Thursday, March 10, 2011

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes

Employee Benefit Trusts (EBTs) have long been used for tax avoidance purposes. They have evolved over the years as advisers tried to avoid the impact of tax cases and changes to the tax rules.

HMRC have clearly got fed up of playing catch-up and last December the Government announced onerous new rules to tax "disguised remuneration". In addition to EBTs, the rules would also impact Employer Financed Retirement Benefit Schemes (EFRBS).

Some commentators suggest that the proposed rules are draconian. This may be right. But in most cases those who would be caught are only those who persist in their attempts to frustrate the rules that would tax income when it is earned. Don't want to get caught by the new rules? Avoid fancy and artificial payment arrangements. Pay the tax otherwise due on what would be your income but for the fancy scheme.

Following a consultation on the draft new rules HMRC published a list of Frequently Asked Questions on February 21. These confirm that the new rules are intended to apply to arrangements
"involving a third party to reward employees and directors which seek to avoid, defer or reduce income tax and national insurance contributions",
and to arrangements that are
"used as a tax-advantaged way to save for retirement, using an employer-financed retirement benefit scheme as an alternative to, or to top up, savings in a registered pension scheme."
In advance of the new rules coming into effect, some newer avoidance schemes have been promoted. These are designed to shelter funds in current EBT schemes from the effect of the proposed legislation. These new schemes rely on the availability of credit for loan repayments made before 6 April 2012.

HMRC have wasted no time in adding such schemes to the Spotlights page of their website.
In HMRC's view, while these convoluted arrangements seek to weave a way through the legal changes, they do not succeed. Even if they did HMRC would still challenge them as delivering remuneration which should have been subject to PAYE from first principles.
Subject to parliamentary approval, the new legislation will be effective from 6 April 2011 and some aspects of the proposed new law will apply from 9 December 2010. These changes are designed to prevent the avoidance of PAYE and national insurance contributions on employment income.
Individuals considering entering into such income tax avoidance arrangements should be aware that HMRC will pursue people who seek to avoid tax on monies they earn, through the courts where necessary.
But, hey, if you want to risk such activity go ahead. Some promoters no doubt will sugest that (part of) the financial cost of such legal cases can be covered by tax risk insurance. That is of course just one of the issues to consider. Each to their own.

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1 comment:

  1. Perhaps EBT have had their day, but I do expect there will always be those who still remain pretty effectively one step ahead of the next legislative attack!