Building Company Sale Hampered by EBT

A client approached me as he had received a good offer for his building company business and was approaching retirement age. The purchase of the business by the third-party involved in depth due diligence work being carried out and it transpired that the director had entered an EBT (employee benefit trust) back in 2010 and this had never been resolved with HMRC.
As it was a company matter and remained unresolved for over 10 years, the tax liability etc fell on the company and of course precluded the sought-after sale of the business.

His own accountant had not been involved in the initial setting up of the EBT via an Isle of Man trust and it had been done independently by the director and the company. They were however involved in the bookkeeping side of things when the company funds changed hands.

Background == Counter avoidance teams at HMRC have historically been very tardy in settling these cases, as well as directors and companies largely choosing to ignore the tax settlements for many years. This is because the schemes were sold to them as tax efficient, legal, and usually carrying a barristers opinion stating that they met all legal tax obligations. It was only when HMRC was successful in this field that they felt that they had sufficient power to proceed to settlement of all the open aged cases on their desks.

The supreme Court ruled in favour of HMRC in the Rangers football club tax case.
This was a landmark victory in a tax avoidance case, and everyone warned that they were likely to be dramatic consequences for businesses that used such elaborate schemes themselves after this unanimous verdict was handed down by five Supreme Court judges

In this case payments were made via EBT’s and were agreed in ‘side letters’ which were separate agreements to the employment contracts, of footballers and employees and were hidden from the taxman and the football authorities.

The judges agreed that any payments made through EBT’s should be considered taxable income and not loans. This gave HMRC authority to pursue others for income tax without the need to embark upon further series of legal actions.

Therefore, what HMRC called ‘follower notices’ were issued to many companies to recoup income tax almost immediately following the success of this case, however to this date there are still many cases that remain unsettled, and these are gradually being picked up by counter avoidance teams.

Progress is still slow, and I still have cases that I am trying to resolve for clients who wish to settle but are having to wait months for a reply even though we have sent off every piece of information HMRC needs, to assess the tax etc due in these cases. In Tax Avoidance cases I’ve never had so much trouble handing over large amounts of money to HMRC in any other type of investigation cases.

So, what happened to the building company were they able to sell?

In that case some of money had already been paid upfront under an accelerated payment notice issued to the company some years before, but this did not cover the whole of the liability due.

HMRC calculations were issued, and negotiations ensued with HMRC resulting in a settlement vastly lower than the £1.2 million originally demanded in the calculations. The settlement they produced largely equated to the £1.25 million that had been invested in the Isle of Man scheme originally and taken back years ago by directors as tax free loans.

This is because it comprised PAYE tax and national insurance on the directors treating the loans that they had extracted (the £1.25 million) as earnings, plus interest back to the date the tax should have been paid, plus a large benefit in kind charge if the company was going to settle the bill on behalf of the directors, plus a £10,000 fee for HMRC approaching the courts to secure payment of national insurance contributions before they went out of date for collection, and what no client seems to be aware of, the inheritance tax charges that fall due periodically on trusts.

Settlement was achieved by the director personally settling his own liabilities rather than the company and utilising the directors loan account. No penalties were charged in this case and the whole matter was able to be resolved in a matter of weeks, made easier by the large sum expected by the director from the sale of the company.

Not all clients have the funds available to settle such a large scheme sold to them initially as tax efficient what is successful time to pay arrangements have been agreed for other cases all treated on their merits.