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Substance of the argument

This week, I will conclude my examination of the Dextra case on employee benefit trusts.

You will recall that the contributions that were the subject matter of the case were made by six group companies to an EBT. Within the trust, specific funds were allocated to six sub-trusts – one for each of three director shareholders and the wives and the mother of two of the directors (“the six&#39). All these were potential beneficiaries under the trust.

The Revenue&#39s contention was that, as payments into the trust were potential emoluments, section 43(11) Finance Act 1989 meant that the deduction for the employer should be delayed until the amounts claimed were assessed as emoluments. It also contended that the sub-funds, even though not paid out, should be taxed as a benefit in kind under section 154 ICTA 1988 because of the allocation of the payment to the sub-fund.

Finally, based on the substance over form argument seen in the Ramsay case, it was argued that the whole was an artificial tax avoidance scheme and that the trust should therefore be regarded as a sham.

Last week, I explained why the Commissioners rejected each of these arguments by the Revenue.

The Commissioners stated in respect of the Ramsay contention: “In our view, it is material that the trustee imposed some restraints on the type of investments in which allocated funds could be invested and that the trustee was not prepared to advance by way of loan the whole of an allocated fund. In order for the funds to be in the unfettered control of the six, the trustee must exercise its discretion and take the further action of appointing those funds absolutely to them as beneficiaries.

“The highest the case can be put is that the trustee is likely to comply with any reasonable request that is for the benefit of the beneficiaries, which is hardly surprising in the context of a trust established for the benefit of employees. This falls far short of saying that the trustee is a cipher who will do what it is told by the six.”

The Commissioners therefore concluded that: “Cash in the sub-fund is equivalent to cash in the individual&#39s money box if the trustee is, in a commercial sense, inevitably compelled to comply with the individual&#39s wishes, which we have found that it is not.”

So, the Inland Revenue lost on all counts and it was decided that the payments to the trust were deductible and allocations to the sub-trusts were not assessable.

The fact that loans could be made (and were made) appears to have been a key aspect of the defence to the section 43(11) argument on potential emoluments.

This decision is undoubtedly good for the users and potential users of employee benefit trusts. However, it is essential to remember that the taxpayers&#39 success was substantially founded on the finding of facts in this case.

The key to resisting Inland Revenue attacks for employee benefit trusts (under current legislation, at least) would appear to be to ensure that there is actual trustee discretion as a matter of substance as well as form.

In cases where the trust is, as a matter of fact, nothing more than a conduit for payments to employees, then the deductibility and assessability issues raised by the Inland Revenue are likely to have far greater strength.

Where, as a matter of fact (held in this case), the trustees are fully independent of the contributing employer, then the funds in the employee benefit trust are not at the disposal of the group. This would seem to render, in effect, the accounting standards referred to previously (UITF 13 and 32) inoperative.

It will be recalled that the basis of these is that the funds in an employee benefit trust remain the property of the employer/contributor until the trust incurs a liability, that is, the employee beneficiaries are informed of a forthcoming bonus payment from the trust or a payment is actually made from the trust to an employee beneficiary. This would, as a result of this case, appear to be capable of being overridden by the facts of a case.

So ends my analysis of the Dextra case. But that is certainly not the end of the story as far as employee benefit trusts are concerned, after they featured in the Chancellor&#39s pre-Budget report delivered last month. I will be looking at this shortly.


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