Employee benefit trusts (EBTs) were established as a means for businesses to hold assets which could then be paid out to employees with minimal or no tax burden. HMRC has designated many EBTs as tax evasion schemes, and has been pursuing liable companies and directors for more than two decades.
In this podcast, Tim Symes and Lisa Vanderheide discuss the tax liabilities that can come about from an EBT scheme, and the implications for the directors of a company that has entered a formal insolvency process. A summary of the conversation is available to read below.
HMRC’s approach to EBTs
Lisa began the conversation by tracing the history of EBTs and how HMRC has treated them. During the 1990s, EBT planning for corporates was sold widely as a means for businesses to remunerate employees with minimal tax implications. Employers paid funds into a trust which would then pay out to the relevant employees via interest-free loans. EBTs have also been used by individuals, particularly self-employed contractors. HRMC typically designates arrangements like this as disguised remuneration (DR) schemes.
The last two decades have seen numerous EBT-related tax disputes in court, largely decided in HMRC’s favour. Thousands of companies and individuals with EBTs have instead chosen to settle with HMRC, however many EBT’s enquiries remained open. The introduction of the ‘loan charge’ was designed to help HMRC draw a line under all these enquiries, however it has not worked out that way. In particular, 2019’s Morse Review restricted the loan charge to DR loans made on or after 9 December 2010, and some that had been ‘reasonably disclosed’ before 2016 would still not be affected.
Many have still not resolved their EBT tax obligations with HMRC. Following a delay caused by the Covid-19 pandemic, HMRC has now launched a group targeting companies which may have outstanding liabilities. HMRC have also recently launched a new settlement opportunity with settlement parameters more attractive for some businesses than others.
EBTs and insolvency
Because an EBT tax planning arrangement causes cash (assets) to leave a company, and creates a tax liability against it, the arrangement by design causes the company to be poorer, which would immediately be of interest to liquidators in a formal insolvency situation. A failed EBT can mean misfeasance (breach of duty or wrongdoing) by the directors as set out in the Companies Act. Directors can also be targeted on the basis that they have purposefully put assets out of the reach of creditors, which in this case is HMRC; or for an unlawful capital distribution.
Directors do have a defence to misfeasance claims, and some have successfully argued them. Section 1157 of the Companies Act 2006 says a director will be excused if they have acted honestly and reasonably and ought to be excused when taking the circumstances into account. The first part of the test is quite a high bar, but cases have shown the defence can work when the director has taken proper professional advice on the EBT which the court considered reasonable.
Tim recommends in the podcast that a director whose company used an EBT and is now in an insolvency process, or heading that way, should take legal advice on both the insolvency and tax elements to ensure a co-ordinated approach if multiple claims are brought. A director should not be rushed into a deal with the liquidator or administrator without also involving HMRC in a process managed by legal advisers.
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