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New Settlement Terms for EBTs, EFRBS and Contractor Loan schemes

New Settlement Terms for EBTs, EFRBS and Contractor Loan schemes

If you’re an employer, employee or a contractor who’s been involved with a disguised remuneration scheme, you may have been wondering how the new tax charges treating loans as employment income on 5 April 2019 will affect you. HMRC has been thinking about it too, and this has heavily influenced their new guidance on voluntary settlements of EBTs, EFRBS and Contractor Loan schemes.

Following an embargo on settlements, HMRC has now published revised settlement terms. The announcement from HMRC comes in the wake of the Supreme Court judgment in July on what has become known as the “Murray Group Holdings”, “Rangers” or “Big Tax Case”. The new settlement policy provides welcome clarity and also some good news in relation to certain aspects of settlement where HMRC is now taking a more pragmatic view than previously. However, other aspects of the policy are less welcome and reflect HMRC’s bargaining power in the context of the 2019 legislation.

Importantly, HMRC has not committed itself to a policy of settling all cases on the basis of the decision in “Rangers” that EBT contributions were “a mere redirection of earnings”. Instead, the point at which PAYE is considered to have been triggered will be decided on the facts of each case. In practice, this will often be a choice between the time funds were contributed to an EBT or EFRBS for the benefit of most or all employees or the point when funds were appointed to a sub-trust or sub-fund. In many cases these two events are almost simultaneous. However, even in such cases the question of whether the PAYE is triggered by a real or notional payment by the employer could have a major impact on the ability of HMRC to recover tax from an individual before the new loans charge in 2019; this will be relevant in cases where the employer is not able to fund the liability.


Key points of detail for employers, employees and contractors: 

  • Firstly, there are improved terms for contractors. HMRC has given up on the idea of taxing the full amount paid to the intermediary, which means that only the net amount after fees will be taxable. Additionally, HMRC will not insist on NIC being paid where the contractor has become an employee.
  • PAYE & NIC won’t be due on contributions used to pay expenses of the trust; this is new and welcome, but the guidance doesn’t provide full details of the expenses that will be covered.
  • “Netting down” for NIC to reduce the PAYE liability is still available if this is allowed by the trust deed and provided the NIC liability is paid out of the trust fund. However, in many cases the only trust assets are loans to beneficiaries, so part-repayment of loans will be needed to generate the saving, which may not be practicable. Even if it is, the loss of corporation tax relief on the NIC expense if the employing company would otherwise have met this cost needs to be considered.
  • A corporation tax deduction will be given for the original contribution in the year of contribution only if that year is open – although in many cases the corporation tax deduction will already have been claimed and therefore becomes “guaranteed”.
  • A corporation tax deduction for promoter fees will be allowed; this is also new and welcome. Again, the CT deduction will be given for the original contribution in the year of contribution only if that year is open.
  • If no CT deduction was claimed previously on the contribution, it can be claimed in the year of settlement or the earliest open year.
  • If a Regulation 80 PAYE Determination was issued for tax at Basic Rate, the balance of tax due must be settled to prevent a 2019 loan charge, but interest won’t be charged on the top-up tax paid; this is disappointing, as we would expect the settlement to be limited to the PAYE & NIC that the employer would have been liable to account for at the time.
  • Section 222 tax charges won’t arise if the trust deed includes an obligation to reimburse the employer for PAYE and the trustee or the employee actually pays the tax. This represents a significant tightening of the policy under the previous settlement opportunity and is likely to mean that more section 222 charges will arise. However, in many cases there is no open personal tax enquiry on the employee for the year in question and this will prevent a section 222 charge.
  • It’s important to remember that if the original PAYE liability arises on a real payment by the employer (rather than a notional payment such as transfer to a subfund) and the employer pays the tax and is not reimbursed, there will be a liability for the employee under section 223. This is because section 223 charges arise in the year in which the PAYE is paid, not the year it was originally due.
  • Although not mentioned in the HMRC guidance, there is another important point on section 223. If the employer has paid PAYE under an Accelerated Payment Notice and subsequently withdraws their appeal against a Regulation 80 Determination, perhaps due to the issue of a Follower Notice or because they’re settling with HMRC, a failure to reimburse the PAYE paid under the APN will also result in a section 223 charge. Therefore, the implications of settling or withdrawing appeals need to be carefully considered.
  • Employers who have already settled with HMRC under the previous option of disclaiming the CT deduction will have to brace themselves for further liability in 2019 if any loans are outstanding; this is very unfortunate but not entirely unexpected in the context of HMRC’s objectives for the 2019 loans charge.
  • HMRC have confirmed that PAYE & NIC won’t be charged on accrued and unpaid loan interest when loans are forgiven as part of the settlement. The guidance is silent on the question of whether there will be tax for the employee under section 731 on the unpaid interest but it seems unlikely that there is any “available relevant income” to provide a benefit in these circumstances.


To describe the options as complex is an understatement; in reality there are so many variables in the mix that identifying the right course of action can be very difficult.

In cases where HMRC is out of time to collect any money before 2019 that doesn’t necessarily mean that doing something before then – whether it’s settlement with HMRC using voluntary restitution or something else – is a bad idea. In fact, the complexity of the tax legislation, HMRC policy and the fact patterns in individual cases mean it is essential to review options to identify the optimal course of action as soon as possible.

Please contact us if you’d like to explore your options.