Originally published July 2005
The House of Lords has found in favour of HM Revenue - upholding the Court of Appeal decision in the Dextra case that payments to the employee benefit trust (EBT) in question were not deductible for corporation tax purposes unless and until the EBT applied them in paying emoluments: MacDonald v Dextra Accessories Limited
The planning which is the subject of this case sought to obtain a corporation tax deduction when a contribution was made to an EBT, but to delay the tax any individual would have to pay in respect of this contribution indefinitely, whilst still allowing the individual to receive some benefits.
HM Revenue argued that Section 43 Finance Act 1989 prevented this planning by delaying a deduction where, broadly, ‘the emoluments are not paid before the end of the period of nine months beginning with the end of that period of account’. To determine whether this provision applied to the particular planning it was necessary to consider the meaning of ‘potential emoluments’ as defined in the section.
HM Revenue lost their case at Special Commissioners and on first appeal. The Court of Appeal overturned these decisions and found in favour of HM Revenue. The House of Lords has now confirmed the Court of Appeal decision.
In light of the case, many companies will be reviewing their EBT arrangements. This could result in requests from the companies, as the settlor, to the trustees to make changes to the EBT. In the most extreme cases, the company may ask the trustees to pay out the whole of the trust fund to the beneficiaries, in order to achieve a corporation tax deduction.
Trustees should be alert to the risk that such requests from companies may result in a conflict between the company and the trustees. In these circumstances the trustees should seek independent legal advice.
Possible questions requiring independent legal advice include:
- Does the Trust Deed permit the trustee to follow the wishes of the company?
- Are there any provisions allowing the company settlor to make a request or demand of the trustees?
- Is there an exclusion of any benefit to the settlor and is the receipt of the corporation tax deduction to be considered as a benefit?
- Is it for the benefit of the beneficiaries to make a payment out to them if they then get taxed on the receipt of this benefit?
- Issues will also arise from the existing investments within the trust fund - trust funds could currently consist of loans made to beneficiaries, investment in properties (including residential properties for the beneficiaries) and portfolios of share investments. If the trustees do wish to make appointments out then how best to realise these assets will need to be carefully considered.
- Should reserves be made for potential tax liabilities of the trustees?
- What indemnity arrangements should be put in place with the settlor company and with the beneficiaries?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.