Anti-avoidance provisions for disguised remuneration

Wide-ranging draft legislation has recently been published, which is designed to prevent tax avoidance through the use of “disguised remuneration” arrangements.

The main targets of the legislation are sub-trusts, family benefit trusts and employer-financed retirement benefit schemes (“EFURBS”). The measures are intended to catch arrangements using employee benefit trusts (“EBTs”) and other vehicles to benefit employees, or persons linked to them, in ways which avoid or defer income tax or National Insurance contributions ("NICs") on the full amount. This could include loans or other relevant arrangements which simply involve refraining from allowing employees directly to benefit from the amounts provided until employment has ceased or employees have moved abroad.

However, the draft legislation is widely drawn and as currently drafted appears to catch many mainstream employee share plan arrangements where employee trusts are used to hedge employee awards by using shares already in trust or acquiring further shares.

Representations are being made to HMRC with the intention of either amending the legislation or obtaining guidance which makes it clear that such arrangements are not caught by the new rules. The initial response from HMRC is that it does not intend to interfere with the operation of mainstream employee share plan arrangements that are operated on a commercial basis without a tax avoidance motive and is considering how best to reflect this. On the basis that we expect the legislation to be changed to reflect this, we are not suggesting that clients change their practice for operating standard employee share plans, but the position should be kept under review.

The legislation will come into force on 6 April 2011. Pre-existing arrangements are not affected, although actions taken now (but before 6 April) to beat the impact of the legislation are unlikely to be effective due to special anti-avoidance measures and any changes to pre-existing arrangements need to be very carefully considered.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com