Some of the most important consequences of the decision for companies which have used EBTs as part of their remuneration arrangements for employees and directors will be that;
In RFC, when a Group company wished to benefit an employee, it made a payment to a Remuneration Trust (the “Principal Trust”). Upon payment, the employer asked the Trustee to resettle the sum onto a sub-trust and requested that those funds be applied in accordance with the employee’s wishes. Invariably, the sub-trusts then made loans to employees (“the trust arrangements”). It was contended on behalf of RFC, that as the payments made to the employees were loans, employment income or PAYE liabilities did not arise from the trust arrangements and both the First Tier and Upper Tax Tribunals accepted that contention. However, in an appeal to the Court of Session, HMRC was successful on the basis of a new argument, that contributions to the Principal Trust were a component of the footballer’s remuneration and were, therefore, simply a “redirection of earnings” subject to employment income tax and PAYE liabilities.
The central issue in the appeal to the Supreme Court was whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for their work in order for the payment (of remuneration ) to amount to taxable emoluments.
Several key points emerge from the judgment;
Some of the potential consequences of the Supreme Court decision in RFC which are likely to apply to both EBTs and EFRBS are considered below.
Follower Notices from HMRC can now be expected in open enquiry cases into arrangements by companies involving contributions to EBTs and, potentially, also EFRBS. The issue of a Follower Notice (“FN”) will, in effect, result in closure of HMRC’s enquiry with the risk of penalties if the previously disputed tax and NICs are not paid within 90 days of the FN.
Employees will need to reclaim tax paid on any interest-free loans from an EBT, although the normal 4 year time limits will apply to such claims and, the proposed April 2019 employment tax charge on outstanding loans from EBTs should now only affect those cases which are not subject to a FN based on the RFC decision.
If, following receipt of a FN, an employer pays the PAYE liability of a director, such payment will be treated as a benefit in kind of the director unless the director reimburses the employer for that liability.
It is our understanding that many companies with EBT arrangements will not have sufficient net assets to meet all of the PAYE and NIC liabilities in respect of contributions which they made many years ago and, in some cases, the employer company may no longer exist. In this respect, it is important to understand that HMRC can only transfer PAYE liabilities from an employer to an employee in limited circumstances.
In light of the Supreme Court decision, HMRC will now be looking to close the vast majority of its long-running enquiries into EBT arrangements and to collect all of the underlying PAYE and NIC liabilities. It will, in our view, be critically important for any company affected by the decision and which now faces significant financial liabilities to take appropriate professional advice in order, wherever possible, to mitigate the effect of those liabilities.
If you or any of your clients are affected by the decision and would like to discuss any EBT or EFRBS arrangements in advance of receiving a FN and/or closure notice from HMRC, please contact us.