There has been significant media coverage regarding the Inland Revenue’s seemingly continual attack on EBTs in recent months. Following the outcome of the Dextra/Caudwell case in July 2002 (in which the Revenue lost on all 4 counts), new legislation effecting the tax treatment of contributions to an EBT was introduced in the Pre-Budget Statement (November 2002). Whilst the new legislation was not retrospective, it effectively brings a contribution made to an EBT within the definition of a "potential emolument". This means that if Corporation Tax relief is to be claimed for the accounting period in which the contribution is made, the trustees are required to provide "qualifying benefits" to the company’s employees within that period - or within nine months of the end of that accounting period – or pay "qualifying expenses". If the trustees do not provide such benefits or incur such expenses, the Corporation tax relief will be deferred until the date the employee suffers a tax charge on a payment received or a benefit provided.
Following the change in legislation, the Inland Revenue further appealed to the High Court on one point (Definition of "potential emoluments") and the hearing was held in April 2003. The Inland Revenue lost the appeal and there is currently no indication that the Revenue will take the appeal further.
Nevertheless, the Inland Revenue continues to attack the use of EBT’s. We understand that a case is to be heard in February 2004 where the Revenue will argue that the Accounting Abstract UITF13 applies to EBTs. If this argument were to succeed the consequence would be that the assets of the EBT would need consolidation with the company assets, and thus corporation tax relief would be deferred until the trustees distribute benefits to employees. The advice we have consistently received from leading Tax Counsel is that UITF 13 is not applicable to EBTs.
As a company, and further to a recent meeting in May with Tax Counsel, we continue to believe that EBTs remain a useful vehicle in planning remuneration packages. The postponement of an Income Tax charge for the employee and National Insurance liabilities for both the employer and employee will often outweigh any deferral of the Corporation tax relief (which is at a lower rate than Income Tax). Funds held by independent trustees for future payment to employees provides comfort to the employee, whilst ensuring his services are retained by the company to continue contributing towards its success.
If you wish to discuss the implications of this latest decision supporting the view we have always held on the tax treatment of contributions to an EBT please do not hesitate to contact us.
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