Monday, April 25, 2016


BLOG 172


I’m ashamed to admit it but I voted Conservative at the last general election.  Fortunately most of my neighbours voted Labour so my vote didn’t matter.  But I’m still embarrassed to have done so.  Why?  Because I am becoming increasingly tired of the Conservative government lying to me all the time.  That may be a bit of an exaggeration as I do not have the breadth of knowledge to gauge that in non-tax matters.  But I do know that they do so when it comes to tax.  Lying may be a bit strong too.  It may be that the government believe that once Margaret Thatcher abolished most of the grammar schools in the early 1970s, the standards of State education have plummeted to such an extent that the citizenry cannot cope with the truth.  But I was a grammar school kid.  The State educated me fairly well, so I don’t need protecting from facts.

This article has been prompted by an HMRC Technical note on what they call “disguised remuneration avoidance schemes.  Let me make clear immediately that I have no problem with HMRC tackling tax avoidance schemes.  I am delighted when they do so – albeit that my understanding of what is a tax avoidance scheme seems somewhat different to HMRC’s.  HMRC tell me that “the government’s view is that these schemes don’t work”.  The government is of course entitled to its view.  It is also entitled to bring in legislation to reinforce its view.  But what the document is largely talking about is Employment Benefit Trusts (EBTs).  Whilst I do not wholly discount the possibility of the Cabinet agenda having included a discussion on whether or not EBTs “work”, I am a bit horrified if that is what happened, as there are enough strategic issues for the government to worry about without the collective Ministerial talent being diverted to considering the efficacy of historic tax arrangements.  Of course I fully accept that David Gauke, who has ministerial responsibility for HMRC, may have himself immersed himself in the tax legislation and the detailed documentation of thousands of EBTs and formed his own conclusion that EBTs do not work.  But even if he did so, his considered opinion is just that; it is his view, not that of the government.  As a solicitor, he is capable of doing so, although whether such industry is a sensible use of his ministerial time and the high salary us taxpayers pay for his services is another question.  But I think it is more likely to be HMRC’s view than the government’s.  I would also make the point that, as far as I am aware, although HMRC have won a number of cases before the Courts and Tribunals, none of these have been on the basis that EBTs do not work, but rather than in those particular cases what actually happened did not reflect what the parties had intended.  Accordingly HMRC’s view – or the government’s view if that is in fact the case – is not universally shared.

But it is not simply that view that concerns me.  The document goes on to say, “the package of changes announced by the Chancellor at Budget 2016 will ensure that those who have used or continue to use a disguised remuneration tax avoidance scheme will pay tax and NIC on that remuneration as Parliament intended”.  An immediate difficulty here is that not just me, but everyone else to, does not have a clue what Parliament intended.  I studied British Constitution subsequent to leaving my grammar school, so the State education system is not to blame if my recollection that the UK’s unwritten constitution creates a balance by splitting power between the legislature (Parliament), the administration (the government) and the courts (which have oversight over the government) is incorrect.  The effect of that balance is that no-one knows what Parliament intends when it passes legislation as it rarely discusses it in depth and, even where it does, only a tiny fraction of the 650 MPs are able to express their views.  In their oversight role the courts have solved this dilemma but assuming that the legislation that Parliament enacts reflects its intention, and so discerning that intention from a consideration of the legislation.

Parliament in fact enacted legislation against disguised remuneration (which includes some payments by EBTs) in 2011, but only in relation to transactions undertaken after 8 December 2010.  That suggests that Parliament has no view on disguised remuneration before that date.  Yet the Budget announcements are mainly directed at pre 8 December 2010 EBTs, so it is wrong to pretend that those changes are in any way aimed at what Parliament intended.

Indeed over the years, Parliament has positively encouraged EBTs.  An EBT is not some sinister tax avoidance tool.  The letters stand for Employee Benefit Trust.  That is precisely what it is; a trust created to benefit the employees of a company.  Share Incentive Plans which Parliament introduced in 2000 require the use of EBTs.  You are exempt from CGT if you transfer shares in your family trading company to an EBT.  There are IHT exemptions for EBTs.  So how can Parliament have regarded an EBT as an avoidance device prior to 2011?

What HMRC don’t like is actually not EBTs as such.  It is EBTs lending money to employees.  But again it is unclear why pre-2011, Parliament should have regarded a loan by an EBT as wicked, but a loan by the employer as acceptable.  If a company lends money to an employee, Parliament has not decided that the loan should be subject to tax in the employee’s hands unless and until it is waived or otherwise cancelled.  Parliament certainly decided that if the loan exceeded £5,000, the employee should pay tax on the difference between a market rate of interest and the interest, if any, charged on the loan.  Why should it have thought that routing the loan through trustees should attract any different tax treatment?  Nevertheless it is indisputable that Parliament did indeed adopt such an odd view in relation to transactions after 8 December 2010.

The reason that Parliament was asked to enact this weird legislation in 2011 is because at the time a large number of EBTs were being set up specifically to lend money to employees.  But the impetus for the loan being made via an EBT rather than direct was because it was hoped that the contribution of the capital to the EBT would attract a tax deduction.  The courts have subsequently held that assumption to be misconceived, so that hoped-for advantage never really existed.  But that surely does not justify a different tax treatment for the employee.  So perhaps HMRC and/or the government actually feel that because Parliament chose to act irrationally in 2011, it would have been equally irrational in 2004 or whenever a company set up its EBT.  Of course since 2010, Parliament has had a Conservative majority, so a Conservative government is probably better able than me to judge whether Parliament would have acted irrationally from that time, but I question its ability to gauge the rationality of earlier Parliaments led by other adminstrations.

I am not myself a fan of loans to employees.  I thought that in a lot of marketed EBT schemes the loan was so artificial that it was probably a sham, so did not introduce clients to such schemes.  But in Advocate-General re Murray Group Holdings Ltd, the Inner House of the Court of Session (the Scottish equivalent of the Court of Appeal) said that the trust in that case was not a sham.  Indeed, so did both the First-tier and Upper Tribunals.  So even if HMRC are right in thinking that by the time that Murray Group set up its EBT in 2001, Parliament had formed an intention that loans via an EBT should be taxed differently from loans direct from the employer, Parliament would in fact have been proved to be mistaken in its belief that loans from EBTs did not “work”.  For clarity, I should mention that HMRC actually won in Murray Group, but only on their alternative claim that, on the facts of that case, the money was already remuneration before it was paid to the EBT.

So, if I am not a fan of EBT loan arrangements, and some, at least, of them, like that in Murray Group, do not avoid tax at all, why should I care if HMRC and/or the government lie to me and the rest of the citizenry in order to seek to persuade us that the Chancellor is right to attack such arrangements entered into pre 2011?  Well, apart from the fact that I don’t like being lied to full stop, it is because the lies are to hide the fact that the Chancellor intends to introduce retrospective legislation to tax now (or rather in 2019) the loans that were made by EBTs before 2011.  Parliament is normally violently opposed to retrospective legislation.  It accordingly seems that by pretending that Parliament was opposed to such loans pre 2011, the Chancellor thinks that they will not realise how clearly retrospective his proposed legislation is.  What the Chancellor is really saying is that if a person received a loan from an EBT before 8 December 2010, he should either voluntarily pay tax on the capital amount, even though it is probably not taxable at all under current laws, or he should repay the loan before 5 April 2019, and if he chooses to ignore both of these options and insist on exercising his legal rights under the loan agreement, then Parliament will introduce a new law to tax him in 2019 on money he received in a non-taxable form in 2001 or 2009, or even 1979.  That is retrospection with a vengeance!



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