Another EBT defeat

15 August 2017

In the case of Oco and another v HMRC (2017 UKFTT 589) the FTT found that a scheme involving the use of a trust to avoid income tax and national insurance contributions (NICs) on directors’ remunerations failed under the Ramsay doctrine.

The Ramsey Doctrine has been with us since 1981, in the case of WT Ramsay Ltd v CIR (1981 STC 174) it was decided that the Commissioners were not ‘bound to consider individually each separate step in a composite transaction intended to be carried through as a whole’. Rather the Commissioners ‘should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction or a number of independent transactions’.

The courts have used this concept to varying extents over the years to ignore the legal consequences of artificial steps inserted into tax avoidance arrangements that had no commercial rational.

The Ramsey Doctrine would appear to be going through a bit of a renaissance and this is undoubtedly bad news for tax avoidance generally as it enables the courts to ignore inconvenient realities. Ramsey undermines the letter of the law, whereas in other areas of law it is better to let 10 guilty men go free rather than locking up one innocent man tax is heading in the opposite direction, it now seems better to penalise 10 innocent men rather than letting one guilty man go free.

With regard to EBT’s in the Rangers case (RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland (2017 UKSC 45)) the contribution to the trust was classed as earnings. In Oco the payment to the trust was not earnings, however as funds were allocated for the benefit of a worker and his family via a sub-trust the Ramsey Doctrine enabled the courts to say that that was equivalent to earnings.

Tax legislation has long been drafted in an ambiguous way to give the courts certain freedoms over the way they interpret it, in this day and age when individuals and businesses are seeking and expecting certainty over their tax affairs there has to be a push back sooner or later that requires the law to be certain and clear in it’s wording and application.

Recent decisions are going to have some very high profile consequences, many household names are going to face life changing tax liabilities. We would like to hope that sense prevails and the public mood shifts from where we currently stand.

For now anyone involved in an EBT arrangement sits in an uncomfortable position, if their arrangement involved Sub Trusts and is similar to Rangers or Oco then it is probably time to consider settling. Anyone involved in other EBT arrangements would be well advised to start to prepare for the worst but hold tight, at least for the time being.

In the Rangers case Tax/NIC should have been accounted for by Rangers themselves at the point the remuneration was paid to the trust, it is therefore their liability. This liability is hard (but not impossible) to pass onto the individual taxpayers, that of course does not mean HMRC will not try, and in many cases the taxpayers will simply pay up.

To circumvent this problem a new tax point is being created by legislation, The loan charge, which imposes a tax and NIC charge on any employment related loan from a third party, or made by the employer and later transferred to a third party, that is outstanding on 5th April 2019.

This liability is also technically the liability of the employer but further legislation is being introduced to shift that liability to the worker if it cannot be recovered from the employer. In our opinion this amounts to an acknowledgement that under current rules this cannot be done automatically.

If a Rangers user has not paid the tax/NIC by 5th April 2019 then they too will be subject to the loan charge so all HMRC have to do in regards to them is wait. It remains likely they will try to get the money from Rangers users sooner.

The legislation behind the Loan Charge has been drafted to avoid the double taxation position, so if tax/NIC has already been paid under a settlement agreement, or by assessment, then the loan charge will not create a further charge. However, this does not mean any open enquiries will be closed once the loan charge is paid, we received communication from HMRC Counter Avoidance as follows:

“Payment of loan charge does not settle any open enquiries or appeals in respect of use of the scheme - HMRC would still need to consider all earnings points, and apply double taxation relief, to reach a settlement with the user. Other heads of duty must also be considered, for example, Inheritance Tax and/or additional sums due from individuals.”

If you have been involved in any EBT arrangement, or any arrangement where you received part of your earnings via a loan, and you need assistance to bring your affairs up to date with HMRC please contact us or get in touch today by calling 0203 039 3993.

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