Guidance

Employee Benefit Trust settlements after 31 July 2015

Published 31 August 2016

1. Settling after 31 July 2015

You can still settle your affairs with HM Revenue and Customs (HMRC) even though the Employee Benefit Trust Settlement Opportunity (EBTSO) was withdrawn on 31 July 2015, but the treatment of the agreement will be different.

EBTSO only applied to uses of Employment Benefit Trusts (EBT) before the introduction of the rules at Part 7A ITEPA 2003 (Part 7A). It’s still possible to enter into an agreement that meets the conditions of Paragraph 59 of Schedule 2 to the Finance Act 2011 (Para 59).

This guidance shows the general principles that HMRC will apply to settlements. The circumstances of each case can be different so not everything covered here will apply to every arrangement, and there will be some arrangements that have additional elements that aren’t covered here.

2. Terms of settlement before and after EBTSO

Item	Before 31 July 2015 (under EBTSO)	After EBTSO
Benefit in Kind on beneficial loans	Income Tax and Class 1A National Insurance contributions (NICs) paid on beneficial loans from the EBT could be offset against the total liability even if the Income Tax and NICs paid on the beneficial loans were out of date for an overpayment relief claim.	Income Tax will only be offset for years which are open, or for which a valid overpayment relief claim can be made. The Class 1A NICs can only be offset if it is possible to make a valid application for return of contributions paid in error.
Calculation of earnings	Where there was an effective indemnity in the trust deed at the time that the contribution was made for the tax and NICs due on the contribution and the secondary Class 1 NICs were paid by the trust or the beneficiaries, HMRC would accept that the contributions were made up of earnings plus secondary NICs so that they could be reduced by the amount of the secondary NICs to reach the amount of earnings. Where there was no enforceable indemnity the contribution wouldn’t be altered before the earnings charge was calculated.	No change.
Investment growth on secondary NICs	A Para 59 agreement provided Part 7A relief on the investment growth on both the earnings and the amount representing secondary Class 1 (employer) NICs within the trust.	The Para 59 agreement will, for agreements reached before 31 March 2017, give Part 7A relief on the investment growth on the earnings but not on the investment growth on the secondary Class 1 NICs. When the investment growth on the amount representing secondary Class 1 (employer) NICs is distributed it will trigger a Part 7A charge.
Section 222 ITEPA 2003	HMRC would accept that an enforceable indemnity was ‘making good’ for the purpose of section 222(1)(c) so that there was no section 222 ITEPA 2003 charge. Where there was no enforceable indemnity a section 222 ITEPA 2003 charge was sought if within normal time limits.	No change.
County Court fees for issuing protective NICs claims	HMRC did not seek recovery of County Court fees.	Full settlements must include recovery of County Court fees incurred in protective proceedings for NICs.
Double taxation	HMRC ensured that settlements did not result in double taxation.	HMRC will continue to ensure that settlements do not result in double taxation. Any instances of double taxation should be dealt with in line with the draft legislation published on 10 August 2016.
Group relief claims	Late group relief claims were accepted in accordance with CTM97065.	Group relief claims follow the statutory rules and any late claims will be subject to consideration under HMRC’s normal practice. See CTM97060 onwards for further guidance.
Inheritance Tax (IHT)	Any IHT liabilities that existed at the time of the settlement would be settled alongside the PAYE and NICs liabilities as part of one settlement. Where the deed permits, or allows, the trustees to pay Income Tax and NICs, a payment made to settle that liability was granted relief from IHT exit charges in a similar way to a deed which obliged the trustees to settle the income tax and NICs liability. This applied where a trust settles that liability, and payment wouldn’t be subsequently recovered from another party. Any effect on 10 year anniversary charges would continue to be determined on the facts of each case.	No change.
Notional Corporation Tax (CT) set off	A notional CT deduction was allowed for contributions to the EBT where a claim for a deduction or repayment would otherwise be out of time. The practice at BIM47090, with respect to CT deductions for the PAYE and NICs paid under the Para 59 agreement applied.	A CT deduction can be given only if the year is open, capable of amendment or a valid overpayment relief claim is made. The practice at BIM47090 continues to apply.
Penalties	In accordance with HMRC practice for enquiries, penalties were considered.	No change.
Proportional Employee Taxation Settlements (PETS)	HMRC accepted PETS with an employer when not all of the employees wished to settle. Employee settlements, without the employer, were also acceptable but only if the secondary Class 1 (employer) NICs were paid by the employee as part of the settlement.	No change.
Statutory interest	Interest was calculated on a reducing balance basis treating any set-offs as payments on account.	Interest is calculated on a strict basis with repayment interest calculated separately on any repayment amounts.
Voluntary restitution and sufficient information	Customers were allowed Para 59 relief on contributions to the EBT without paying the earlier earnings charge where ‘sufficient information’ had been provided. This would apply where HMRC had been provided with sufficient information to raise assessments/determinations under normal time limits but did not do so.	Settlements must still include all protected years and HMRC will continue to invite voluntary restitution for years without assessments and/or determinations. Any unprotected years where voluntary restitution is not made will not be covered by a Para 59 agreement and will not have relief from a subsequent Part 7A charge.