Time is running out for employers to use HMRC's Employee Benefit Trust (EBT) Settlement Opportunity (EBTSO). It ends on 31 July 2015. Advisers and their client need to act quickly and consider the consequences of not settling their liabilities now.

Many companies, including owner managed companies used an Employee Benefit Trust (EBT) as a method of deferring income tax for directors and key employees.

  • Typically funds have been advanced by way of a loan to the director/employee. 
  • The director/employee will have an annual tax charge in respect of cheap loan interest, and the employer Class 1A NICs on the benefit. These costs and the fees of trustees will mount up over the years.
  • If the directors repay the EBT and the EBT then applies those funds for the benefit of any of the employees, there is a tax charge under the Part 7A ITEPA 2003 disguised remuneration provisions.

How to settle with HMRC

There are many different types of EBT in existence and the way in which HMRC will settle depends on the trust deed and whether some of the past liabilities are time barred from assessment and outside the scope of a discovery assessment however HMRC will normally:

  • require the employer to account for PAYE and NICs on any loan advanced by the EBT to an employee as if the sum were earnings, this may also include a NICs charge where the employer has paid the tax on behalf of the employee (grossed up charge)
  • giving credit for any income tax and NICs paid on the cheap loan benefit
  • give nortional corporation tax deduction for earnings
  • make an IHT charge where the EBT was not under s86 IHTA 1981.

HMRC had given employers up until 31 March 2015 to notify them of their intention to use the EBTSO. Those who do not settle by 31 July 2015 may well receive accelerated payment notices (APNs). The use of APNs in respect of EBTs may be highly controversial depending on the terms of the EBT.

HMRC has so far been unsuccessful in litigation with the Rangers Football club over their EBTs: the courts have so far agreed that loans from the EBTs are genuine loans and not employment remuneration.

Do you require assistance or a second opinion in resolving any EBT issues for a client or yourself?

Please contact the Virtual Tax Partner ® helpline.