After 15 years of litigation, changes in legislation, settlement opportunities, the introduction of the disguised remuneration loans charge and the forthcoming amendments to the loans charge, are we entering the final chapter on EBTs and EFRBS?
To recap, the major changes following the independent review of the loans charge in December 2019 are as follows:
• the loan charge will apply only to outstanding loans made on or after 9 December 2010
• the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where “reasonable disclosure” of the avoidance scheme use was made to HMRC and HMRC did not take action (for example, by opening an enquiry or issuing a determination of PAYE due)
• HMRC will make refunds where settlement was made by voluntary restitution and the loans in question were made before 9 December 2010
• The loans charge will not apply for loans made up to 5 April 2016 if reasonable disclosure was made to HMRC, but no enquiry was opened
• Where the loans charge will still apply, there are relaxations on time to pay arrangements and a new measure to spread the taxation of the loans charge over 3 separate tax years
• There will be no penalties charged where loans are not disclosed in 2018/19 personal tax returns
Employers and employees who have not agreed a settlement with HMRC will wish to re-examine their options in light of the report click here on the loans charge by Sir Amyas Morse published in December 2019 and the subsequent confirmation by HMRC click here of the reduced application of the loans charge.
However, as we await draft legislation to amend the loans charge some key questions remain unanswered.
Loans repaid to prevent the loans charge arising?
Some individuals have repaid their loans to prevent a tax charge arising in 2018/19 but have now found they needn’t have done so. There seems to be an inherent unfairness in this because the existing disguised remuneration legislation will create a tax charge if they re-borrow the money they have repaid. This situation is not dealt with in the report of Sir Amyas Morse, nor is it mentioned in the guidance published by HMRC but it must be hoped that action will be taken to ensure those affected will be restored to the position they would have been in if the loans charge legislation has been enacted in its final rathe than its original form.
Loans written off by trustees following voluntary restitution settlement?
It is customary following settlement of an EBT or EFRBS case with HMRC that any loans to individuals are then written off by the trustee. This prevents any ongoing liabilities to benefits in kind charges and inheritance tax. Although writing off a loan is a “relevant step” that would normally result in the amount written off being treated as employment income, the fact settlement has been made reduces the value of the relevant step by the amount already taxed and prevents a double charge to tax. However, reversal of previous settlements and refunds means that a tax credit is no longer available to prevent the tax charge that would otherwise arise from the earlier loan write-offs. HMRC’s guidance makes no reference to this issue but we hope it will be dealt with when draft legislation is published.
Settlements made without voluntary restitution but where the threat of the loans charge existed?
Many employers and individuals decided to settle in view of the loans charge when they might have otherwise decided to contest the validity of protective Regulation 80 Determinations and/or contest penalties that HMRC levied. In some cases, HMRC took the view that simply entering into an EBT or EFRBS arrangement was careless and used extended time limits to make tax assessments and to justify charging penalties. The independent report of Sir Amyas Morse makes clear that it was not careless to use EBTs and EFRBS and that it took many years of litigation for HMRC to succeed in its contention that PAYE was due in some circumstances.
Although there is no proposed legislative remedy to correct the position for those who feel they had no option to settle because of the upcoming loans charge, it may still be appropriate to re-examine the facts of their case to determine whether HMRC’s approach was reasonable and if not, to explore whether cases can be re-opened.
The comments in the Morse report about the reasonableness of using EBT and EFRBS arrangements may also be a factor to consider when the actions of directors are being questioned by liquidators and issues of potential misfeasance have been raised.
If you would like to discuss your case please contact us.