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Game of two halves

Nigel Holmes considers the decision of the Court of Session on employment benefit trusts.

In my article “They think it’s all over” (Taxation, 31 July 2014, page 14) I wished that HMRC would not appeal the Upper Tribunal’s decision in Murray Group Holdings Limited (and other companies) UKUT 0292 (TCC) but would concentrate on policing the complex legislation in ITEPA 2003, Part 7A. As is now common knowledge, not only did HMRC appeal but the Court of Session has now published its decision, which found for HMRC.

This case has received much publicity, not only because of the interest in employee benefit trusts (EBTs), given the number of companies and individuals who may be affected by this decision, but also due to the fact that one of respondent companies was Rangers Football Club (as it was then).

My article does not consider the impact on the beautiful game or further repercussions on the current Rangers FC team. (To do so would result in me never being invited back to our Dumfries office in which there are many fans of the team.) Of course, the taxpayers won at both First-tier and Upper

Tribunals and, since this case is so closely linked to football, surely the score stands at 2-1 (if only). Although it would appear that an away goal in the Court of Session counts double, it is hoped that the case will go to a penalty shoot-out at the Supreme Court. However, at the time of writing there has been no definite confirmation of an appeal.

What’s next for EBTs?

I will not to go into vast detail of the technical issues of the case itself, but rather look at what is next for EBTs and those with a financial interest in them.  Many of the comments made in my previous article referred to above and my article “Cunning disguise” (Taxation, 7 September 2011, page 18) remain.

To summarise the case, HMRC have argued successfully that a PAYE liability arises when funds are set aside in an EBT for employees. In other words, this is very much akin to the earmarking provisions of Part 7A legislation published in 2010. In the case of the non-playing staff, the amounts were seen as a replacement for the discretionary bonuses paid in the past. However, for the footballers, the amounts formed part of their contractual terms by way of a side-letter agreement.

To the layman, and indeed to those educated in tax, it is expected that new tax laws are introduced to change the laws already there. The outcome of Murray Group Holdings closely reflects Part 7A legislation and contradicts HMRC’s own guidance on EBT transactions. For example, Employment Income Manual at EIM26110 still states that loans made by EBTs pre-Part 7A are a benefit in kind and loans made within Part 7A are taxed in full.

It is interesting to note that the respondents raised the Part 7A issue in that they had pointed out future transactions would be caught and HMRC had taken the steps to deal with this exact matter going forward. It is also interesting to note the outcome refers specifically to the fact that there will be no double charge to income tax, just like para 59 offers in Part 7A.


  • „„The Court of Session rules in favour of HMRC in the Murray Group Holdings case.
  • „„The decision contradicts HMRC’s guidance in the Employment Income Manual at EIM26110.
  • „„Advice for those who have missed the employment benefit trust settlement opportunity.
  • „„Inheritance tax exemption in IHTA 1984, s 65(5)(b) and s 70(3)(b) are not offered where an EBT transaction is taxed as income at an earlier date.
  • „„Repaying a loan to an EBT may give rise to a Part 7A charge on a future loan.

Impact on EBTs under enquiry

There are some who will have settled their EBT affairs under the settlement opportunity (EBTSO) which recently ended. My earlier article dismissed the EBTSO although since then we advised a number of our EBT clients to use it to settle their affairs. This was because the settlement figures being offered by HMRC were more favourable than originally set out, and I have to acknowledge how helpful the HMRC EBTSO inspectors were in reaching a suitable settlement for our clients. However, there will be far more who have not settled, and the opportunity has now passed with HMRC in the ascendancy due to their “away goal”, or win, at the Court of Session.

What now for those who have not settled?

First, undoubtedly there will be many who have entered into EBT arrangements and there is no open enquiry. This is particularly likely to be the case with “vanilla EBTs” where no application under the disclosure of tax avoidance scheme (DOTAS) rules was felt to be necessary.

HMRC may try to raise discovery assessments. Given that I would expect most vanilla EBTs to have been formed before 9 December 2010 (when Part 7A was published), there will be few cases in which the four-year window for discovery remains. Note, though, that there is the six year rule under which any incomplete disclosure could be deemed as careless.

