Employee benefits trusts still keep £2 billion from HMRC

Wednesday 24 July 2013

Contractors are keenly aware of HMRC’s crusade to clamp down on tax avoidance, and many are reassessing their arrangements to make sure they are still on the soundest footing. However, it appears that HMRC is still having trouble with reclaiming revenue which it believes to be owed, since the tax authority is yet to collect up to £2 billion in outstanding tax due from employee benefits trusts, reports suggest.

The Times reports that according to internal estimates from the tax authority, less than a quarter of the amount supposedly owed by these sources has been reclaimed. This is despite the fact that it has been two years since HMRC established a settlement scheme for businesses using these trusts to come forward and pay any outstanding tax.

According to the broadsheet, HMRC believes that around 6,500 firms have used employee benefits trusts as a mechanism for paying their top earners, particularly during the early years of the new millennium. The taxman estimates that as much as £3 billion in tax has been essentially ring-fenced by companies adopting these aggressive tax schemes.

Employee benefits trusts work as a loan from an offshore trust that was set up by a company to pay its staff. Often the loan does not need to be repaid for a lengthy period of time - in some cases, this can be as long as a century, Accountancy Age reports.

Legal proceedings are still ongoing between HMRC and Rangers Football Club over the use of such a scheme. HMRC challenged the club’s tax arrangements, which involved the use of an employee benefit trust to pay more than £47 million to players and staff. A first-tier tax tribunal ruled last year that Rangers has used the scheme legitimately, but HMRC was given the right to appeal in February. It has already filed its appeal with the upper-tier tribunal.

In 2011, the government launched a mechanism which works similar to its range of tax disclosure facilities, allowing companies who have used the trusts to come forward and pay outstanding income tax and National Insurance contributions. By doing so, they can limit the penalties expected of them and avoid the considerable time and resource costs that come with tax investigations and a tribunal down the line.

But it seems that companies are resisting the lure of a government deal. Around 500 firms have made use of the facility, paying a total of roughly £650 million into HMRC’s coffers. A further 400 firms are currently in talks with tax officials, which is expected to raise another £300 million in outstanding revenue.

Nevertheless, HMRC issued a statement saying that it is “pleased” with the progress made so far and is still on target to receive “substantial sums”. The authority added that it has contacted every company known to have used an employee benefit trust in the past and is continuing to chase them for the revenue that HMRC believes is owed.

“We would have liked more people to have come forward by now but the numbers are accelerating as the benefits of settling become more widely known,” the statement explained.

“Clearly HMRC cannot litigate or settle all of these cases at exactly the same time so we have an ongoing programme to bring all to resolution.”

By Victoria McDonnell

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