You cannot have failed to notice that we are living through (and are likely to continue to live through for some time to come) a period of (relative) tax austerity – in other words, tax increases. This makes the return on the time and effort spent on reducing tax potentially greater than it has been when the tax burden was lower. So, a potentially attractive return on intellectual capital expended is in the offing.
But with that dynamic at play, the corollary is that HM Revenue & Customs is upping its game to ensure that tax leakage is not such as to put a hole in their ambitious plans for increasing the tax yield.
It is a bit like the defences of the Premiership and Champions league (Rafa’s Inter excepted, of course) doing all they possibly can to stop the seemingly inexorable damage waiting to be caused by the power and unstoppable force that is Gareth Bale who, according to many sports writers, is the best or, at least, second-best player in the world and hottest property in football right now.
OK…right…so where were we? Oh yes, taxation.
So, where have we seen tax increases? Well, definitely in relation to income tax and National Insurance, and seeing that these are the fiscal impositions that most directly and regularly affect the biggest segment of UK taxpayers, it is where we also see a fair bit of interest in methods of reduction and avoidance. In relation to employee benefits (and in this category I include owner/managers of SMEs) a biggish game in town is employee benefit trusts (EBTs) and employer-financed retirement benefits schemes (EFRBS). However, HMRC also has a ticket to this game and has recently made its position a little clearer with its statement (in connection with the recent pension tax changes) that it would be looking to make EFRBS (and, presumably, all trust-based employee benefit arrangements) less attractive than other forms of remuneration.
Add to this the generally well publicised HMRC crackdown on tax avoidance and the future for these arrangements does not look as rosy as Gareth’s.
As a result, it would perhaps be unsurprising if promoters of employee benefit schemes, which seek to avoid or defer tax and National Insurance liabilities, and, in particular, trust-based employee benefit schemes, such as EFRBS and EBTs, were somewhat concerned.
The HMRC onslaught on schemes of this sort started with “Spotlight on EBTs” about a year ago, followed by a Budget note issued in Alastair Darling’s Budget in March this tear and the first Budget of the Con-Lib coalition Government in June.
The two tax planning strategies that seem to be under particular HMRC spotlight are the use of trusts to reward employees and the geared growth and employee-related securities.
As stated above, the latest announcements in relation to the tax treatment of pension arrangements make it clear that EFRBS, as well as EBTs and FBTs, will be targeted by the proposed anti-avoidance legislation from April 2011.
We are, of course, still waiting to see the shape of the proposed legislation. However, in addition to the above, there is anecdotal evidence from practitioners (for example, on one of the forums frequented by trust practitioners) that HMRC inspectors are already taking an aggressive stance towards these schemes.
Typically, there are reports of HMRC challenges via a corporation tax inspector raising an enquiry into the CT return.
In some instances, the attacks are directed towards arrangements seeking a CT deduction from outset but there have been reports of challenges even where that is not the case, that is, no deduction is being claimed.
For example, there have been reports of instances of CT inspectors raising questions about PAYE and NIC liabilities on any allocations of the fund in respect of particular beneficiaries of an EBT.
One reported case concerned a bona fide employee benefit trust run by a reputable FTSE100 company, although, in that case, HMRC was persuaded to back down. However, it illustrates the more aggressive attitude on behalf of HMRC.
Readers will remember that in the case of Sempra Metals Ltd v Commissioners of HMRC 2008, HMRC succeeded in preventing a CT deduction for payments to a family benefit trust but failed in their argument that loans to beneficiaries were subject to PAYE and NICs (albeit there is a charge linked to the interest not paid).
EBTs, FBTs and EFRBS have offered genuine and often very effective tax planning opportunities for a long time but it is clear that the Government is determined to stop the schemes that, in their view, abuse the tax system.
Tax avoidance is certainly not illegal but it is clearly not something that the Government is happy with, especially in these difficult economic times.