AS THE NATION contended with a blast of Siberian snow and politicians uniformly lined up to condemn Stephen Hester’s bonus and Fred Goodwin’s knighthood, an EBT was a meaningless three letter acronym to all but high earners and their advisers.
Then, Glasgow Rangers football club, one of the biggest and most historic clubs in Britain, announced its administration and potential liquidation following an HMRC investigation into its use of Employee Benefit Trusts (EBTs). Overnight the previously anonymous three letter acronym was the subject of trade publications, football radio shows and Sunday supplements.
But what’s the background to this apparent overnight sensation and what does it mean for businesses and their tax planning?
For years it had been acceptable tax planning for corporate employers to structure remuneration arrangements with their employees in a manner which involved a trust, hence the name “Employee Benefit Trust”. Under these arrangements, the income tax and NIC liability on income could be deferred until some future date when the trust would make distributions to employee beneficiaries. The trust was also able to make loans to employees from time to time without any adverse tax consequences.
However, HMRC became unhappy with these arrangements when it emerged that many of these structures resulted in little or no tax being paid into the Revenue’s coffers. As a consequence, new legislation was introduced, with effect from April 2011, to block the use of EBTs. But, not satisfied with ending future arrangements and taking advantage of the wave of public discontent towards City high earners, tax inspectors now also appear to be focussed on historical tax planning. They are investigating EBT structures set up prior to the 2011 legislation, to review their intent and use.
This retrospective approach is worrisome as historical planning which was always considered to be legitimate is now challenged as being unlawful. The impact has created a lack of certainty and faith in the tax regime.
But, it’s not just footballers who are in the firing line. Many City earners are likely to be beneficiaries under an EBT – so the potential implications for HMRC’s aggressive pursuit are considerable. It could be a painful and costly exercise for all concerned.
So what does this mean for UK companies, particularly in the financial sector? Records and documentation should be carefully maintained. While the tax authorities suggest they are open to constructive engagement with a view to resolve the matter, the Rangers case may not be the only one to be litigated. We believe there are at least another 280 EBT’s currently being investigated by HMRC and it is expected more will follow.
Put in this context, the tax arrangements of a Scottish football team are just a drop in the ocean, but their fate is nonetheless anxiously awaited by employers across the UK.
Liesl Fichardt, is a contentious tax partner at Berwin Leighton Paisner.
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