Employee Benefit Trusts | Disguised Remuneration Schemes
In this article, we will discuss Employee Benefit Trusts (EBT), explaining how EBTs have been used to implement disguised renumeration schemes, and highlight the most famous disguised remuneration scheme case involving Rangers Football Club. Additionally, we will outline HMRC’s approach to such schemes and explain how our specialist HMRC tax lawyers can assist with a HMRC tax investigation.
An Employee Benefit Trust (EBT) may take one of several formats, all of which are generally discretionary trusts. An employer normally sets up an EBT in order to reward and motivate employees by providing benefits, such as pensions, sick pay, shares or a share of profits, which may result in legitimate tax benefits.
An EBT may hold employee assets such as shares and share options and, may be used to enable high-earning employees to defer receipt of part of their income until they have retired or left the UK.
The manner in which an EBT is treated for tax purposes can be extremely complex and requires careful attention having regard to the anti-avoidance disguised remuneration rules.
Whilst there are many legitimate EBTs in operation, their basic format has often been manipulated into disguised remuneration schemes, formed solely with the intent to evade payment of the correct amount of tax, thereby amounting to an unlawful financial gain.
HMRC, with support from the courts, continues to clamp down on this form of tax avoidance. HMRC warns taxpayers contemplating involvement in such schemes, that they never work, and may result in potential fines exceeding any benefit being sought.
The prime example of the need for caution is provided by RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45 where HMRC successfully argued that contributions into the EBT were, in fact, earnings subject to PAYE which had been improperly diverted.
Hamraj Kang senior partner of KANGS comments upon this important case law.
The Case in Focus
RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45.
The History
Rangers Football Club (RFC) implemented a tax avoidance scheme between 2001/02 and 2008/09, providing renumeration to employees through an employees’ renumeration trust to avoid payment of PAYE and NIC.
HMRC raised an assessment for income tax and national insurance contributions on the sums paid as remuneration.
The Points in Issue
The issues debated were:
- Whether an employee’s remuneration, paid to a third party i.e. the Trust, is taxable as emoluments or earnings.
- The interpretation of income tax legislation regarding emoluments or earnings from employment.
- The applicability of the PAYE system to payments made to a third party, including a trustee.
The Court’s Decision
The Supreme Court upheld the previous decisions of the lower courts that tax liabilities arose on renumeration paid though the trusts.
The Court confirmed that payments through the Trust clearly contributed to the payment of an employee’s wages and the legislation determined that income tax is capable of being applied to third party payments.
It agreed with HMRC that loans made to employees under RFC’s Employee Benefit Trust loan scheme, were in fact remuneration and so subject to tax and NIC.
The Reasoning Provided by the Court in support of its Judgment.
- Income tax on emoluments or earnings is payable on money paid in return for an employee’s work.
- Statutory provisions do not require that the remuneration is paid directly to the employee.
- It is sufficient for it to be paid through a third party such as a trustee.
- The legislation seeks to tax remuneration, whether it be money or money’s worth.
- PAYE can operate efficiently where remuneration is paid to third party.
- Employment related loans amount to emoluments, as provided by statute.
How Can We Assist?
Any form of disguised remuneration scheme is going to attract the attention of HMRC which is constantly expanding and developing its procedures for quashing them.
As mentioned above, HMRC clearly emphasises that, unless compliant with the very strict and regulated framework in place, such attempts at tax avoidance simply will not work and financial penalties will be imposed.
We have emphasised above that carefully constituted and operated Employment Benefit Trusts operate quite legally and successfully.
However, these Employment Benefit Trusts will have been developed following expert legal advice. Whereas disguised remuneration schemes regularly maintain that they have been backed by legal experts, but, inevitably, this will not reflect the actual position.
HMRC investigations are stressful, complicated and daunting to any taxpayer who is faced with one. Should you be contacted by HMRC in respect to any form of tax investigation, please do not hesitate to contact our experienced team of tax lawyers at KANGS who will be delighted to assist and guide you.
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Email: info@kangssolicitors.co.uk
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