Contractors' Questions: How to handle HMRC enquiry on loans from EBTs?

Contractor’s Question: Is there any general guidance for contractors who this week have been approached by the taxman relating to use of Employee Benefit Trusts (EBTs)?

I ask because one letter from HM Revenue & Customs requests details of loans received in the 2010-11 tax year, while a second HMRC letter is a tax re-assessment stating that loans received in 2008-09 should be taxed as income.

Why have these HMRC letters been issued; what are the options for the recipients and is the best course of action for affected individuals to form a group in response to challenge both the request, or/and the demand? Some believe EBT scheme providers may have handed HMRC fresh information, hence these enquiries surfacing now.

Expert’s Answer: Although we provide a specialist support system for people who are subject to investigation by HMRC, as a firm of regulated, chartered accountants we cannot advise anyone until we have formally engaged them as a client, and as such can only make general comments in response to the questions that you have posed. You should take individual professional advice before proceeding and our firm, Cobham Murphy Ltd, will not be held liable for any loss whatsoever.

Why has HMRC asked for details of loans received during 2010-11?

The answer is quite simple; HMRC believes that the loans taken from the EBT, or some entity connected to it, are no more than disguised remuneration and as such are fully taxable in the UK on recipients.

Contractors who have received a request for detailed information have two choices - send the information or ignore the request. If the request is ignored HMRC are likely to issue a Formal Notice for production of the information and if that is not complied with, then the recipient could be liable for large daily penalties until they do provide the information.

HMRC is entitled to the information as long as it relates to the individual's tax liability, which it does, so it is certain that they will get it sometime in the near future anyway. The best advice to the recipients of such a request for 2010-2011 therefore is to send the information or if they don't have it, and can't obtain it, respond to HMRC explaining why.

Why has HMRC sent tax re-assessments to EBT users dating back to 2008-09?

Once again the answer is straightforward; HMRC believes that any loans from the EBT, or any connected party, relate to earnings in the UK and as such are taxable here.

The reason for issuing assessments at this time is that HMRC’s right to asses 2008-2009 runs out in a few weeks and they are simply protecting their right to collect the 2008-2009 taxes.

How do contractors appeal?

Those contractors receiving assessments have the right to Appeal against them, and unless they accept that in their circumstances the loans are taxable they should appeal within 30 days of the date of issue of the assessment. There is normally an appeal form with an assessment and it should be completed stating the grounds for appeal. Those grounds could be that the assessment is estimated, excessive and not in accordance with the information included on their self assessment tax return.

Even if a contractor appeals, the taxes remain payable unless the contractor requests a postponement of payment until the Appeal is settled. The postponement request should be made on the form enclosed with the assessment and the grounds for requesting postponement are identical to those used on the appeal.

Has HMRC received fresh information from EBT scheme providers?

It is impossible to say, as HMRC will not reveal the source of information at all. However there is a mixture of providers – some are UK-based and some are overseas. It is more likely that UK-based providers would have to surrender information. However we are unaware of any UK-based provider who has given further information to HMRC.

The truth is that contractors will have given details of interest deducted on their tax returns and the HMRC inspector will probably know from any DOTAS notification what interest rates would be used, so it is a simple mathematical sum to compute the gross amount of the loan.

Outcomes

For contractors who used EBTs who are now in receipt of the HMRC reassessment, the best-case scenario is obviously that HMRC is persuaded that the loans are genuine and are not taxable.

However, we do not believe that a small group banding together will influence HMRC's thinking. It is certainly true that representation of a larger number of individuals can ensure that the collective voice is heard, but the signs are that the 2008/2009 issue is only likely to be settled following a Hearing before the Tax Tribunal. HMRC are likely to look for a representative case or two to take to the Tribunal and leave everyone else on the sidelines pending the outcome. Individual appellants have the right to have their own case heard but that is a time-consuming and expensive process.

Tailored, professional advice is essential

While we hope that the general guidance in this answer is helpful, we remind you that all contractors in receipt of HMRC’s EBT letters should strongly consider taking professional advice tailored to their own individual circumstances. We are able to represent contractors and other people affected, but we charge on a time-cost basis and normally require an upfront payment and invoice actual costs monthly.

The expert was chartered accountancy firm Cobham Murphy Ltd.

Editor’s Note: The comments in response to this Contractor’s Question are for general guidance purposes only. Neither ContractorUK nor the contributor accepts liability for any direct or indirect loss arising from any reliance placed on the reply.

UPDATE: This topic is being discussed heavily in the CUK forum here - if you are affected feel free to join in.

Further Reading:

Contractors' Questions: Any advice for EBT contractors under HMRC enquiry?

Contractors' Questions: What if I can't pay my EBT tax demand?

Why most EBT users haven't had to pay HMRC - yet

Thursday 14th February 2013