FOI release

Section 12 - Settlement opportunities

Published 23 April 2020

Generally, HMRC’s policy is to encourage settlement by offering settlement opportunities in appropriate circumstances with clear transparent and Litigation and Settlement Strategy compliant terms to make settlement cost effective for HMRC and the customer. We want to encourage early settlements to save the costs of litigation and so we offer terms on the basis that future terms will not be more beneficial.

At Autumn Statement 2010, the government announced it would introduce legislation to tackle Disguised Remuneration (DR) schemes. The then Financial Secretary to the Treasury, David Gauke, said ‘the government will introduce legislation to tackle arrangements involving trusts or other vehicles used to reward employees, which seek to avoid or defer the payment of Income Tax or NICs, including to provide a tax-advantaged alternative to saving beyond the annual and lifetime allowances available in a registered pension scheme’. This became Part 7A of ITEPA 2003 which was enacted in Finance Act 2011 and took effect from 6 April 2011. Part 7A only applied to prevent employers entering into schemes going forwards.

The legislation envisaged a future settlement opportunity and contained specific transitional relief to facilitate settlement. In particular, where funds had been placed in an offshore trust and invested rather than loaned out, if the employer settled, then the investment growth which had accrued in the trust would not be subject to employment Income Tax if brought onshore (although it could be taxed under different provisions in certain circumstances).

A number of settlement opportunities have been offered for DR schemes following the enactment of Part 7A:

• in 2012, HMRC opened the Employee Benefit Trust Settlement Opportunity (EBTSO). This was for DR schemes involving EBTs used by large corporate employers and employers
• in 2013, HMRC opened the Employer Funded Retirement Benefit Scheme Resolution Opportunity (EFRBSRO). This was for DR schemes involving EFRBS rather than EBTs used by employers. It had two settlement options, one of which broadly mirrored EBTSO
• in 2014, HMRC opened the Contractor Loans Settlement Opportunity (CLSO) to individuals who had used schemes prior to 6 April 2011
• in 2016, the government announced the removal a transitional relief to encourage the remaining large corporate employers to settle.
• after the loan charge was enacted, HMRC published settlement terms in November 2017 for all DR schemes. Employers and individuals had until 5 April 2019 to register, and provide the required information, to settle under these terms and prevent the loan charge arising.

Further details of these are set out below, including the main terms as well as figures on settlements.

Employee Benefit Trust Settlement Opportunity

Employers often wanted to settle to ensure they would not face a future DR charge under Part 7A on the money/assets in the EBT and any investment growth on these. Employers could settle by paying Income Tax, Class 1 NICs, late payment interest and Inheritance Tax (IHT) on the sums contributed into a trust for an employee or allocated within the trust for the employee by the EBT trustees (depending on the facts of scheme use). Employees who opted to settle personally would pay their share of their employer’s liabilities through the scheme.

Where years were unprotected, where HMRC was out of time to open an enquiry and raise a tax charge, voluntary restitution had to be paid to get relief from future DR charges unless the employer had provided sufficient information for HMRC to have protected the year before the statutory time limits expired. Where the employer had provided sufficient information, but HMRC had not opened an enquiry, no tax was required. This was on the basis that HMRC was out of time to collect the tax on past transactions, and, usually, had no realistic prospect of collecting the tax in the future.

A small number of scheme users settled on the basis that Corporation Tax Relief was denied on the contributions into the scheme. These customers did not have relief from future DR charges.

We wrote to over 5,000 large corporate employers and employers we were aware of at the time to let them know about the EBTSO. In total, approximately 700 large corporate employers and employers settled under EBTSO, paying around £1.6 billion before the opportunity closed in July 2015.

The settlement terms are available on GOV.UK.

Employer Funded Retirement Benefit Scheme Resolution Opportunity

This opportunity was offered to employers who used EFRBS schemes before Part 7A was introduced. Employers could choose to settle in two different ways;

Option 1: settle on the basis that Corporation Tax relief on contributions into the scheme were denied but that an employment income charge might arise in the future.

