In 2017 the General Anti-Abuse Rule advisory panel (GAP) gave its first four opinions; it has now released its fifth opinion in respect of employee reward schemes giving HMRC a 100% success rate before the GAP.
The GAAR is structured in the form of a “double-reasonable test”:
- It only bites if the arrangements “cannot reasonably be regarded as a reasonable course of action”.
- Where the GAAR does apply, Penalties of up to 60% of the counteracted tax can be levied over and above any penalties due under the normal rules but only apply to transactions entered into after 15 September 2016.
The scheme being reviewed this time was a 2013 Employer Financed Retirement Benefits scheme (“EFRBS”) which used multiple tripartite arrangements:
- The employer company entered into deeds of covenant under which it agreed to pay fixed amounts to the trustees to be held for its own benefit
- The EFRBS was set up with sub-funds for individual employees and their families and the benefit of the deeds was transferred to the sub-funds
- The level of employee rewards was determined and allocated between the particular employees with sub-funds
- A series of tripartite agreements was entered into involving:
- The employer company
- The trustees of the EFRBS
- A BVI limited company
- The individual employees being rewarded
- The end result of this was that the employee received the fixed amounts from the employing company and was left with a loan due to the EFRBS which was non interest bearing and for a term of 20 years. A small amount (1%) of the total received was treated as earnings and taxed under PAYE accordingly.
HMRC considered that these loans would not be repaid and argued that the employer company:
- Sought to avoid a section 62 ITEPA 2003 remuneration charge and a Part 7A ITEPA 2003 Disguised Remuneration charge (and the associated PAYE charges) and
- The scheme of the legislation for deductions for remuneration and employee rewards and benefits only allows a deduction to the extent, and at the time, a corresponding benefit is charged to income tax.
The company argued that there should be no earnings charge as:
- The amounts were not remuneration
- The requirements of part 7A had not been met
and that a full deduction should be allowed for the total amount contributed to the EFRBS as the small amount which was taxable on the employees meant the entire contribution satisfied the restrictive employee benefits deductibility rules.
The panel considered that the steps taken were abnormal and contrived saying:
“We can see no reason, other than for tax purposes, for the steps involving the EFRB to include the creation of a complex web of undertakings to pay, assignments of benefits of undertakings, and releases of obligations to pay so as to provide funding to the EFRB and money to the employees”.
It found that:
- A comparable straightforward transaction would have been taxable under Part 7A
- The scheme sought to exploit a perceived shortcoming in the part 7A rules
- It was inconceivable Parliament intended the contrived arrangements in this case to fall outside of the Part 7A charge.
- The entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions;and
- The carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
Throughout their opinion the GAP referred to “keep off the grass” anti-avoidance legislation such as Part 7A and specific TAAR’s, as well as considering the economic and commercial outcome of the transactions undertaken, and the intention of parliament and comparable commercial transactions.
In respect of this opinion HMRC may now issue pooling notices to apply the opinion to all users of this scheme and provisional counteraction notices (within normal assessment time limits) notifying adjustments to be made to protect against the loss of tax.
UPDATE: In March and June 2018 two further opinions were released in connection with EFRBS planning schemes involving tripartite agreements and again the schemes failed the double reasonableness test and were found to be abusive.
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