As a result, various draft clauses for Finance Bill 2011 were published on 9 December, and are understood to represent the majority of the new measures being introduced. The Government has confirmed that it will keep the number of additional new measures to a minimum. The Budget will be published 23 March 2011 and the Finance Bill will be published on 31 March 2011.
Disguised Remuneration
Of particular importance is the Government’s response to tackling the issue of “disguised remuneration”, involving the use of Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS). The new measures are intended to combat the practice of providing value to individual employees (perhaps as a loan or through the provision of assets for use), without transferring legal ownership to the money or asset.
Previously, such transactions may have given rise to a taxable benefit for the employee but tax on the value of the underlying money or asset was deferred until such time as an actual transfer or loan waiver took place.
With effect from 6 April 2011, the sum of money made available or the market value of an asset (or cost value, if higher) will be treated as employed earnings and subject to tax and national insurance accordingly. This new employment income charge is widely drafted and will also be applicable to sums or assets “earmarked” for employees by trustees or other intermediaries.
This clause will catch assets appointed onto a sub fund or sub trust for a specific employee, as well as single member EFRBS and even allocations made on an informal basis, despite the fact that the funds may not be made available to the employee until a later date or possibly not at all if, for example, the appointment to a sub trust is on revocable terms. There are however, provisions in the draft legislation to prevent double tax charges arising (for example on the initial “earmarking” of funds, followed by a subsequent transfer or loan).
There are certain exemptions from the charge including the provision of loans on “commercial terms”. This is in accordance with the existing taxable benefit legislation and refers to loans made by an employer in the ordinary course of his business where that business includes money lending. The scope of this exemption is therefore quite narrow and won’t affect the large majority of loans made. Loans which fall outside this exemption will be subject to the charge, even if they are made at a commercial rate of interest.
There is a further exemption for “Transactions under Employee Benefit Packages” which is intended to cover the standard provision of benefits by employers, especially to those employees at lower levels. Again, this exemption is quite restrictive and will need to be reviewed carefully to ensure compliance.
The new legislation will have a further impact for EFRBS in that pensions provided from such schemes were previously subject to a 10% exemption from tax, whereas distributions will now be caught by the new employment income charge. The Government has also stated that new regulations will be introduced to apply National Insurance contributions to amounts falling within the employment income charge, although the exact scope of these in relation to EFRBS remains to be seen.
Summary
So, in summary, the Government has set out a new income tax charge on employees where a third party (for example a trustee) earmarks funds for the benefit of employees in advance of actual payment. The new income tax charge also applies where the third party makes loans to current and former or even prospective employees (subject to quite narrow exemptions).
Finally, the new income tax charge applies on the transfer of assets to the employees or any “linked person”. Note the employer must operate PAYE income tax and pay national insurance contributions as provided.
Remaining Advantages
Existing EBTs and EFRBS where funds have been allocated or where they remain unallocated, should still provide tax efficient tax free roll up of underlying income and gains. Further, the assets held would normally be outside the ambit of inheritance tax both as far as the individuals and the trustees are concerned. So, existing arrangements and the funds held within them can still go on to provide tax deferral advantages until such time as distributions and benefits are enjoyed.
Although the new measures will dramatically restrict the flexibility of EBTs and EFRBS, an offshore EBT or EFRBS can still be a useful vehicle in which funds can be set aside by employers for future (unallocated) bonus payments with any growth in value being free of income tax and capital gains tax. Until such time as funds are either loaned to employees or specifically “earmarked” for their benefit, they should remain outside the scope of PAYE.
Even in cases were PAYE is applied to loaned or earmarked funds, there is still the advantage that the value of those funds remains outside of the employee’s estate for inheritance tax purposes until such time as an actual transfer is made.
One can see new arrangements being formed to hold growth assets where the tax cost on contribution of funds to the structure is viewed as acceptable.
It is likely that private pension scheme arrangements, such as Qualifying Non-UK Pension Schemes (“QNUPS”), come to the fore in offshore tax deferral planning. Such personal schemes would be contributed to by the individual member with no tax relief at that point or tax charge and the ensuing growth in value within the pension fund would enjoy a tax free roll up and would be outside the scope of inheritance tax.
Caution
As the legislation is new and it introduces a lot of new terms it is important that no decisions should be made in respect of EBTs and EFRBS or similar arrangements until the exact scope of the new legislation is fully understood. For example, trustees administering unallocated funds need to be very careful not to take steps to inadvertently
