Taxman’s letters to EBT users ‘are hot air’

HM Revenue & Customs is writing to individuals who lowered their tax bills through Employee Benefit Trusts, asking to them to pay what it says they owe or face potential litigation, an advisor says.

According to UHY Hacker Young, HMRC claims in one letter to an affected taxpayer that £160,000 in tax is still outstanding, with the offer that settling up will see any financial penalty quashed.

Other terms of the offer, which the accountancy firm says is likely to be received in writing by thousands of taxpayers, include the prospect of being taken to court for refusing to pay the Revenue’s estimate in full.

“These letters are essentially hot air,” reflected Hacker Young partner Steve Theaker. “Several of the letters I have seen are wildly inaccurate estimates of the amounts of tax actually in dispute. HMRC could at least get the numbers right.

“HMRC is in effect saying, ‘pay all of the tax you would have paid if you had taken your loan as a bonus, and we’ll forget all about it’. But why would anyone who has entered into this form of tax planning to pay less tax do that?” 

EBTs, which date back to the 1980s, became popular in the IT and consultant sectors, for allowing employers to ring-fence cash to pay bonuses, which were taken tax-free as loans, or to buy shares on behalf of staff.

“HMRC has litigated twice on the taxability of loans from EBTs and lost on both occasions,” Mr Theaker said. “ The courts have essentially ruled that EBTs were a legitimate form of tax planning prior to HMRC’s announcement last December. HMRC seems to be pinning its hopes on judges reversing the precedent which has already been set – but why would they do that?”

As a result, “HMRC’s case is far from watertight,” the advisor said, adding: “Taxpayers should think very carefully about how they respond to these letters.

“If they chose to settle they may end up paying tax which HMRC has no legal right to. The letter actually says that if taxpayers chose to settle, but subsequent litigation finds in taxpayers’ favour, the settlement cannot be reopened.”


Further reading: EBTs - Employee Benefit Trusts

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