EBTs (Employee Benefit Trusts) And What They Could Mean For Insolvent Company DirectorsJuly 20, 2021
Has your company ever used an employee benefit trust, also known as an EBT?
Have you, or has your company, received any EBT discovery letters? Is there any risk of a challenging EBT HMRC tax case on the horizon?
If so, it’s important to be aware of the potential consequences and to seek professional advice if needed.
Here are some of the key points you need to know about the consequences of an employee benefit trust and what they could mean for insolvent company directors.
What is an EBT (Employee Benefit Trust)?
EBTs are UK or offshore-established trusts, intended to provide attractive financial benefits to employees. They can hold cash, or other assets such as shares.
Some companies have used them as a way to attract and retain skilled hires, with EBTs advertised to firms pre-2010 in particular based on advice at that time.
The intended benefit for companies was to let them pay into EBTs and then loan the money to their employees without tax deductions.
Incentivised by the potential to avoid making Income Tax and National Insurance contributions (NICs), EBTs were a popular commercial choice for several years.
Today there are still some practical business reasons for setting up an EBT, for example setting aside funds to make redundancy payments.
However, in recent years there have been some high-profile cases of HMRC accusing companies of using an EBT for tax avoidance purposes.
HMRC’s challenge to EBTs
HMRC issued new guidance on EBTs in late 2010, ultimately influencing the Finance Act 2011, based on the principle that money given to employees from an EBT counts as earnings.
Therefore, remuneration should still be subject to pay-as-you-earn tax (PAYE) and NICs.
Since then, using EBTs for tax avoidance is a legislation breach, with the 2014 introduction of accelerated payment notices (APNs) letting HMRC demand tax bill payments before tribunal hearings.
Moreover a famous example of an EBT HMRC litigation case shows how separate pre-2010 cases could still be pursued.
Rangers Football Club lost in a 2017 Supreme Court case against HMRC, which argued that £47m paid to staff between 2001 and 2010 in EBT loans should have been taxed.
Since 2017, another tool used for EBT HMRC cases is the follower notice. This requests recipients to settle tax affairs by a set deadline, or else pay a penalty.
EBTs and insolvent companies
If you have received an APN or a follower notice, or any EBT discovery letters, this could ultimately have significant consequences for your company’s cash flow.
Here, the cash flow test is key - analyse whether your firm can pay the debt on time.
Tax issues with HMRC are a relatively less common cause of debt, but can still lead to insolvency in some cases.
If your company lacks the financial means to pay an EBT HMRC tax settlement within the specified timeframe, then this is a likely sign of insolvency.
If that’s the case, it’s important to ask for help without delay.
Consequences for company directors
When a firm is solvent and financially secure, the directors’ duty is to create value for shareholders and keep the company profitable.
When a firm is insolvent, the directors’ duty moves towards paying the company’s creditors.
This is the case whether directors are aware of the insolvency or not - and when it comes to EBTs, there are further considerations.
For example directors who were involved in setting up an EBT, or personally remunerated by an EBT, or have received any EBT discovery letters, may need to seek specific advice.
Consulting a private insolvency practitioner (IP)
With all this in mind, directors should engage with an IP immediately if faced with an insolvent company - whether it’s due to an EBT HMRC tax case or something else.
The IP can give advice on how to proceed, manage the insolvency and fulfil directors’ duties to their firm.
Potential solutions include going into administration, a creditors’ voluntary arrangement (CVA) or a creditors’ voluntary liquidation (CVL).
The action required will depend on the specific circumstances of the company and the EBT used.
As you can see, receiving EBT discovery letters can lead to a major cash flow test for companies - and failing this could be a sign of insolvency.
We fully understand the pressure that directors face in this scenario and our mission is to help as much as possible.
If your company is insolvent, we specialise in debt recovery, business rescue and insolvency proceedings.
If you would like to discuss the impact of your company’s employee benefit trust, contact us today - we'd be happy to help!