The Supreme Court has decided in favour of HMRC in the long running "big tax case", challenging the tax effectiveness of the use of cash employee benefit trusts ("EBTs") to provide funds to beneficiaries through loans. The Supreme Court found that payments into an EBT made available to football players and executives through loans were earnings on which PAYE should have been operated.
HMRC have stated that they will now follow up on other cases involving cash EBTs where there has not been a settlement agreed with HMRC.
If your company has operated a cash EBT or has inherited such a cash EBT through an acquisition of a business (and your company has not already settled with HMRC), you are urged to get in touch with us to discuss ways in which your company's position can be protected.
Judgment of the Supreme Court
The Supreme Court determined unanimously that the sums paid to the trustees constituted the employees' earnings. This was the case, even if the moneys were not placed unreservedly at the disposal of the employees. The Supreme Court emphasised that, as a general rule, employment income charges extend to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party.
The Supreme Court further held that definition of earnings includes any money paid as a reward for employment and that there is no requirement to have a contractual right to the payment. The fact that it is paid to a third party or that a trustee may not act as desired does not amend the nature of the payment, the employee is still being rewarded for their work as an employee.
The Supreme Court was dismissive of arguments from tax payers, including in particular criticising misplaced reliance on judicial glosses in relation to the concept of "payment".
For additional details see the judgment summary.
Further HMRC action
The effectiveness of cash EBTs has already been closed down since 2010 with the introduction of the "payments through third parties"/ "disguised remuneration" legislation. The case therefore only has relevance in relation to pre- 2010 historic cash EBTs, where a settlement with HMRC has not already been reached.
Further, the government has already signalled that it is proposing to introduce a tax charge on any loan from an EBT that is outstanding on 5 April 2019. Whilst this was dropped from the Finance Act earlier this year, this is still expected to come onto the statute books.
Given the Supreme Court's broad comments on the definition of earnings and its purposive interpretation, it is expected that HMRC will take immediate action against other cash EBTs, issuing follower notices demanding immediate payment of amounts of income tax through PAYE and employee and employer National Insurance contributions.
David Richardson, director general of HMRC's customer compliance group, is widely quoted as saying that "This decision has wide- ranging implications for other avoidance cases and we encourage anyone who's tried to avoid tax on their earnings to now agree with us the tax owed".
This case is likely to have wider application and HMRC is expected to vigorously pursue any circumstances where it believes an EBT was used to pay earnings that were not subject to PAYE. It is also widely expected that HMRC will take action against other areas of perceived abuse, including most notably image rights.
HMRC will take direct action against the employing companies of the employees for the recovery of the income tax and employee and employer National Insurance contributions. Significant interest charges and penalties could be applied.
One aspect that may well be difficult now is understanding the position of your company where there has been significant personnel changes in recent years and/ or recovering monies income tax and employee National Insurance contributions from employees (many of whom will have now left your company).
Any companies that face liabilities in relation to any cash EBTs, should act quickly and consider different routes to minimise liabilities and/ or recover amounts. Possible considerations may include:
- Examining the full circumstances behind the use of the cash EBT to see if there are any major differentiators from the Rangers case- though taxpayers might face an uphill battle on this, given the general principles stated by the Supreme Court,
- Examining the limitation periods,
- Considering early voluntary disclosure to HMRC of any outstanding cash EBTs so as to reduce penalties,
- If an EBT was acquired through a business acquisition, checking the purchase agreement and/or tax deed for any indemnities that remain operable,
- Checking the trust deed and any employee communications for any tax indemnities,
- Pursuing restitutionary rights against employees,
- Obtaining a PAYE direction from HMRC against senior employees and key managers so that HMRC pursue those individuals rather than the company, or
- Examining the advice given to your company in relation to the cash EBTs and the role of tax advisers, accountants and trustees in the setting up and operation of the trusts.
If you require any advice about potential route or guidance on dealing with HMRC, we have a team of tax disputes and employee benefit lawyers that can assist.