HMRC yet to collect £2bn in unpaid tax held in offshore trusts

AROUND £2bn in unpaid tax is awaiting collection by HM Revenue & Customs from offshore trusts used by companies to allow high-earning employees to minimise their income tax.

Internal estimates suggest that two years after establishing a settlement scheme for businesses using the trusts, less than a quarter of the amount believed to be owed has been collected by HMRC, The Times reports.

The taxman believes approximately 6,500 companies used employee benefit trusts (EBTs) as a mechanism to pay high earners, particularly in the early 2000s. EBT’s are a loan from a trust set up by a company to pay its employees. Usually the loan does not need repayment for a substantial amount of time, some even for 100 years.

HMRC estimates around £3bn in tax has been ring-fenced in this way in the schemes it has identified, arguing they are illegitimate. In 2011, it launched a programme encouraging businesses to come forward and pay outstanding income tax and national insurance, avoiding potentially lengthy litigation in the tax tribunals. Laws have since been passed banning the use of trusts to disguise remuneration.

Since the taxman’s scheme has been in place, around 500 companies have utilised it, paying some £650m in tax. Another 400 companies are in discussions, according to HMRC, with a further £300m expected.

Jason Collins, head of tax at law firm Pinsent Masons, said the remaining 5,600 businesses are reticent to engage with HMRC or take up the settlement because it is unwilling to enter negotiations.

“It’s not working particularly well. HMRC haven’t offered any carrots in the settlement offer. Most people are waiting to see whether litigation goes their way or whether HMRC offers better terms in the future,” he said.

“HMRC must be quite disappointed that of the £3bn… identified, £2bn is not even under discussion.”

One of the best-known cases in which EBTs were used is that of Rangers Football Club.

The corporate entity which formerly housed Rangers, now in liquidation, had used the scheme between 2001 and 2010 to pay £47.65m to players and staff. The arrangement was challenged by HMRC, which said it was illegal.

However, Rangers disputed the bill and a tribunal held the payments were loans that can be repaid and, as such, were not taxable. An appeal has been filed by HMRC in the upper-tier tribunal.

HMRC said in a statement:”HMRC is pleased with this progress to date and remain on target to recover substantial sums of tax for UK plc from these avoidance arrangements. Whilst we are in active discussion with 400 users we have been in contact with all known users and continue to pursue them for the tax we believe is due.

“We would have liked more people to have come forward by now but the numbers are accelerating as the benefits of settling under the EBTSO become more widely known. Clearly HMRC cannot litigate or settle all of these cases at exactly the same time so we have an ongoing programme to bring all to resolution. Our belief remains that the majority can be settled without recourse to tribunal.

“HMRC continues to receive a number of approaches for settlement discussion outside of that programme and we are moving those cases to resolution alongside our main programme of work.”

This story has been updated.