Whether as the benefactor or the recipient of an Employee Benefit Trust scheme, it’s definitely worth developing a comprehensive understanding of what they involve, along with their inherent legalities.
Firstly, it’s important to recognise that there is more than one type of EBT scheme. The majority are completely lawful means by which employers may bestow benefits and rewards upon qualifying employees within their company.
What is an EBT Scheme?
Most commonly, EBT schemes are utilised by businesses with high-earning employees who can afford to defer elements of their remuneration until a preferable time. Some individuals may choose not to access their benefits until they have retired or left the country. In the case of shares, they may be cashed-in at predetermined intervals, and many recipients prefer to wait until they are worth a little more.
Some tax charges relating to funds received through an EBT are usually slightly diminished, which also makes these schemes more attractive – but, when legally applied, these benefits are relatively restricted.
The bonuses that may be accessible through these schemes include financial rewards and shares in the company – both of which are completely legal and, in fact, are encouraged – as the government naturally prefers to ensure employee loyalty and investment in the companies for which they work.
There may be any number of predetermined criteria that entitles a member of staff to a token of recognition from an Employee Benefit Trust, be it a particular achievement or the reaching of a certain milestone in their period of service. Once this criteria is met, the trustees of the scheme in question then award the “prize”.
As long as finances remain within a trust, they are not subject to taxation – and this fact is partially what has given rise to the illegal side of this practice.
When Are EBT Schemes Illegal?
Disguised Remuneration Schemes are currently the subject of a major HMRC crackdown. They are illegal strategies that exist to attempt to evade the correct payment of tax and generate unlawful financial gain. These schemes use the basic format of a legitimate Employee Benefit Scheme, but include a few fundamental differences. Specifically, the financial rewards that are paid out to successful employees are awarded as “loans” and not as direct payments that are subject to taxation.
As loans are designed to be repaid, they are not liable to be taxed. Of course, in the case of a Disguised Remuneration Scheme, the amount is never intended to be paid back, so the employee in question receives the amount in full with no apparent requirement to pay tax on it. In this way, money may enter a trust then be paid to a recipient with no tax taken at any stage. This kind of activity amounts to tax evasion and is punishable by law.
What Will Happen If I Have Been Involved in an Illegal EBT Scheme?
Many recipients of Disguised Remuneration Schemes may be unaware that their particular arrangement was, in fact, against the law. If you are in any doubt regarding the legitimacy of your company’s Employee Benefit Trust scheme, it is definitely worth investigating the amount of tax your rewards are supposedly liable for.
One upcoming matter to be aware of is the 2019 Loan Charge. This refers to action due to be taken by HMRC from 5th April 2019 against any provider or user of an illegal Disguised Remuneration Scheme who has failed to repay their “loan” by this time.
Any unsettled payments that have taken place historically since 6th April 1999 will be affected, and the individuals involved liable for a sizeable tax charge. If all relevant taxes have already been paid on the amounts in question, you will not be at risk from this.
Under the 2019 Loan Charge, all the “loans” an individual apparently received through their EBT will be combined as a lump sum and taxed at their marginal rate, payable as part of their full annual taxation for 2018/2019.
What Should I Do Next?
If you are concerned that you may have been involved in an illegal Disguised Remuneration Scheme, the important next step is to confirm whether or not this is the case. A financial expert such as Patrick Cannon will explore your history with the scheme in question, then discuss your options going forward.
If it is found that you will be affected by the 2019 Loan Charge, it is important to make contact with HMRC regarding your previous activity in connection with the relevant scheme. Your advisor will be more than happy to assist you in this process. Contact Patrick Cannon today for further assistance.
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For professional and insurance reasons Patrick is unable to offer any advice until he has been formally instructed.