This week, I turn my attention to what have been (until recently at least) apparently increasingly well used forms of employee benefit – the employee benefit trust (EBTs) and the employer-sponsored retirement benefits scheme (EFRBSs).
The tax loss estimated by HM Revenue and Customs from the use of these schemes is up to £500m a year which, of course, equates to the estimated saving if the schemes are stopped.
Since the announcement of the anti-forestalling provisions in relation to disguised remuneration on December 9, 2010, it has been clear that HMRC was “extremely unhappy” with the growing avoidance of tax, NICs and, in its view, the pension input limitations facilitated by earmarked EFRBSs and EBTs.
Essentially, these trust-based arrangements permit specific employees and directors to have access to benefits earmarked for them but without triggering (much of) a tax charge.
In many cases, this would be done through an interest-free loan from the trust where the only taxable benefit was the interest not paid on the loan each year – which would typically be minimal.
Aside from the clearly confrontational loan arrangements in relation to trust arrangements (EFRBS/ EBT) the earmarking of benefits for a particular beneficiary (employee/ director) was also not high on HMRC’s most-loved strategies list. Now we have the legislation in this year’s Finance Bill, that is clear. As indicated above, it is estimated the savings in tax loss for the Government could be up to £500m a year.
There is, however, a major concern that some innocent arrangements could be caught by the disguised remuneration provisions.
It is understood it is not the Government’s intention that the legislation should catch the operation of ordinary share plans, regardless of whether or how they are funded. The drafting of the provisions does not, however, make this entirely clear and this point has been well made by those making representations.
As drafted, it seems that the following are definitely excluded from the disguised remuneration provisions:
- HMRC-approved share schemes;
- restricted securities where no income tax arises because the securities are forfeitable within five years; and
- employment-related securities options where no income tax charge arises on the acquisition of those options.
Many are of the view that these exceptions should be extended.
Employer contributions to EFRBSs and EBTs with earmarked benefits would appear to be caught by the new rules. However, given the perceived exploitation of these schemes in the eyes of HMRC this is hardly surprising.
Unfunded unapproved retirement benefits schemes (UURBS) would appear to escape the disguised remuneration rules but not if the benefits are effectively asset backed (or hedged).
The mere making of a provision in its accounts for the liability under the UURBS would not appear to trigger a liability though.
The financial services advice sector has, understandably, shown most interest in ensuring that ordinary tax-effective arrangements, such as registered pensions and approved share schemes, are not caught and in understanding the impact on EFRBSs and EBTs.
Well, for post-April 5, 2011 schemes that are based on earmarking or loans (or both), they seem to be squarely caught. This will mean the tax (and NICs) charge will arise, broadly, when the payment is made to the trust by the employer or, if not taxed at that point, which it normally would be, when a loan is made. So how about arrangements set up between December 9, 2010 and April 5, 2011?
Well, the tax will be due under PAYE on April 6, 2012 unless the benefit or loan is repaid before that time.
And just because a scheme was set up before the anti-forestalling provisions were announced does not mean that it is beyond HMRC challenge based on the law as it was before the new provisions were introduced – to put the position beyond doubt.
The nature of the legislation on disguised remuneration (“everything is caught except for the exceptions”) makes it inevitable that some transactions/ arrangements that should not be caught are caught.
Although the disguised remuneration legislation may not be seen as core by financial advisers, its provisions touch much of what many business clients will see as important.
Familiarity with how the new legislation works, together with a good understanding of what is caught and what isn’t, is therefore a must for all advisers with business and employee-benefitrequiring clients.