Contractors’ Questions: Who’s caught by the EBT legislation?
Contractor’s Question: I’ve read that users of Employment Benefit Trusts– whether a director or an employee of an EBT – are caught by new anti-avoidance legislation. But who and what exactly is caught by the new regulations and what is the likely consequence for existing and new scheme users, or so-called ‘investee’ companies?
Expert’s Answer: Firstly, you ask what's caught by the anti-avoidance rules. A PAYE charge will be triggered if any third party (typically an employee benefit trust - EBT, established by an employer):
- "earmarks" any asset or cash for; or
- pays any sum (including by way of loan) to; or
- makes any asset available to...
...any employee or director, or anyone "linked" to them. And this includes former or prospective employees, so you can't get around the anti-avoidance legislation by having someone resign, and then re-appoint them later.
Typical schemes caught by the new rules include:
- loans made by EBTs to employees which are never repaid; and
- the creation of so-called "family trusts", under which cash or assets are placed into a sub-trust solely for the benefit of a named employee and his or her family members.
For example, under the new rules if an EBT makes a loan to an employee, a PAYE liability will, in most circumstances, arise on the full amount loaned – at the time the loan is first made (irrespective of whether or not the loan is later repaid). Or, if cash or shares are placed into a trust for the benefit of a named employee and dependents, a PAYE charge can arise on the value of the assets, or the amount of cash, placed into that trust.
And the draft legislation is far-reaching. It will catch some pension arrangements, such as Employer-Financed Retirement Benefit Schemes (EFRBS), as well as other more aggressive tax or NIC-saving schemes that use EBTs. In fact, it is so widely drafted that it could catch arrangements which were never intended to be caught, including some kinds of share schemes, and deferred remuneration arrangements. So far, we've had two sets of FAQs issued by HMRC, but these raise as many questions as they answer.
However, there are exemptions for "approved" share option arrangements, and for registered pension schemes.
Existing EBT schemes
In terms of existing schemes,if an employer already has a scheme in place for an investee company that uses an EBT and which the employer suspects may be caught by the new rules, the employer needs to review it to see whether or not it still works. If it does not work anymore, the employer should consider how best to close it down.
Note, if an employer continues to operate an arrangement which is caught by the new rules, the employer will have to operate PAYE on the value of the benefits provided - including employer's national insurance (which cannot be passed back either to the employee or the EBT). So if an employer does decide to keep a scheme in place, they should check exactly how the investee company will be able to recover the income tax and employee's NICs arising, either from the EBT or the executive. The investee company is "on the hook" to HM Revenue & Customs irrespective of whether or not the employer can force the executive, or the trustees of the EBT to reimburse the tax and NICs.
New EBT schemes
In terms of new schemes, employers thinking about putting into place any kind of scheme using an EBT (whether or not the intention is to avoid tax), should think again. We cannot yet say with certainty precisely what arrangements will end up being affected. The new rules are not yet finalised – the draft legislation is published, but may still be subject to change. And once they have been finalised, we would hope for some more detailed (and definitive) guidance from HMRC on how widely it will apply the new rules.
The Expert’s Answer is an edited extract from guidance by Neil Pearson, partner at law firm Wragge & Co.
Further reading: EBTs - Employee Benefit Trusts