Investment banks are bracing themselves for an assault from the taxman on
employee benefit trusts, used to allow them to avoid tax when paying huge
bonuses to City bankers.
Following a crucial legal decision last week, tax advisers said the City will
be the next target for Revenue & Customs, which is attempting to recoup
hundreds of millions of pounds in unpaid tax from the schemes.
The trusts, which are a convenient way for private companies to provide share
schemes for employees, have been used in ways that the Revenue regards as
abusive tax avoidance.
HMRC won a crucial case last week, when the Lords ruled in favour of the
Revenue over a scheme used by Dextra, part of the Caudwell Group.
Though the scheme has crucial differences with those used by investment
banks, tax advisers are predicting that the government’s success will encourage
the Revenue to cast its net further afield.
In the Dextra case, the company had made contributions to a £20m fund, which
was then used to provide benefits to employees such as loans.
The court ruled that the benefits were ‘potential emoluments’, and thus they
could not be set off against Dextra’s corporation tax bill.
The Revenue disclosed this week that it had set up a group to recover
corporation tax losses as a resultof similar schemes, within the Revenue’s
anti-avoidance unit under Chris Tailby.
There are also hundreds of other cases involving EBTs that have been held up
pending the decision. Eric Williams of Grant Thornton predicted a ‘long legal
battle’ over the schemes.
The investment banks’ EBTs were commonly structured in a different way.
Instead of paying ‘potential emoluments’ such as loans, they were used to award
shares in the EBT, ‘actual emoluments’.
Cash was then paid out as a dividend, attracting lower tax rates for both
employee and employer, and relief against corporation tax claimed.
The government is likely to pick a test case, Williams indicated, though with
whom and over what it is unclear.
EBT planning has long angered the Revenue, which has launched successive
attempts in recent years to rule out avoidance associated with them. Tax
advisers from Deloitte suggested there were ‘hundreds of millions’ of pounds
Dave Hartnett, HMRC director general, described the Dextra decision as
‘significant’. He said: ‘It confirms HMRC’s approach to the tax treatment of
those companies that transfer money to employee benefit trusts in an attempt to
reduce what they have to pay in corporation tax.’
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