HMRC to Close EBT Settlement Opportunity

A potential loophole that promised to cut the costs of settling tax avoidance disputes involving offshore trusts has been suspended by HM Revenue & Customs.

People seeking to use Employee Benefit Trusts (EBT’s) to avoid tax and have tried to use the Liechtenstein Disclosure Facility (LDF) – under which individuals with undeclared offshore assets can regularise their tax affairs – will have to find another route to pay less tax.

The Liechtenstein Disclosure Facility is a mechanism by which UK tax payers with offshore holdings can “regularise” their affairs.  It was introduced by agreement between the UK and Liechtenstein governments to encourage UK taxpayers with undeclared offshore investments to come forward. By using the facility, users are able to take advantage of more favourable terms of settlement than a regular tax investigation, with participants normally receiving a fine of 10 per cent of tax due instead of 100 per cent, with tax interest and penalties only sought for the previous 10 years rather than the previous 20 years.

Along with other tax avoidance schemes, investors in EBT’s would have no financial advantage from settling under the facility. HMRC instead urged users of such trusts to take advantage of a specific “settlement opportunity” which would close in March 2015.

The settlement opportunity, launched in April 2011, has raised £800 million in tax and National Insurance Contributions from around 700 employers who previously used the trusts as tax avoidance vehicles.

HMRC and the Liechtenstein government have made changes to the LDF, meaning users of EBT’s that are caught by the Disclosure of Tax Avoidance Scheme (DOTAS) rules cannot take advantage of the full terms of the facility. HMRC said it expected others to settle in the near future and would pursue those that did not settle through the courts. The Revenue did not believe that schemes using such trusts to avoid paying income tax and national insurance worked.

In July, HMRC lost an appeal in a long-running dispute over Rangers Football Club’s use of employee benefit trusts, although it has announced that it intends to try to overturn that decision.

Jennie Granger, HMRC’s Director General of Enforcement and Compliance, said:

“Time is running out for anyone who used an EBT to avoid paying tax and still hasn’t settled with HMRC through the settlement opportunity. EBTs are avoidance vehicles and we will continue to pursue those who do not pay up. I would encourage all employers who have used these schemes to take this opportunity to settle under these clear terms. They can hold out and litigate, but they may well end up paying more tax, as well as big legal fees. They are also up against HMRC’s strong litigation record – we win around 80% of avoidance cases heard in the courts.”

“This settlement opportunity is just one of a host of ways HMRC is tackling avoidance, not least Accelerated Payments which mean that many people who have avoided tax will now have to pay up quicker than ever before. This puts them on a level pegging with the vast majority of people who have nothing to do with tax avoidance and pay their tax up front.”

The Revenue said it was also restricting the favourable terms of the Liechtenstein facility in some cases, including for situations where no new information had been disclosed. But it said there would still be advantages in using it, as those who did so would be able to get immunity from prosecution and a “bespoke” service with a single point of Revenue contact.

Dawn Register, a BDO tax dispute resolution partner, said the changes represented a tightening of who would be eligible to benefit from an LDF, and would restrict access for people with only UK related tax problems. Register said:

“The LDF was originally designed to encourage offshore tax evaders to come forward voluntarily and it has been a huge success in terms of the amount of cash collected for the Treasury and the number of voluntary disclosures. However, it now appears that many HMRC inspectors are unhappy that it allowed taxpayers, with existing enquiries, to benefit by moving their case into LDF.”

Register also warned that the development could lead to renewed calls of an amnesty for people with a UK related tax problem only.

“Overall, these changes highlight that the disclosure facilities offered by HMRC are becoming increasingly complex and as a result could have the opposite effect they are meant to, possibly discouraging, rather than encouraging, people from coming forward.”

Phil Berwick, a partner at Irwin Mitchell, a law firm, said:

“These changes represent yet another shift of the LDF goalposts by HMRC. Many advisers are still not aware of the LDF or the circumstances in which it can be used. The changes will further penalise taxpayers who do not have specialist representation. With less than two years before the Liechtenstein Disclosure Facility ends, further reviews or changes by HMRC cannot be ruled out. Taxpayers with a disclosure to make should take specialist advice, before HMRC change the rules again.”