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A family affair

At this time of year, any adviser of corporate clients with calendar year ends (and there will be a lot of them) should be thinking very carefully about managing the year-end planning strategy.

Traditionally, central to this planning will be the decision as to how to most tax-effectively extract funds from the company by way of dividend, salary or pension. This year, however, more focused attention may be given to cash retention, despite rapidly falling interest rates, and debt or overdraft repayment.

Once this is done, there will still be some companies for which the distribution decision will be important. At a time when much focus is on reducing costs, why ignore one of the most important costs – taxation?

I will look at the dividend, salary and pension decision in the current environment in succeeding articles.

First, I want to look at another method of corporate profit extraction that has attracted some attention from planners – and HM Rrevenue & Customs – over the past few months. This is the employee benefit trust.

The most extravagant boast for this tax planning strategy is that it provides a way for a company to pay money into a trust for the benefit of employees, directors and their families, with no employee or beneficiary charge to tax, albeit with no corporation tax deduction, access to the funds, little year-on-year tax cost and attractive supplementary inheritance tax savings.

How easy is it to secure these benefits and how much certainty is there that these benefits will be delivered? To ascertain this, we need to have a close look at recent case law and legislation. The most recent case in which the employee benefit trust and the latest version, the family benefit trust, featured was that in which the employer was Sempra Metals.

The basic idea of the FBT is that the employer makes payments into a trust for the benefit of family members of selected directors, officers and employees. The directors, officers and employees themselves are excluded from all benefit.

This is an evolution from the relatively well known EBT. Since Finance Act 2003, it has been made clear that payments made by an employer “to another person to use for the provision of benefits to employees under a trust scheme and other arrangements for the benefit of persons who … include … employees are not deductible when they are made, unless they gave rise to an employment income tax charge and liability”.

In the Dextra case, the House of Lords in 2005 ruled that a contribution to an EBT, under which an employee or director could benefit, was a potential emolument if there was a realistic possibility that the sum could be used to pay emoluments. This decision, together with the legislation in 2003, made it clear that there could be no corporate deductibility without employee or director assessability when “relevant emoluments” including potential emoluments were paid, even if to a trustee.

HMRC appeared to be happy with this position but since then we have had the Sempra case. From this case, which I will consider in following articles, it seems that there may also be some disquiet over the interest-free loans that are an intrinsically important part of the structure of the EBT/FBT to deliver tax-effective benefits to the employee or their family.

What this latest case should do, at the very least, for any business considering an EBT or FBT, is serve as a warning that HMRC is not acting in any way in a benign fashion in regard to EBT/FBT arrangements and one can expect that the Sempra case will probably not be the last.

Special care may need to be taken in connection with EBTs or FBTs under which the significant shareholders in the business are the beneficiaries under the arrangement.

Next week, I will look at the detail of the Sempra case. For now I would reiterate that any adviser recommending EBTs or FBTs should liaise carefully with the company’s tax and legal advisers and ensure their clients are aware that we may not yet have seen the end of the line in respect of HMRC activity against EBTs and FBTs.


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Morgan critical of L&G reserves for defaults

JP Morgan claims that Legal & General is the UK insurer most likely to issue a profit warning and suggests it could be breaching FSA guidance by not increasing capital reserves despite poor market conditions.

Reverse gear

It was not long ago that Mervyn King was cautioning against the ravages of inflation. Now the D word – deflation – has been uttered. In case a 150 basis point cut to bring interest rates to their lowest level for more than half a century was not enough to convince you that the Bank of England governor had changed tack, his comments at last week’s launch of the quarterly inflation report demonstrated a dramatic U-turn.


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