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HMRC Offers a Settlement Opportunity for Employee Benefit Trust Schemes

Written by Jon Cooper

As a precursor to writing to individuals who have open tax assessments resulting from their loan arrangements under Employee Benefit Trust (EBT) schemes, the HMRC have written to tax advisors outlining a Contractor Loans Settlement Opportunity.

There are three key points about this Contractor Loans Settlement Opportunity:

–              the HMRC documentation unequivocally states the deadline of 9th January 2015 is an opportunity to settle before a case relating your scheme reaches a Tribunal.  This seems to take the Follower and Accelerated Payment Notices that were legislated for in the 2014 Budget out of play for the moment.

–              the requirement, if you choose to settle, is to be ‘engaged’ with HMRC about a settlement by 9th January rather than to have settled and paid any tax due by this date.

–              this covers the tax years up to and including the 2010-11 tax year.

The HMRC are promoting a number advantages to taking this opportunity:

–              the certainly of closing this matter with HMRC in a legally binding manner that precludes HMRC seeking an additional amount from a more favourable future ruling.

–              this is restricted to the 2010-11 tax year and earlier years where there are open enquiries or assessments.  If a settlement is agreed, the HMRC will not pursue any earlier years where there is no open enquiry or assessment other than in ‘exceptional circumstances’.

–              the settlement is restricted to the Income Tax due on the amounts received as Loans (together with the resulting late payment interest) with no National Insurance due.

–              the HMRC will waive any pursuit of the individual having ‘culpability’ in relation to the operation of the EBT except in ‘exceptional circumstances’ which would exclude any penalties being applied.

The first consideration is that, although the HMRC makes reference that they ‘strongly believe’ that the arrangements of your EBT do not work, this is still a matter of opinion.  To date, there is no Tribunal ruling to validate this.

The second consideration is that there are frequent references to ‘exceptional circumstances’ where the HMRC could issue an assessment or penalty in the future without there being any indication of what these circumstances could be.  This seems to undermine their primary offer of the certainty that the matter is closed if a settlement is agreed and, therefore, this would need to be clarified in any negotiation.

The HMRC document focuses on the Philip Boyle v HMRC Tribunal ruling that they won last December. 

Whilst the similarities are highlighted insofar as Mr Boyle was an IT Contractor who had a contract of employment with an overseas employer and who was paid for his work in the UK partly through taxed salary and partly from the provisions of loans, the HMRC do acknowledge the not inconsiderable differences.

Firstly, the scheme in this case involved loans provided directly by the employer and not through a Trust.  Secondly, the repayment mechanism for these loans was purported to be through unusual foreign currencies that led to such arrangements being known as ‘soft currency loan schemes’.  One of the key reasons that the HMRC won the ruling was that no foreign currencies were actually supplied or transacted.

The HMRC argue that the principles that applied in this case of a contractor receiving loan payments from an employer abroad are relevant in all similar circumstances notwithstanding the clear differences. 

In deciding whether the Settlement Opportunity is the route that you wish to take, it is important to reiterate that this argument is an opinion that is yet to be successfully tested by HMRC.

Indeed, last month HMRC lost its appeal to the Upper Tier Tribunal against a First Tier Tribunal ruling that had essentially determined that large parts of the Employee Benefit Trust run by Rangers FC were compliant.

It is worth noting that this First Tier Ruling was issued in November 2012 and the whole process started in 2010 which gives an indication of how time-consuming and expensive the process is.  The HMRC are now seeking permission to appeal the Upper Tier Tribunal ruling to the Court of Session, so this case is far from over.

Finally, it is important to emphasize that the legally binding aspect of the Settlement Opportunity works both ways.  If you agree a settlement with HMRC and, subsequently, they fail to win a judgement that your EBT was not tax-compliant, you have no recourse to recover the tax paid as part of the settlement.

Despite all the aforementioned caveats, with the correct negotiation, the Contractor Loans Settlement Opportunity does present a chance to close this issue.

At CooperFaure, we are currently working with several clients who have ongoing open tax assessments from their EBT. 

In addition, in 2008 we helped to negotiate settlements with HMRC for clients who were under the same scheme as Mr Boyle and were facing the same dilemma as to whether or not to settle.

If you would like any further information or to discuss your circumstances, please contact us at welcome@cooperfaure.co.uk to arrange an initial free consultation.

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