At its most basic an EBT is a discretionary trust set up by a company with the beneficiary class consisting of present and future employees and their families.
The company makes contributions to the trustees and the beneficiaries (or perhaps their families) may at some future point receive benefits from the trustees.
Isn’t that a description of a pension scheme?
Many EBTs can be seen as pension schemes stripped of irksome restrictions on contributions and benefits.
EBTs received a significant boost with the introduction of the pensions “cap” in 1989. HM Treasury decided that they were “too much of a good thing” and the tax benefits – real or claimed – have gradually been restricted.
There are three main tax issues:
- Is the employing company entitled to a deduction for contributions to the trustees, in computing its taxable profits?
- At what point (if ever) does an income tax fall on the employee?
- Are there inheritance tax (IHT) implications?
The HM Revenue & Customs (HMRC) view on deductibility is that there is no corporation tax deduction until an employee suffers a tax charge.
Proposals in the current Finance Bill are designed to remove any lingering doubt as to the situations in which an employee suffers a tax charge.
HMRC will argue that certain “special provisions” – under which transfers made by “close” companies are deemed to have been made by their shareholders – can apply to contributions to EBTs. Where a “close” company makes a transfer of value, that value is treated as having been made by the shareholders in proportion to their shareholding.
There are some who would disagree with elements of the HMRC view, particularly in relation to IHT. The tax analysis of each arrangement depends on the precise terms of the trust and surrounding agreements.
HMRC has been reviewing the tax affairs of hundreds of EBTs. In an effort to bring these reviews to a speedy conclusion, HMRC is now inviting employers, companies and other users of these arrangements to settle without recourse to litigation. There is no deadline for the incentive but if employers or companies do not respond by 31 December 2011, HMRC will assume that they are not interested in engaging in this process and will look to progress enquiries formally.
Employers or companies willing to reach a financial settlement with HMRC will be invited to discuss how this might be achieved. Any settlement will depend on the facts of the individual case. Enquiries into open EBT cases will continue and HMRC could start further enquiries during this period.
Settlements reached will take into account all relevant duties and interest will be charged in the normal way. Arrangements have been put in place to ensure that HMRC adopts a consistent approach in agreeing settlements under this disclosure initiative.
EBTs set up as part of employee share purchase arrangements are unlikely to be affected by these reviews.
Anyone potentially impacted – employer, employee or trustee – should seek specialist advice as soon as possible.
It is too soon to say if all EBTs have had their day as tax planning tools. Due to the fact that the term covers such a wide range of structures, some – particularly those designed to facilitate employee share purchase arrangements – will still be useful to the sophisticated financial planner.
