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They think it’s all over

…it is now, says NIGEL HOLMES, unless HMRC appeal against the Upper Tribunal’s decision against them on employee benefit trusts.

On 8 July 2014, the Upper Tribunal published its ruling in relation to the Murray Group Holdings case ([2014] UKUT 0292(TCC)) and its employee benefit trust (EBT) transactions. Most of us know this as the Glasgow Rangers case and, although some matters were referred back to the First-tier Tribunal, the judges ruled again in favour of the taxpayer.

This article is not intended to be a technical analysis of the case, but rather a look at “what now?” for HMRC and a consideration of the less provocative EBTs often referred to as “vanilla EBTs” or “EBT-lite”. I co-wrote an article “Cunning disguise” (Taxation, 8 September 2011, page 18) that looked at EBTs after the disguised remuneration provisions of ITEPA 2003, Part 7A and most if not all of that article is still relevant today.

A brief summary

To quickly recap, in the Glasgow Rangers case, HMRC considered that the appointment of EBT funds on to a sub-fund or sub-trust for the benefit of a particular employee and/or their family gave rise to a PAYE charge. HMRC were also of the opinion that loans provided from these sub-funds were not loans, but were akin to a bonus available without any chance of repayment and, therefore, again subject to PAYE. These points have, of course, been challenged unsuccessfully before in the cases of Dextra Accessories ([2005] STC 1111) and Sempra Metals ([2007] STC 1559), yet HMRC continue to put forward this argument. Tax planning has received very one-sided press coverage of late, with many well-known companies and individuals named and shamed publicly. The “Man on the London Underground”, as he now seems to be known, appears to agree with the comments of public accounts committee chair Margaret Hodge and the wider press coverage. However, if the full facts were made available to him, I wonder whether this same man would agree with HMRC that it is acceptable to apply new legislation retrospectively?

ITEPA 2003, Part 7A was introduced from 6 April 2011. Among other factors, it now:

  • creates a PAYE and National Insurance contributions charge on “earmarking”, ie setting aside funds for a particular employee, such as using a sub-fund or sub-trust; and
  • taxes in full, to PAYE and National Insurance contributions, with no repayment facility for this charge, any loan provided by an entity such as an EBT.

Consequently, the rules are now there, so why do HMRC still challenge these older situations that predate Part 7A when, as I will show below, the legislation and guidance at that time was clear and HMRC continue to be defeated on the matter accordingly? In the remainder of this article I presume that these less provocative EBTs follow the tax legislation as the taxpayer understood it before 2011.

Corporation tax

The Dextra Accessories case, closely followed by FA 2003, Sch 24, established that the founder company of an EBT can only obtain corporation tax relief when the EBT makes a distribution that gives rise to an income tax and NIC charge, known as a qualifying benefit, and this specifically excludes loans. Consequently, from the 2003 legislation it is clear to me that HMRC never intended for an EBT loan to give rise to a full PAYE charge, otherwise they could have made this change when they introduced Sch 24.

Because many EBTs will have provided loans to either employees or family members, the corporation tax relief has not kicked in and, therefore, HMRC has received additional corporation tax of anywhere between 19% and 30%, being the rates applicable between 2003 and 2011.

Loans and benefits in kind

If HMRC did not consider a loan to be an outright payment that would trigger the corporation tax relief, what was it? Despite HMRC’s Spotlight 5, issued not long before Part 7A expressing their views on EBTs, in my opinion the department’s own manuals make the matter clear. The Employment Income Manual at EIM26110 states that HMRC consider a loan made by an EBT to be caught by the beneficial loan rules in ITEPA 2003, s 173(2)(b) because the trust has facilitated the loan. This makes sense and, indeed, many of the EBTs I have seen have provided loans where a beneficial loan benefit in kind has been declared year on year. Of course, some loans may not give rise to such a charge, including:

  • loans where interest in excess of the official rate of interest is charged;
  • loans provided for a qualifying purpose – following HMRC’s line of thought that, if EBT loans fall into the loan rules of ITEPA 2003, the exemptions are available too; and
  • post-employment loans.

