Arrangements to deliver de facto loans from an Employer Funded Retirement Benefit Scheme (EFRBS) were not a ‘reasonable course of action’.
The General Anti-Abuse Rule (GAAR) allows HMRC to counteract tax advantages that arise from ‘abusive’ arrangements. For these purposes, arrangements are ‘abusive’ if they cannot ‘reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions’.
Before invoking the GAAR, HMRC must refer the matter to the Advisory Panel for an opinion on the ‘reasonableness’ of the arrangements.
An employer established an EFRBS which was funded by way of a small cash contribution and assignment of the benefit of two deeds of covenant. The employer, the participating employees and a British Virgin Islands company then entered into a series of tripartite deeds which, through several steps, resulted in:
In substance, the arrangements resulted in a loan from the EFRBS to the participating employees.
The taxpayers contended that no income tax charges arose in relation to the arrangements (in particular, the ‘disguised remuneration’ legislation did not apply) and the employer was entitled to a corporation tax deduction in respect of the funding provided to the EFRBS.
The Panel’s view
The Panel noted that it is normal for an employer to establish an EFRBS in order to provide retirement benefits, and that the employee benefit legislation recognises employers have a choice of rewarding employees directly or via a trust.
However, the Panel formed the view that the method of funding the EFRBS and the complex series of transaction entered into to deliver benefits into the participants’ hands were ‘abnormal and contrived’, and carried out solely for tax purposes.
Furthermore, the arrangements were intended to exploit perceived shortcomings in the drafting of the ‘disguised remuneration’ legislation and provide participants with loans from a trust structure without triggering immediate income tax charges (and PAYE and NIC obligations).
This was not a reasonable course of action in relation to the relevant tax provisions, as their underlying principle was that employees should not be able to avoid a charge to tax on employment income by entering into arrangements with parties other than their employer to receive employment reward (including by way of loans).
The full Opinion Notice is available here.
The Panel’s opinion in this case is unsurprising, and the message clear.
When implemented for bona fide reasons, EFRBS are a legitimate way of providing retirement benefits.
However, employers who seek to exploit such structures and ignore the ‘keep off the grass’ warning intended by the GAAR, in this case in relation to the ‘disguised remuneration’ rules, can expect a robust challenge from HMRC.