry and progressed in accordance with the department’s Litigation and Settlement Strategy (LSS) [PDF].

The LSS always gave HMRC a remit to seek an agreed settlement but it also advised on an ‘all or nothing approach’ and most tax inspectors would be reluctant to opt for ‘nothing’, hence a backlog of cases awaiting court litigation.

While there is no official deadline for this opportunity, HMRC has stated that if employers or companies have not responded to the incentive by 31 December 2011, it will be assumed that they have no interest in taking part and will progress enquiries formally with the probability of court litigation.

Making EBTs less desirable
The use of trusts by employers without operating PAYE has been an issue for HMRC for many years. The case of Dextra Accessories Limited vs Macdonald (HMIT), for example, initially found in favour of the taxpayer in 2002 but ultimately the House of Lords decided for HMRC. This has not stopped the use of EBTs and HMRC is clearly keen to make them as unattractive as possible.

Warning of more employment remuneration targets
This settlement opportunity is part of a wider programme by the Government to target the use of trusts and other tools to avoid or defer tax on employment remuneration. In his Emergency Budget of 22 June 2010, Chancellor George Osborne announced that new legislation would be introduced to combat this ‘disguised remuneration’ and draft legislation published on 9 December 2010 introduced a new charge, triggered when a third party makes a provision, or earmarks, a reward linked to an individual’s employment.

Help and advice
Our Tax Investigations team has years of experience in defending and settling past tax planning arrangements, with HMRC. Do get in contact if you think you may be affected by the new HMRC initiative on EBTs. Alternatively call me directly on 0161 953 6402.

Image: © Steve Punter

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