So, assuming the recipient is a higher-rate taxpayer and the loan is a benefit in kind, HMRC will collect 1.6% of the outstanding balance each year (1.3% from 6 April 2014) until the loan is repaid. Furthermore, there will be the Class 1A NIC, less the associated corporation tax relief, in addition to this. This can add up to a substantial amount and it is possible that over many years the tax collected could exceed that collected by way of an upfront charge.

Inheritance tax

Another line of enquiry HMRC take is whether the contribution by the founder company gives rise to an inheritance tax charge as a chargeable lifetime transfer. In the past, there was reliance on IHTA 1984, s 12 because the corporation tax relief also provided inheritance tax relief. FA 2003, Sch 24 saw to that. IHTA 1984, s 13 requires participators to be excluded from benefiting which is unlikely in the case of most EBTs set up by small and medium-sized enterprises.

Trading companies can use the arguments put forward in the Nelson Dance case ([2009] STC 802) to ensure that the contribution is made by a company whose shares would attract business property relief, although investment companies cannot apply this possible argument.

We have advanced this argument on a number of cases and generally, after reviewing the company’s position, HMRC do concede that the relief is available. To date, I have not seen the department argue that the cash invested must be somehow “excess” to the business requirements and, if such an argument were to be raised, I would suggest resisting it strongly. These funds came from a trade and were used as part of the working capital of a trading business.

ITEPA 2003, Part 7A

So, after believing that they have got the tax position correct, denying corporation tax relief, taxing loans, perhaps paying inheritance tax or at least using nil-rate bands, those with EBTs still have a further problem: applying Part 7A for transactions that happen now and in the future. EBTs can no longer provide loans, nor earmark funds, without a PAYE charge. Therefore, many EBTs and related sub-funds have cash and other assets locked in the trust and face a tax problem in extracting the funds. Repaying outstanding loans makes no sense because that will merely exacerbate the problem.

Although there may be some options to assist here, such as writing off pre-Part 7A loans on death without triggering an income tax charge or repaying a loan with a non-cash asset, many find the problems they are in now of more concern. One solution is to pay the income tax and then invest the cash extracted into tax-efficient investments such as an enterprise investment scheme (EIS) or venture capital trust (VCT). However, the recent consultation on these may cause the risk profile of some of these investments to shift, so this course of action should perhaps be taken sooner rather than later.

The EBT settlement opportunity

HMRC may suggest the EBT settlement opportunity at this point. It is my experience that the SME market which has established these types of EBT structures sees no incentive to do this and would rather carry on with the EBT in its present structure and the problems that may bring further down the line. Further, the term “settlement opportunity” when explained to clients is seen as nothing such. There seems to be little incentive or “carrot” to follow this route and clients would rather not settle and pay tax now when tax law is on their side.

What now for HMRC?

I would hope that HMRC concede defeat on the Murray Group Holdings case and not appeal, although I would anticipate they will not. However, before they appeal in haste I do hope they consider various issues. By not appealing, HMRC will be able to:

  • keep the corporation tax as a result of denying relief as above;
  • keep all income tax and Class 1A National Insurance contributions collected from EBT loans;
  • review the inheritance tax position of each EBT;
  • monitor EBTs to ensure that they conform with Part 7A for all future transactions; and
  • concentrate their finite resources on other areas such as EBTs and similar structures formed after Part 7A was enacted and the DOTAS elements of the more provocative EBTs. I am sure HMRC will not listen to me, nor apply some common sense, but it would be good, for once, if they knew when enough was enough and they moved on to other things. Only time will tell, but we will know soon.

Hopefully, the Glasgow Rangers case will not go to extra time, and let’s not even mention penalties; it is time to blow the final whistle and concentrate on the next game.

Nigel Holmes is a tax partner and can be contacted by email at: or telephone: 01228 690200.

This article was first published in Taxation magazine.

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