HM Revenue & Customs (“HMRC) has recently published Spotlight 5: Using trusts and similar entities to reward employees - PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax, highlighting avoidance schemes.
Recent tax planning in order to defer or avoid income tax has included schemes whereby an employer makes contributions to an offshore EBT. The trustees then hold the funds in “sub funds” for the benefit of the employee or his family for use at a time and in a manner which, when compared to paying the monies as employment income, will attract more favourable tax treatment. However, HMRC has now signalled its intention to challenge such arrangements.
HMRC states that it is aware “of arrangements seeking to defer PAYE/NICs or avoid them altogether”. HMRC’s view is that “at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer”. However, this view was not accepted by the Special Commissioners in Sempra Metals Limited and HMRC and HMRC subsequently appealed to the High Court.
HMRC is “actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes. This means that we will most likely investigate tax returns where these schemes have been used and seek full settlement of the tax due, plus interest and penalties where appropriate. You should also be aware that some ineffective schemes, such as that described in Spotlight 5, may give rise to unexpected tax consequences.”
The commentary further notes that HMRC regards the tax avoidance schemes to be ineffective. However, as HMRC has now withdrawn its appeal to the High Court in Sempra, it is not clear on what legal basis it considers that the arrangements “are not likely to have the legal effect desired by those thinking of using them”.
Advisors and their clients will bear in mind HMRC’s vowed intention to challenge these arrangements as being legally ineffective. Increasingly, HMRC look to the reality of the arrangements. In these cases, the reality was often that the employee could direct what would happen to the monies in the sub fund, thereby undermining the discretionary nature of the trust and the tax treatment on which the tax planning was based.
For further information on the anti-avoidance legislation, or to discuss any of the issues raised, please contact Guy Abbiss (email@example.com) or Libs Davies (firstname.lastname@example.org) on +44 (0) 203 051 5711.
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