HMRC is cracking down on companies whose directors use their EBTs for cheap loans and deferring income tax.
A company can use an Employee Benefit Trust (EBT) as a method of deferring income tax for directors. The company transfers funds to the EBT which then uses them to make a loan to the director, who only pays income tax on the benefit of a cheap loan. There is no section 419 Income Taxes Act 1988 charge either. This is very handy when the 50% tax rate is looming, but EBTs are hardly inexpensive to set up and run, and so are only really useful when big sums are involved. When they are used the EBT can hold sub-trusts and these can be used to benefit the directors' family too.
Following the Dextra case in 2002, HMRC changed the rules which goven EBTS so that a company does not get a corporation tax deduction for its contribution into an EBT, until the EBT applies the funds as taxable earnings for an employee, which are correspondingly subject to PAYE and NICs. This has not prevented EBTs making cheap loans though.
HMRC is now pursuing a policy where it will treat any contribution made by a close company to its EBT which benefits the participators of a close company as a transfer of value for Inheritance Tax purposes. The result is a tax charge on the company. To achieve this, HMRC also has to argue that none of the exemptions in section 10 to 13 IHTA 1984 apply. This is where the fun starts! We will need a court case to decide this, I am sure.
Tax aspects of how the transfer of value rules affect close companies is fund in the Practical Tax Guide to close companies (Part 4).
HMRC's versions of events is here:
Join us on LinkedIn 
