Blog: Legacy loans from Employee Benefit Trusts judged offside

By Colin Ben-Nathan

Buoyed by HMRC’s recent victory in the Court of Session against Glasgow Rangers’, the Chancellor of the Exchequer struck a further blow against Employee Benefit Trusts (EBTs) in his March Budget.  Amongst a number of anti-avoidance measures, he announced that legacy loans to employees and former employees made by EBTs before the Finance Act 2011 rules on ‘disguised remuneration’ came into play will now be judged offside and subject to a new PAYE (and NIC) charge if still outstanding on 5 April 2019.

There has long been speculation that something like this might happen and here it is, albeit the Government has decided delay the pain until 2019 – some three years from now – to give people time to make arrangements for their loans to be repaid, if the charge is to be avoided.

That said, even where the loan is repaid this will still mean that funds sit within the EBT so that where there is a subsequent distribution, PAYE will apply under the existing disguised remuneration rules at that point.  So making a substitution will make no difference!

HMRC has issued a technical note with more detail on how this new charge will work, as well as referring to the Government’s intention to enact separate legislation to tackle the use of particular schemes that are apparently still doing the rounds.

The legislation is being tightened up in several other ways too. When the disguised remuneration rules were introduced in Finance Act 2011 the Government also announced an EBT Settlement Opportunity.  This expired on 31 July 2015 but one of its terms rested on legislation which said that if an employer decided to settle PAYE on amounts when originally contributed to an EBT then there would be no further PAYE on any later distribution, including on any investment returns.  This relief on investment returns remains on the statue book but the Government has now said that it will be withdrawn if PAYE is settled after 30 November 2016, clearly with a view to persuading those employers who have not yet settled to do so quickly. Which coupled with the victory in Rangers’, the April 2019 change on legacy loans and the action against particular schemes brings the score to 3-0 to HMRC.

Finally, HMRC said that, in future, where an employer cannot pay PAYE due under the disguised remuneration rules, for example  because it has gone bust, then, in ‘specific circumstances’, the law will be changed to allow transfer of the tax liability to the individuals concerned – so there is clearly no pulling of punches here. Play will continue even where there is a red card and a sending off!

But is it all over?  Well not necessarily because Rangers’ have been granted leave to appeal their case to the Supreme Court…so there will be extra time and who knows what the final score will be after that.   

Further detail on all these points can be found here:

Colin Ben-Nathan is chairman of the CIOT’s Employment Taxes Sub-committee.