A window for UK employers using tax avoidance schemes on remuneration to settle their affairs and pay up will shut on 31 March next year. The UK tax authority has also announced changes to how a tax disclosure pact with Liechtenstein will work to tackle potential misuse, a move that prompted criticism.

A window for UK employers using tax avoidance schemes on remuneration to settle their affairs and pay up will shut on 31 March next year. The UK tax authority has also announced changes to how a tax disclosure pact with Liechtenstein will work to tackle potential misuse, a move that prompted criticism.

The UK’s HM Revenue and Customs referred to the use of Employee Benefit Trusts, or EBTs, which had sometimes been used to remunerate staff in ways that would avoid, or defer, tax. HMRC started to clamp down on these vehicles in 2011. So far, it has raised about £800 million ($1.33 million) in tax and national insurance contributions from about 700 employers who had used EBTs for such purposes.

The statement from HMRC late last week said some people trying to use EBTs to avoid tax have sought to use the Liechtenstein Disclosure Facility - under which individuals with undeclared offshore assets can regularise their tax affairs - to find another route to pay less tax.

HMRC and the Liechtenstein government, however, have changed this facility. As a result, users of EBTs that are caught by the Disclosure of Tax Avoidance Scheme rules cannot take advantage of the full terms of the facility. Such people should engage in the EBT settlement opportunity instead, while it is still available, the tax organisation said.

The crackdown on EBTs has been controversial because it appears to be at odds with European and UK rules supposedly encouraging banks to defer bonus payments to reduce risky behaviour. Starting from 2010, the UK removed some of the tax benefits from EBTs. In the broadest terms, EBTs are discretionary trusts set up for employees, from which payments can be distributed at a later date, often in a highly tax-efficient manner. The decision effectively means that new EBTs will not be established. (To see an editorial on this issue that was published shortly after the change was announced, click here.)

“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,” Jennie Granger, HMRC director general of enforcement and compliance, said.

“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 per cent of avoidance cases heard in the courts,” Granger said.

Criticism over Liechtenstein arrangement

Although HMRC says that the category of people who cannot enter the LDF will not change, it does say that some of the favourable terms, which can lead to a reduction to the amount paid to HMRC, will now be restricted in certain circumstances, according to Irwin Mitchell, the law firm.

“These changes represent yet another shift of the LDF goalposts by HMRC. Many advisors 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,” Phil Berwick, partner and head of contentious tax at the law firm, said in a statement.

“HMRC are introducing a two-stage entry requirement before taxpayers can benefit from the full favourable terms of the process. It is remiss of HMRC to still be making amendments to the process five years after it was introduced. With less than two years before the Liechtenstein Disclosure Facility ends, on 5 April 2016, further reviews or changes by HMRC cannot be ruled out,” Berwick said.

“Preventing taxpayers who are more than three months into an enquiry from getting the full favourable terms of the LDF is not helpful. They may have an accountant who is not familiar with the LDF, or they may not be aware that they have a problem. It is not clear whether HMRC will be writing to every taxpayer under enquiry, or who now becomes subject to an enquiry, to explain that they may be able to use the LDF,” he added.