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Failed EBT scheme results in double taxation

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As HMRC opens a consultation into the taxation of employee ownership trusts and employee benefit trusts, a recent tax tribunal spotlights how taxpayers are using the schemes to avoid tax – except this failed scheme resulted in double taxation for the taxpayer. 

28th Jul 2023
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Employee benefit trusts (EBTs) can be a tax-efficient mechanism for rewarding employees, often in the form of shares but also through cash bonuses and other benefits.

The disguised remuneration legislation has successfully closed down the advantages of most abusive schemes but we have seen several recent cases involving the use of EBTs that pre-dated the full force of the anti-avoidance legislation. 

At the same time HMRC has opened a consultation on:

  • proposals to ensure that the tax reliefs associated with Employee Ownership Trusts (EOTs) meet the policy objectives underpinning those reliefs; and
  • proposals to reform the inheritance tax treatment for EBTs.

Recent HMRC win

As an example of the type of schemes HMRC is cracking down on, a recent first tier tribunal judgment involved a novel arrangement aimed at avoiding tax through clever use of an EBT which ultimately failed, resulting in double taxation – quite the opposite of the taxpayer's intention!

The basic idea seems to have been to use the company’s value to create a credit balance on a director’s loan account that could then be drawn down by the director without any tax or national insurance contributions.

It is worth noting that the company did not seek a corporation tax deduction for its payment of the amount contributed to its EBT.

In November 2010 M R Currell Limited, 'the company' transferred £800,000 into an EBT with the purported intention of ring-fencing the money to pay staff bonuses.

The source of the £800,000 was a loan to the company made by Mrs Kimberly Currell. Mrs Currell was a director of the company and (before these transactions) held 31% of the shares. Her husband, Mr Mark Currell, was the managing director and also, initially, held 31% of the shares.

Mark Currell bought shares valued at £800,000 from his wife and this enabled her to make the loan to the company. The source of the £800,000 used by Mr Currell to buy his wife’s shares was an interest-free, five-year loan of £800,000 made by the EBT set up using the same £800,000 provided by Mrs Currell.

The end result was that the company ended up with an EBT for the benefit of its employees funded by a loan from Mrs Currell and Mr Currell ended up with £800,000 borrowed from the EBT with no tax consequences at all. The benefit to the couple would have been that Mrs Burrell could then draw down the loan account, again with no tax consequences.

If, without the use of the EBT, Mrs Currell had made a loan to the company and the company had made a loan of £800,000 to Mr Currell then the company would have had to pay corporation tax under s455. Mr Currell would have also had to pay income tax on the benefit of an interest-free loan.

The FTT noted that it was a “neat tweak” in the arrangements that Mr Currell used the loan to buy his wife’s shares since a loan to purchase shares in a close company is not subject to the benefit in kind charge.

The question for the FTT was whether the £800,000 should be treated as earnings for Mr Currell and subject to PAYE of £320,000 and £113,427.33 of national insurance.

A genuine loan or remuneration?

HMRC's position was that the sum was paid to the EBT to reward Mr Currell for his services as a director over many years in building up the business. In that time he had taken relatively little in the form of salary or dividends.

The company argued that a genuine loan, repayable in the short term, could not be treated as a reward or benefit.

It was accepted by both sides that the loan was genuine and that Mr Currell had both the intention and the funds available to repay it.

The reason it had not been repaid in 2015, when the five-year period ended, was that HMRC had already opened an enquiry into the arrangements at that point and the taxpayers were concerned about potential double-taxation. Had the money been repaid to the EBT and used to pay staff bonuses, as indeed £50,000 of it was in 2019, it would be subject to tax on those bonuses.

However there is no law against treating loans to participators as remuneration. After consideration of the facts and relevant cases such as Rangers and the Baxendale Walker cases, the judge found that the payment was "more likely than not" made to Mr Currell as a reward for his services to the company and dismissed the taxpayer's appeal.

Double taxation

As a result, the £800,000 will be subject to taxation not just once but twice! First as remuneration paid to Mr Currell and again when it is paid out as bonuses to staff from the EBT. The company would have been better off had bonuses and director's remuneration been paid as normal, without the use of any scheme.

The judge had little sympathy for this, calling it a "consequence of the arrangements put in place by the appellant".

This outcome demonstrates HMRC's commitment to ensuring that EBTs remain focused on engaging and incentivising employees and deterring arrangements that seek to obtain tax advantages outside of these intentions.

Replies (15)

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By Justin Bryant
28th Jul 2023 13:09

Presumably the company did not make a CT deduction (at the time) due to the EBT CT restriction in s 1290 CTA 2009*: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim44573

Regardless, see: https://www.accountingweb.co.uk/any-answers/the-worst-ftt-judgment-this-...

