Pinsent Masons, the law firm behind Out-Law.com, has found that HMRC has opened approximately 12,000 investigations into the use of EBTs in the past five years. HMRC has warned that the new charge on outstanding loans stemming from the use of EBTs could affect as many as 50,000 people should cases not be settled by the 5 April deadline.
Tax investigations expert Josie Hills of Pinsent Masons said: "With the deadline fast approaching, taxpayers need to ensure they settle any outstanding employee benefit trust case or risk paying a significant charge."
"The thousands of cases show just how wide a net HMRC is casting when investigating employee benefit trusts. HMRC has kept strong pressure on EBTs for several years now, even after the new loan charge was first announced in 2016, to recoup what it sees as lost tax. Many have claimed that HMRC is being overly harsh on the individual taxpayers in their investigations. With the introduction of the new loan charge and people voluntarily settling ahead of the deadline however, HMRC may start to look to use resource elsewhere," she said.
An EBT is a legal structure which is usually set up by an employer for the benefit of its employees and directors or their family members. EBTs can be used by companies for many purposes, including to support their employee share plans and executive long-term incentives. However, they were also historically used by many businesses, particularly hedge funds and banks that used them to manage tax payments on bonuses, before many of the tax advantages of the structure were removed by new rules on disguised remuneration in the 2011 Finance Act.
HMRC has been targeting the abusive use of these structures for a number of years, as it its view that they artificially lower income tax and national insurance contributions (NICs) that would otherwise be paid on employee remuneration.
After the 5 April deadline, a new charge will be applied on any outstanding loans made through disguised remuneration schemes. It essentially presents taxpayers with a very substantial tax bill based on the outstanding loans. Many individuals have come forward voluntarily to close outstanding cases to settle and pay what could be a lower amount of tax compared to the new charge, which HMRC has said could raise £3.2 billion in total.
Pinsent Masons said that many employees used EBTs in good faith and never thought they were doing anything wrong, assuming they were just using a legitimate arrangement. In other cases, employers are alleged to have insisted that employees be paid via an EBT.
In 2017, the Supreme Court ruled that payments made by Rangers Football Club plc (RFC 2012) to players and executives at the club through an EBT avoidance scheme were earnings, and therefore subject to income tax and NICs.