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Simon Griffiths of Tax Innovations shares his experiences of HMRC enquiries into Employee Benefit Trusts and Employee Remunerated Trusts.

A number of weeks ago, HMRC made public its intention to formally progress enquiries into Employee Benefit Trusts (EBTs) and Employee Remunerated Trusts. (ERTs). Employers or companies who have established EBTs or ERTs can look forward to an open enquiry into the taxation treatment of either the contributions into - or indeed the benefit taken from - the funds. Furthermore, employees, companies and partnerships who have operated these schemes only have until the end of this month to open discussion with HMRC to negotiate a settlement.

As heavy-handed as this appears, I’ve found that HMRC have actually adopted a rather pragmatic approach in dealing with the outstanding cases. It is clear they want to move a lot of these on without having to formally start proceedings which are costly to both the tax payer and client.

When dealing with this sort of case, I’d suggest that there are three main issues that you need to contend with. They are:

• the Inheritance Tax position of the shareholders of a ‘close’, or owner managed business,
• the Corporation Tax relief available when making the contribution, and
• the taxation treatment of the beneficiaries.

Unfortunately, details such as the use of the funds once in the trust; the identification of profits that could be allocated to a trust; and staff communication on the scheme itself, could mean that many cases are going to find it quite difficult to defend themselves against HMRC enquiries. Weaknesses in these areas invariably lead to disallowed tax relief and a taxed beneficiary.

All is not lost, however. When the trust has been administered in a thoughtful and considered manner, HMRC have been ready to concede ground to the employing company and its employees. It almost goes without saying that there are of course other cases which fall outside the normal EBT/ERT pattern, and they require specific and careful advice given their complexity.

In each of the above scenarios, what has particularly surprised me has been the lack of provision for a defence fund, or an inability to continue client support by the provider of the original advice. I’ve seen on a number of occasions the promoter of a particular scheme withdraw support to a client undergoing an HMRC enquiry. Even in a situation such as this, there is still provision to negotiate a cashflow-effective settlement and significant reductions in potential tax liabilities for the directors or shareholders, not to mention scope for tax-effective cash extraction from the structure without the tax penalty.

All in all, the deadline for opening dialogue with HMRC is fast approaching. There is still plenty of room to manoeuvre, so there really is little excuse not to get your affairs in order before 31 December.