HMRC has cracked down on companies whose directors use their EBTs for cheap loans and deferring income tax.

In the past companies have used an Employee Benefit Trust (EBT) as a method of deferring income tax for directors. The company transferred funds to the EBT which then used them to make a loan to the director, who only pays income tax on the benefit of a cheap loan. There was no section 455 CTA 2010 charge (loans to participators). This was very handy when the 50% tax rate was  looming. The downside was that EBTs  were expensive to set up and run, and so were only really useful when big sums are involved. Many EBT held sub-trusts and these can be used to benefit the directors' family too.

Changes in the rules for EBTs

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.

In the 2011 Finance Act the government introduced a new Part 7a into ITEPA 2003. Under these provisions there will be an income tax charge as soon as a third party earmarks funds for providing otherwise untaxed benefits to employees. This has decreased the advantages of using EBTs as a method for providing cheap loans. A loan is effectively treated as a salary.

In the 2013 Finance Act there are also new measures which are designed to impose a s455 CTA 2010 tax charge on a loan made to a close company participator.

EBTs are useful on a commercial basis which has almost been overlooked due to the years that persons have spent in developing them as tax avoidance vehicles. An EBT can be used to provide a market for employee shares and this becomes very difficult following the measures introduced in Part 7a ITEPA 2003. This matter is currently under consideration by the Office of Tax Simplification.