This article has been submitted by Greenaway Scott
The Supreme Court has recently ruled in favour of HM Revenue and Customs in a long-running dispute with Rangers FC over the use of employee benefit trusts (EBT) as a means of avoiding tax.
The case, which was initially decided in favour of the Glasgow-based football club in two employment tribunals in 2012 and 2014, is regarded as being a landmark ruling in tax avoidance schemes. It is predicted to have huge implications for many other businesses who use similar tax avoidance methods.
In the UK, the majority of all listed companies offer their executive directors and employees some sort of equity incentive. Generally, these sorts of scheme offer companies various advantages, including tax advantages in some cases. An employee benefit trust (EBT) is a special type of discretionary trust that is used to benefit employees and former employees of a company. The main reason for using these sort of schemes is to recruit, retain, and motivate employees and they can also help reduce employment costs and align the interests of the company employees. Successive governments have taken the view that encouraging equity incentives can improve the general economy. However, this sort of scheme has been found to have been wrongly used by large companies as a means of avoiding tax liabilities.
The recent case involved cash payments of almost £50m, which were made to players, managers, and directors of the football club through the use of offshore trusts in the form of tax-free ‘loans’, which for the most part were never repaid. The judges in this case ruled that if the income received by the various beneficiaries was derived from an employee’s services in their capacity as an employee, then it is to be regarded as earnings and would therefore be subject to income tax.
As a result of schemes such as EBT’s being abused by companies, anti-avoidance legislation was brought in in the form of the Income Tax (Earnings and Pensions) Act 2003. The purpose of this legislation is to prevent the use of trusts being set up to benefit employees and their family members in a way that avoids or defers income tax or national insurance contributions. The legislation imposes an immediate tax charge when a trustee, or other third party, takes certain steps under arrangements that are designed to benefit employees and avoid the payment of tax. Further legislation has since been brought in in 2010, which offers companies the opportunity to reach a settlement with HMRC over unpaid taxes.
Following this landmark ruling, companies are now being urged by HMRC to come forward where EBT’s have been used as a means of tax avoidance so that a settlement can be reached.