GAAR Panel opinion on contrived employment tax avoidance arrangements

The GAAR Advisory Panel has opined that arrangements involving an employer financed retirement benefit scheme (EFRBS) which, via a series of tripartite transactions involving deeds of covenants and loans which were later cancelled, resulted in long-term loans to employees were not a reasonable course of action in relation to the relevant employment tax provisions.

The reference in this case perhaps shows that HMRC may perhaps consider the GAAR a more straightforward means of attacking highly contrived employment tax avoidance schemes than the broad principle set out by the Supreme Court in the Glasgow Rangers case.

Background

The matter referred by HMRC to the GAAR Advisory Panel involved an employer which funded an EFRBS through two deeds of covenant in the total amount of £200,000. Subsequently, the employer, a third party company registered in the British Virgin Islands (BVI) and the two employee beneficiaries entered into tripartite arrangements involving undertakings to make payments from employer to BVI, from BVI to employee and from employee to employer. Further tripartite arrangements were then entered into which involved several of the obligations under the initial arrangements and deeds of covenant being released. At the end of this exercise, the employer owed each employee £100,000, which was credited to the employee’s loan account and the employees had an obligation to repay £100,000 to the EFRBS.

The employing company argued that no liability arose under either ITEPA 2003 section 62 (as the arrangements did not give rise to remuneration) or under Part 7A (as the detailed requirements for falling within the disguised remuneration rules were not satisfied). In addition, the employer argued that it was entitled to a corporation tax deduction for the amount it contributed to the EFRB.

GAAR Advisory Panel Opinion

The Panel noted that Part 7A was introduced as a wide-ranging anti-avoidance measure to tackle arrangements used for the purposes of disguising remuneration to avoid, reduce or defer income tax. In particular, the Panel noted that the principal amount of a loan made available by an employee trust (including by an EFRB) is chargeable even though, being a loan, there is a requirement for the principal of the debt to be repaid.

These arrangements resulted in what the panel considered to be, in substance, loans to the employees. There was no economic difference between the arrangements in this case and a loan made to the employees by an employer-funded EFRB. In substance there was a loan made to the employees by an EFRB.

Whilst noting that it is not abnormal for an employer to establish an EFRB, the Panel concluded that it was abnormal and contrived for an employer to arrange long term funding of an employee trust and the provision of money to employees through the mechanism of the deeds of covenant, assignment of the benefit of these covenants and the three sets of tripartite deeds adopted in this case. In this case, the Panel could see no reason, other than for tax purposes, for the steps involving the EFRB to include the creation of a complex web of undertakings to pay, assignments of benefits of undertakings, and releases of obligations to pay so as to provide funding to the EFRB and money to the employees. Accordingly, the arrangements were abnormal and contrived.

In addition, the arrangements were not consistent with the principles and policy behind the employment tax provisions (to tax rewards once they were available to the employee). In particular, the Panel considered that the scheme was designed to exploit a perceived shortcoming in the disguised remuneration provisions, being the fact that the disguised remuneration provisions focused on employee trusts advancing money to employees, but not on economically equivalent transactions. It was inconceivable Parliament wished, particularly in anti-avoidance legislation like Part 7A, where the policy intent is clear, to treat the result of a series of contrived steps as tax free when the result of economically equivalent simple steps was, and was intended to be, taxed.

As a result, the Panel considered that the entering into and carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions. In the Panel’s view, the most likely comparable commercial transaction, if the aim of avoiding Part 7A had not been an issue, would have been a funding by the employer of the EFRB followed by a loan from the EFRB trustee to the employees on the same debt repayment terms as in the existing agreements.

Comment

It can be no surprise that the GAAR Panel has opined that these arrangements would fall foul of the GAAR. The arrangements were contrived and in many ways self-cancelling. Of course, one wonders whether HMRC would have been able to tax the arrangements in any event given the scope of the Supreme Court’s judgment in the Glasgow Rangers case. The decision to refer the matter to the GAAR panel may indicate that HMRC regard the GAAR as a rather more straightforward method of attacking highly contrived employment tax avoidance cases than reliance on the broad principles set out by the Supreme Court.