New tax rules affecting users of EBT schemes
31st May 2016
Posted in Articles, Business Tax, Employee Incentive Arrangements, Employment Tax by Tom Minnikin
Tucked away in the March Budget were two significant changes affecting users of Employee Benefits Trusts (EBT) schemes.
New tax charge on disguised remuneration loans
The Government has said that in April 2019 it will bring in a tax charge on “disguised remuneration loans”. The main target here is EBT schemes, but contractor loan schemes will also be affected. These schemes operated to avoid employment tax charges through the use of loans to employees and directors as an alternative to paying remuneration. New legislation will be introduced so that where loans remain outstanding on 5 April 2019 they will be treated as a payment of remuneration to the individual concerned. In the first instance this will mean the company is liable to PAYE and NIC; however, the government has said it will amend the PAYE regulations to allow, where appropriate, for the tax and NICs to be collected from the employee where it cannot reasonably be collected from the employer.
A consultation on these amendments will be held during the Summer. It will be interesting to see what happens as a result of this as HMRC’s proposals – which amount to retrospective taxation – are likely to be met with some controversy.
However, our advice to clients is to consider settlement options now. If a settlement is reached with HMRC before 5 April 2019 then the charge will not apply. We have considerable experience in this area and have negotiated settlements for a number of clients.
Withdrawal of transitional relief on investment returns
The second change announced was the withdrawal of relief on investment growth within EBTs. If a company reaches a settlement with HMRC in respect of EBT contributions it is given protection (known as the “paragraph 59 credit”) against tax charges that would otherwise apply when the EBT is unwound. In many cases EBTs were used not to make loans to employees but, instead, as investment vehicles. Under current rules, the paragraph 59 credit applies both to the original contributions and any investment growth. This often resulted in low settlement figures in comparison to the value of the EBT fund and was therefore an incentive to conclude cases with HMRC. After 30 November 2016 this relief will be withdrawn so that from then onwards a settlement will not protect investment growth from future income tax charges.
Again, our advice is that clients who are in this position should consider the options for settling now.