As for the comment "However there is no law against treating loans to participators as remuneration", it omits to acknowledge or recognize that equally there is no law treating loans to participators as remuneration i.e the judge has wrongly made this all up as new case law on s62 ITEPA 2003 per the comments in the above link.

* the decision contradicts the whole rationale of s 1290 CTA 2009 as to when "benefits" are received re such EBT loans, not to mention the whole rationale of P7A ITEPA 2003.

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Replying to Justin Bryant:
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By richard thomas
28th Jul 2023 17:20

While I see the force of your last point, the Courts will rarely take into account that Parliament has already legislated for the outcome in a subsequently decided case. I myself was responsible for all the Post-DOTAS anti-avoidance legislation in 2005, 2006 and 2007 and I made the point often to Dawn Primarolo and Chris Wales that while we may be successful in many cases, we could not guarantee it, especially back then (see the great escape of A Thornhill), so we donned belt and braces (and technotrousers).

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Replying to richard thomas:
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By Justin Bryant
28th Jul 2023 18:16

I would respectfully disagree with that. Very many court judgments (the vast majority) are based on being consistent with existing legislation (and/or not inconsistent with it), for obvious reasons (exceptions to that would need to be justified or explained somehow and there was none of that in this judgment).

Incidentally, the ratio in Rangers (that the FTT here wholly failed to appreciate/apply and the fact that loans are totally irrelevant to that) is well summarised here: https://setukamal.eu/posts/

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Replying to Justin Bryant:
By Ruddles
29th Jul 2023 09:27

Justin Bryant wrote:
As for the comment "However there is no law against treating loans to participators as remuneration", it omits to acknowledge or recognize that equally there is no law treating loans to participators as remuneration

The usual nonsensical Justinian logic.
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By ireallyshouldknowthisbut
28th Jul 2023 17:55

Great to see another win for HMRC on dodgy schemes.

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Chris M
By mr. mischief
30th Jul 2023 07:53

If it walks like a duck and talks like a duck, it's a duck. Shame HMRC were not more awake like this more often.

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By Justin Bryant
31st Jul 2023 09:48

Lots of people are clearly missing missing the point here. The only example of a genuine loan being treated as s62 earnings (and that's being generous, as on that occasion the judge did not consider it to be a genuine loan) was the dissenting judgment in FTT Rangers (Heidi Poon), which was disavowed by HMRC higher up (JGKC accepted it was total garbage as an argument - as did pretty much everyone else - which is why he ran the redirection of earnings argument instead, which relies for its success on evidence of agreement thereto or at the very least acquiescence per the above link and at most the loan is merely evidence of such and so a loan is not needed at all for that and the judge here presumably got confused about all that).

It's exactly for this reason that the other EBT cases mentioned by the FTT treated the payment (that may or may not have had a subsequent EBT loan) as a distribution and not as salary i.e. it needs to be salary in the 1st place to be found as such under the Rangers principle and this is less likely for the company owner(s) than its employees (obviously).

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Replying to Justin Bryant:
By ireallyshouldknowthisbut
31st Jul 2023 11:15

Are they missing the point?

The no doubt highly paid advisors inadvertently built an anti-tax avoidance scheme, to pay twice.

The main point of this article is to enjoy the schadenfreude.

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Replying to ireallyshouldknowthisbut:
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By Justin Bryant
31st Jul 2023 11:57

You'd make a great FTT judge, someone who should be totally fair, impartial and unbiased etc. and apply the correct law to the facts and all that, as this other FTT judge rightly does re a tax avoidance scheme at para 197(2):
https://caselaw.nationalarchives.gov.uk/ukftt/tc/2023/626

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Replying to Justin Bryant:
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By Justin Bryant
08th Aug 2023 10:33

Even HMRC don't think loan principal is a "benefit" (unless it's an outright payment dressed up as a loan). See: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm601640

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By petestar1969
31st Jul 2023 09:54

Hahahahahahahaha!!!!

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By moneymanager
31st Jul 2023 11:48

"First tier tribunal"

I wish I could find the original quote but I'm reminded of the musings of a senior judge thus,

'The lower courts make mistakes which is why we have the higher courts to set them right'

I wouldn't be surprised to see this go further as, whilst I have sympathy with those of the "anti avoidance" stance I would note that we have an excessively complex tax code with apparently inconsistent and capricious judgements, one judge opined long ago that every man had the right to restrict the scope of the Revenue's spoon into his stores just as thecRevenue had the duty to extend it, either way, win or lose, all would be better off without scapegoating and finger pointing.

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Replying to moneymanager:
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By AndyC555
31st Jul 2023 15:46

"one judge opined long ago that every man had the right to restrict the scope of the Revenue's spoon into his stores"

It was Lord Clyde (Ayrshire Pullman Motor Services v Inland Revenue [1929]) and it was a shovel, not a spoon

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Replying to AndyC555:
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By moneymanager
31st Jul 2023 17:23

Thank you, I undersold the extent of tax take!

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