As expected for some time, HMRC recently announced its Employer Financed Retirement Benefit Schemes (EFRBS) settlement opportunity. Broadly, HMRC’s position is that a corporation tax deduction is not allowable for EFRBS contributions until a payment has been made out of the EFRBS on which PAYE & NIC has been accounted for. As an alternative, HMRC will accept corporation tax deductions that have already been claimed for EFRBS contributions if the employer company now accounts for PAYE & NIC on the full amount of the contributions.
Letters have been issued by HMRC to employers, scheme promoters and EFRBS trustees notifying them of the settlement opportunity. Employers have until 31 December to register an interest in settlement, although this does not commit them to settling with HMRC. Those who wish to settle must do so by 30 June 2014 and those wishing to settle PAYE & NIC on previous contributions must ensure all funds have left the EFRBS by that date to avoid the possibility of the funds being taxed again if they are withdrawn later.
In summary, the options given by HMRC are as follows:
- Accept that a corporation tax deduction for the EFRBS contribution is not available and the corporation tax enquiry will be closed, denying the tax relief claimed and also meaning that any later payments from the EFRBS will be taxed in the normal way as a pension; or
- Agree to settle on the basis PAYE & NIC will be accounted for on the contributions, achieving the original CT deduction and a further CT deduction in the settlement for the tax and NIC now being paid; or
- If neither settlement route is accepted, HMRC say they will issue closure notices and start preparing for litigation
Detailed FAQs have been published by HMRC as there are many complex issues that have to be considered as a result of unwinding EFRBS. These issues include secondary income tax charges on investment income within the EFRBS, the fact that capital gains tax will not arise if the PAYE settlement route is taken and the question of inheritance tax exit charges on funds leaving the trusts.
Interestingly, the question of outstanding loans to beneficiaries and how they will be dealt with if settlement is made on the basis of accounting for PAYE & NIC on the contributions is not specifically dealt with in the FAQs.
However, from discussions with HMRC we understand that if PAYE & NIC is accounted for on the contributions to the EFRBS HMRC will not consider that any further charge to tax arises on the release or writing off of a loan by the trustees if they agree to such a write off.
If funds are extracted from an EFRBS following settlement of PAYE & NIC with HMRC and distributed to beneficiaries the only further tax charge should be on the beneficiaries in respect of investment income earned in the EFRBS. If the EFRBS has paid UK tax on the investment income it may be possible for any tax otherwise payable by the beneficiaries to be offset by tax already paid by the EFRBS.
In contrast to investment income, no further tax charges should arise on the distribution of the proceeds of chargeable gains made by the EFRBS following settlement with HMRC using the PAYE route.
If a company settles PAYE relating to an individual and is not reimbursed by that individual there is normally a benefit in kind charge on the individual. The benefit is charged on the amount of tax they have not had to pay personally. However, depending on the terms of the EFRBS trust deed, it may be possible to avoid this secondary tax charge with the agreement of HMRC.
Of course, any plans to account for PAYE and extract funds from an EFRBS must be discussed and agreed in advance with the trustees. The worst of all positions would be to settle a large amount of tax only to find that the trustees are unable to release funds and allow the trust to be wound up.
We are helping a number of companies explore their options in relation to the settlement offer and if you would like to discuss the terms of the expected settlement offer or any issues associated with this, please contact us.