Contractors' Questions: Any advice for EBT contractors under HMRC enquiry?

Contractor’s Question: Although I’ve read the general advice for contractors being investigated by HM Revenue & Customs over their use of Employee Benefit Trusts, I’m still unsure of what to do next or how to respond, especially as my accountant recommends just paying the demand outright. In particular, is appealing the first port of call or is contacting the scheme provider the most important initial step? I also wonder if there’s scope for HMRC to multiple the liability which it has estimated for a single tax year by the number of other tax years a contractor received loans from an EBT?

Expert’s Answer: Contractors involved in any tax arrangements, whose affairs have been picked up for investigation, should, in the first instance, contact the company who provided and operated the arrangements. All arrangements are different and some operators may have made provision for defence of the arrangements either through insurance or perhaps through a ‘fighting fund’ funded out of the fees.

Providers/operators are not of course obliged to provide this cover and whether or not it is available should have been agreed when the contractor went into the arrangements. Some providers may offer some degree of cover out of goodwill but there is unlikely to be any obligation, and contractors should seriously consider what protection, if any, is going to be offered before they go into any tax planning or arrangement.

When the EBT scheme provider’s cannot help

If no defence facility is available then contractors will need to make their own arrangements with an appropriate tax or legal adviser.   

Similarly, contractors should understand the nature of any tax arrangement before they enter it. Contractors often believe they are going into so-called ‘compliant’ schemes. But this term has no meaning in this context. Most of these schemes are held to be 'tax avoidance’ by HMRC.

HMRC offer no formal ‘clearance’ procedure for these arrangements. They all stand or fall on their merits if and when HMRC investigate them. Most scheme providers offer their arrangements in good faith having taken appropriate legal opinion. But any tax Counsel’s opinion is just that - an opinion. It is always open to HMRC to take a different view of the law and to contest the technical basis of any scheme in the Courts. This conflict of legal interpretation is the reason why tax cases end up in Court and the Courts are the only true arbiters of whether a scheme or arrangement works or not.

In addition, the implementation of the scheme is also crucially important. Many schemes work in theory but fail when the facts are investigated because they have not been operated or implemented properly. This will often only emerge in the course of the HMRC investigation.

When EBT contractors should appeal

Whether or not a contractor should fight any tax assessment or pay a demand will depend on the facts and circumstances of each case and on the strength of the arrangements in question. Contractors will need to take a view after discussion with the scheme provider on the availability of defence (including defence costs). And we would recommend that the contractor obtain the opinion of a third party tax or legal adviser. Payment of the tax would of course prevent the accrual of further interest if it subsequently turns out that HMRC’s assessments are correct but payment should be made along with an appeal to keep the position open.

Revenue can come back for more

However, paying an assessment for any single year will not prevent HMRC from assessing other years if the contractor has been involved in similar arrangements in other years. HMRC’s ability to assess other years will be determined by the normal rules of assessing. They can go back four years in any normal situation but up to twenty years in some circumstances.  

No silver bullet

There can be no set formula for dealing with HMRC’s enquiries as each will depend on the facts and circumstances of the scheme and the position of the individual concerned. In any event, the contractor should engage with HMRC probably with or through his tax or legal adviser to ascertain the basis of the assessment or enquiry and the likely extent of his liabilities.

It should be remembered that HMRC are still in the early stages of investigating many of these schemes and there may be good grounds for resisting them. For example, at the moment the use of loans in EBT arrangements is good law as supported by Sempra Metals Ltd v HMRC, Macdonald v Dextra Accessories Ltd and in the recent Glasgow Rangers case, though HMRC are appealing this last case.

The expert was Mark Boardman, a tax adviser at TaxTalk (UK) Ltd, a specialist provider of tax advice consultancy services.

Editor’s Note: The comments in response to this Contractor’s Question should not be relied upon and professional advice tailored to your individual circumstances should be sought in each and every case. Neither ContractorUK nor the contributor accepts liability for any direct or indirect loss arising from any reliance placed on the reply.