Taxpayers who have been paid through disputed trust arrangements have been warned they may face payment demands from the UK tax authority after a settlement window closes this month.
Recent legislative changes will allow upfront tax demands to be used by HM Revenue & Customs to recover outstanding national insurance contributions, on top of income tax, that it claims are due from beneficiaries of employee benefit trusts.
The threat of these demands, known as “ accelerated payment notices”, may force the hand of taxpayers who have until March 31 to settle tax that HMRC considers due, said Dawn Register, a partner at accountants BDO.
“Individuals who have been involved in an EBT arrangement should consider the risks and benefits of using the settlement opportunity before the end of March,” she said.
The Financial Times has seen a letter that HMRC has sent to users of EBTs in which it gives a warning alongside notification of the withdrawal of the settlement opportunity. “You have a simple choice: settle with HMRC or be prepared to litigate,” the letter said.
Recipients who do not register their interest in settling by the end of this month “will lose access to the beneficial terms” that are currently on offer, the letter says. For those who register their interest, settlements must be made by July 31.
Ms Register said that taxpayers face a dilemma. “If you settle now, there is no going back, no matter what happens in future cases.” On the other hand, she said, not settling could result in more severe tax and interest — plus penalty payments — in the future.
Tina Riches, national tax partner at Smith & Williamson, said that taxpayers who access money held in EBTs could be caught under disguised remuneration rules introduced in 2010. In such instances, it may be cheaper to settle, she added.
Employee benefit trusts have typically been used by companies to remunerate their top-earning employees to save them income tax and NICs that would be payable under the Pay As You Earn (PAYE) regime.
The tax authority takes the view that such EBT structures are in breach of rules, and added them to its “Spotlights” list of arrangements that it believes amount to tax avoidance schemes in 2009.
In 2011, an initiative was launched allowing taxpayers to seek a financial settlement to resolve their liabilities. Over the past four years, users of roughly 800 schemes have used this settlement opportunity, raising around £1bn, according to HMRC. Beneficiaries of a further 5,000 or so schemes have yet to settle, however, says Ms Register.
In its “nudge” letter, HMRC warns those who do not declare their interest by March 31 that the authority “is accelerating cases to litigation, so you should expect an early request for any information we need, using appropriate powers.”
However, Ray McCann, a partner at Pinsent Masons, said that he does not think the tax authority will be able successfully to employ accelerated payment notices to collect EBT-related tax and NICs.
“HMRC has never won a case against a mainstream EBT arrangement . . . [so] there is no judicial precedent in their favour.”
Mr McCann said that legislation introduced in 2010 was designed to stamp out abusive EBT arrangements, and there are far fewer as a result. EBTs are however used for benign reasons too, he added, in particular to support employees’ families in distress.
The Revenue’s clampdown on disputed employee remuneration schemes lost momentum in February with a tribunal ruling in favour of a scheme that paid employee bonuses in shares, rather than cash, to mitigate their tax liabilities.
The successful appeal against an earlier ruling in HMRC’s favour could jeopardise the authority’s claims to £22m of unpaid tax arising from wider use of the scheme a decade ago.
The authority has also been on the wrong side of a longstanding dispute with Rangers Football Club over its use of EBTs to pay players and staff, losing the most recent appeal last summer. HMRC has said it intends to appeal.
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