Avoiding Tax

[Vallah]

It will, in my view, be much easier for the government to attack the tax treatment of funding on the way in than attacking the way the benefits are paid out.

Even though most of the EBT providers are based offshore and don't pay corporation tax?

[Alan Jones]

I would expect changes in the finance act. So, as is common it will be implemented with retrospective effect to the beginning of the tax year. The intention has already been stated. I suspect that quite a lot of it will be geared to ensuring the there is no corporation tax deduction on contributions to an EFRBS or EBT until benefits are paid which are actually charged to tax (rather than just potentially charged to tax).

The Dextra Case which went to House of Lords determined that there was no corporation tax deduction for payments into EBT's. As a result of this case and legislation that was introduced before the Dextra Case was decided (which basically did the same thing just in case HMRC lost the Dextra case) scheme promoters used offshore companies to employ contractors and pay monies into EBT's . These offshore schemes are not subject to UK corporation tax rules and most of them do not pay any company tax.

It would be very speculative to say how the UK will stop such schemes except that they have announced they intend to do so from April 2011 (NOT forgetting that some of these schemes may not work under existing law depending on how they are administered - see separate thread on EBT's). Draft legislation could be released as early as 9 December 2010.

[ASB]

Even though most of the EBT providers are based offshore and don't pay corporation tax?

That, as ever, is of course the question. Dextra, as was mentioned by Alan established that the payment into the trust (which if I remember correctly was a family benefit trust of sorts) was denied CT relief - and subsequent to this there is specific legislation of course. It also established, again if memory serves, that the payments made out of the trust were not taxable.

Thus, under the current rule set, the impact is such that the comapny get no CT deduction, the employees get no tax bill. Broadly neutral probably, though there may still be savings related to NI.

I do imagine it would be fairly easy to draft appropriate legislation easily achieved to ensure the objectives of denying CT relief until income tax is paid (flying pig alert judging by history though, they haven't been too good at it in the past).

Now, as you rightly point out, what about when the payment into the EBT comes from an offshore entity.

I guess there are two basic issues: how does the payer get the money in the first place? Is there anyway of trying to ensure this does not get CT relief? Legislating against this is going to be rather more difficult.

Overall I imagine there will be some changes. Providers of this sort of tax planning will be busy, it'll close off some avenues and open up different ones. So the system carries on repeating itself.