Employment Benefit Trusts, Tax Avoidance Schemes is something that has been on the HMRC’s radar for some time, and has included the HMRC assessing as to whether certain individuals are treated as contractors as opposed to staff members, as well as schemes set up in the incorrect manner. While on the surface, the schemes set up are legitimate, the problem lies in that many may be using certain schemes in the wrong way.
The Employee Benefit Trust is one such scheme that has been under scrutiny, and in some instances, individuals have been charged thousands in owed taxes, simply because the trust wasn’t used or setup in the correct way.
In many instances, an Employee Benefit Trust is set up by a company and is used to hold cash and other assets, such as shares. This is done to provide benefits to both staff, and their family members and is used to retain quality staff members, as well as offering incentives. The trust is then a separate entity to the company, and is usually signed off by a Board of Directors, which will include details as to why the trust was set up. However, the way in which companies were taxed when accounting for deductions made to the trust meant they were paying less corporation tax as a result. While this is completely expected, it wasn’t long before loopholes could be taken advantage of.
In some instances, companies were offering benefits from the trust, such as interest-free loans. However, it soon came to light that many loans were contractual, or were set up in such a way, that it was highly unlikely that the loan would ever be repaid at all. Something else to note in this regard is that the employee is only charged 3% tax as a Benefit in Kind, meaning that less tax was being paid in relation to NICs and income in relation to beneficiaries of the trust.
Although a loan can be issued at the discretion of the fund, it has to be offered in the right way. As such, a series of regular loans to employees would certainly be a red flag to HMRC, who would highlight such a practice as tax evasion. This could potentially mean that a company has to pay backdated Corporation Tax, as well as those receiving the loans being subjected to backdated taxes and contributions.
Am I Doing Anything Wrong?
There is no straight answer in relation to this, as a number of factors can come into play. However, the first thing you should determine is to why an Employee Benefit Trust fund was set up. Not all companies are looking to evade tax, many may have been misinformed as to what the purpose of an EBT is, and until recently, have seen no harm in using them. However, if it was set up merely to reduce tax, then it could be likely that the HMRC would ask for backdated tax. Again, this can depend on many factors, but seeking the advice of a professional and reputable accountant is advisable.
The main purpose of an EBT is to reward and incentivise employees, who in turn are keen to see the company fare well, and yield the rewards at a later date. This can include the granting of share options, or cash payments to beneficiaries. The company in charge can also hold shares in a way that a company can’t, meaning that a market can be created of unlisted shares, thus making share options attractive to those working for a particular company.
An EBT can also be used to benefit employees in other ways. For example, a company may wish to hold a social event to thank employees for their hard work, or they may have an employee that is disabled and items have to be purchased to ensure they are comfortable in their role.
The Corporation Tax will be reduced when paying into an EBT, as it is assumed that when employees receive benefits, they will be taxed accordingly. However, HMRC doesn’t have a problem with this, as its normal practice. However, it does have issues where money is being paid into an EBT, only for it to be manipulated so almost no tax is paid on the amount.
How Does My Company Ensure its EBT Fund is being used in The Right Way?
It’s hard to give a generic answer, other than ensuring it’s set up for the right reasons. However, many may have so much conflicting advice that it’s difficult to know what their current status is in relation to an EBT. Dealing with such an issue can be cumbersome and time-consuming, but not dealing with it could mean that we’re subjected to a heavy tax bill in the future if we’re not able to argue our case.
As such, the best piece of advice that can be given is to seek the services of a professional and reputable accountant in the first instance. It can be easy to undervalue the seriousness of an EBT if it’s not ran in the right way, but having a professional on side is only going to serve you well moving forward.
Regardless of whether you’re looking to set up an EBT, or you currently have an existing one, The Accountancy Solutions specialised team will be able to advise where you may owe tax, and what should be done moving forward to ensure that you’re not falling foul of the HMRC.
With so much bad news surrounding the use of EBTs, many could be dissuaded from ever investing in such a fund, but as pointed out, it simply needs to be run in the right way. However, It should also be noted that that a series of changes are planned in the way any funds from an EBT fund are taxed, simply because the HMRC feel that such schemes don’t work, and in some instances, many would be best to settle with HMRC, as it is currently looking to tax all income from an EBT as earnings. If the loans taken out in relation to an EBT are genuine, then these will have to be paid back so they can be recognised as a loan.
Evidently, there can be much confusion in relation to EBTS, and ascertaining as to what is owed. As such, if you’re in any doubt, then you should contact a professional accountant in the first instance, who will be able to advice, as well as detailing other schemes that may be more beneficial to your company’s goals.
Many contractors who have been benefit from interest free loans from EBT’s while they work as sole director and employee of their personal service company is a type of tax avoidance which has been highlighted by HMRC.
HMRC after amendment of rules in Part 7A ITEPA 2003, Schedule 2 FA 2011 had published guidance on 14th August 2014 for settlement opportunity for contractors using EBT to avoid tax liabilities before 31st July 2015. It has been withdrawn on 4th October 2016.
A new guidance has been published by HMRC on 31st August 2016 directions to settle after the expiry of Employee Benefit Trust Settlement Opportunity (EBTSO).
As HMRC with the help of its new tool software CONNECT continues to crack down on EBT and contractors using such tax avoidance schemes, our team of qualified and experienced accountants at the Accountancy Solutions will help to calculate correct amount of tax due and fight any penalties if a declaration is made to HMRC.
Time is of essence, if you want to disclose your tax liabilities and pay your taxes before HMRC writes to you, you may be eligible for low rate penalties and acceptance by HMRC.
If you have been advised wrongly in the past and you want to make a self disclosure or you have been subject to HMRC investigation including COP8 and COP9 specialist investigations please call our office now on 01216297768 for a free and confidential advice.