So can these taxpayers rest easy? Yes, to a degree. They still need to consider the complex Part 7A legislation for all future transactions and may, indeed, face a larger tax liability if steps are taken to distribute EBT funds or write off loans already provided that are giving rise to an ongoing benefit in kind charge.

There will be many open enquiry cases that did not settle under EBTSO and these will now be high on HMRC’s radar. Even before the Murray Group Holdings decision, HMRC had already indicated that they would look to settle outstanding EBT cases using litigation if necessary.

Accelerated payment notices

To make matters worse, those in EBT arrangements registered under DOTAS can expect an accelerated payment notice (APN) to land on their doormat soon and, as readers will be aware, there is no right of appeal against them. Therefore, even if the desired outcome is to await a Supreme Court decision, if there is to be an appeal, there will be the substantial cash flow disadvantage of having to settle the APN. There will also be some taxpayers who wish they had settled under EBTSO or would have done so but could not afford to.

For those who do wish to close the enquiry now and avoid an APN or litigation, I would urge them to contact HMRC and aim to reach an agreement. EBTSO may be closed, but I would hope HMRC would still prefer to settle out of court to enable a satisfactory outcome to be reached.

As a reminder of the outcome that HMRC will be seeking; they will want to subject the funds allocated to an employee or their family to income tax and class 1 National Insurance (employee and employer) contributions. Corporation tax relief should be available thereon if not claimed already. Some trusts contain powers to allow the trustees to meet their taxation obligations. If this is the case and cash is “trapped” in the EBT it could be used to pay any tax due and ease cash-flow for the taxpayer.

Inheritance tax implications

Inheritance tax often overlooked in these circumstances. Most EBTs will be discretionary trusts and, therefore, will be subject to entry charges, ten-year charges and exit charges if reliefs are not available. This would be the case when funds leave an EBT that is protected under IHTA 1984, s 86 and pass into a sub trust for an employee’s family.

Entry charges are covered in detail in the “Cunning disguise” article. For exit charges, IHTA 1984, s 65(5)(b) and s 70(3) (b) both offer exemptions if the payment made by the trust is or will be income for the purposes of income tax. However, these exemptions are not being offered by HMRC if an EBT transaction is taxed as income at an earlier date – say on earmarking on to sub-trust or loaned to an employee. HMRC seek exit charges when loans are written-off or funds distributed, as a result of settling the income tax based on an earlier trigger point. Most taxpayers will want to write off such loans or have the funds absolutely once the tax has been paid thereon.

This strict interpretation of the inheritance tax clauses is a bitter pill to swallow and does not align with the current income tax stance on EBTs. Nor, surely, does it enter into the spirit of why these exemptions exist: to ensure an amount is not taxed twice, once to income tax and once to inheritance tax. We are in correspondence with HMRC on this matter.

Possible income tax reductions

Taxpayers facing an income tax charge may seek to reduce it. One possibility is to use cash distributed and charged to make employee pension contributions or make qualifying investments that offer income tax relief, such as the enterprise investment scheme. For existing loans from EBTs, there are various matters to consider. First, a taxpayer would be ill-advised to repay a loan to an EBT because to extract it later would give rise to a Part 7A charge on a future loan. This is because the loan is taxed in full as income and there is no tax repayment mechanism if the loan is subsequently repaid. If loans are giving rise to an ongoing benefit in kind charge this will end on ceasing employment. Although such a change in circumstances no longer makes it a taxable cheap loan, it will still be an employment-related loan and would be taxed if written off in the future, disregarding employment status, unless written off on death.

Loans provided after an employment ceased, but before Part 7A was introduced, should not, if structured correctly, be an employment-related loan. Some EBTs provided employment-related loans that were not subjected to a benefit in kind charge as a result of the loan being for a qualifying purpose, such as to buy property to rent out. It will be interesting to see the impact of the F(No2)A 2015, s 24, which restricts the finance costs for landlords with regard to such loans.


Whether or not an appeal takes place, the Murray Group Holdings outcome is extremely disappointing and concerning for those with open enquiries into EBTs. Further, there are many other issues to consider by those who consider themselves in a safer place regarding their EBTs, such as accessing the funds or dealing with loans in place. So my wish is this: that common sense prevails in any appeal and the Murray Group Holdings decision is overturned in a late penalty shoot-out.

This article was published in Taxation magazine on 3 December 2015.

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