Option 2: pay Income Tax, class 1 NICs and late payment interest on the sums allocated within the trust for the employee by the trustees. After settlement the company could wind up the trust and trigger an IHT charge to be paid separately. This option largely mirrored the EBTSO.

We wrote to the 700 employers we were aware of in November 2013. 33 employers settled under option 1 and 254 users settled under option 2 before the opportunity closed on 31 March 2015 raising around £150 million.

Contractor Loans Settlement Opportunity

This opportunity was available to individuals, contractors, who used a DR scheme up to 5 April 2011 where there was an offshore employer.

Individual customers could settle their scheme use by paying Income Tax on the loans they received in protected years. Where an individual settled all their protected years, the settlement would also cover any unprotected years without the individual being required to pay Income Tax or voluntary restitution in respect of those years. This was on the basis that HMRC was out of time to collect the tax on past transactions, and, usually, had no realistic prospect of collecting the tax in the future. They paid IHT if a charge had crystallised or if they wanted to trigger a charge (as some arranged with the trustees to do).

The opportunity was first offered in July 2014 and ran through to September 2015, although some settlements were still being processed in December 2015. HMRC wrote to around 11,000 known users at the time, as well as their agents, to alert them to the opportunity.

Around 1,500 individuals settled under CLSO, bringing in around £31 million with an average settlement value of around £19,800. Most individuals signed contracts where they agreed to pay their tax in under two years. We were open to considering longer payment arrangements but only a small number of individuals asked for arrangements of more than 3 years.

The settlement terms can be found at www.gov.uk/government/publications/tax-on-contractor-loans/tax-on-contractor-loans and we published further information in response to feedback and questions at www.gov.uk/government/publications/tax-on-contractor-loans/tax-on-contractor-loans-extended-time-limit-and-more-information.

Post-Employee Benefit Trust Settlement Opportunity

After the EBTSO ended, employers could still settle by paying Income Tax, Class 1 NICs, late payment interest and IHT on the sums contributed into a trust for an employee or allocated within the trust for the employee by the EBT trustees (depending on the facts of scheme use). Employees who opted to settle personally would pay their share of their employer’s liabilities through the scheme.

Access to offset of any Income Tax and NICs paid on beneficial loans was more limited than during EBTSO. Voluntary restitution had to be paid for unprotected years to get relief from future DR charges, regardless of the information held when HMRC was in time to protect duties.

In March 2017, the government withdrew transitional relief from DR charges on investment growth in an EBT/EFRBS referred to above. This change in the law is sometimes informally referred to as the “paragraph 59 settlement opportunity”, after the legislation which was being amended. However, strictly speaking it was not a separate settlement opportunity. Rather, the fact that the withdrawal of the transitional relief was announced in March 2016 had the effect of encouraging large corporate employers to settle on existing terms.

Around 190 large corporate employers and employers settled raising around £330 million.

The settlement terms are available on GOV.UK.

November 2017 settlement terms

To help customers to decide whether to settle in the run up to the loan charge becoming due, we published one set of comprehensive and consistent terms for all DR scheme users on 7 November 2017.

The settlement terms are available on GOV.UK

The main differences between these terms and the previous terms are set out below:

• EBTSO - under the November settlement terms, voluntary restitution is required to be made for any tax years where HMRC has not protected the tax position to prevent the loan charge arising. Under EBTSO, voluntary restitution was not required if the taxpayer had provided sufficient information for HMRC to protect the position. Benefit in kind tax can only be offset against the settlement where the year is in date for overpayment relief to be claimed.

• CLSO - under the November settlement terms, voluntary restitution is required to be made for any tax years where HMRC has not protected the tax position. Under CLSO, voluntary restitution was not required for unprotected years. Benefit in kind tax can only be offset against the settlement where the year is in date for overpayment relief to be claimed.

• EFBRSRO - Option 1 is not be available under the November 2017 terms. Option 2 was similar to the EBTSO terms, so the differences between that and the November 2017 are similar.

Table 39 below out the differences between the settlement terms available over time.

Issue	EBTSO	EFRBSRO	CLSO	Post EBTSO	DR (November 2017)
BIKs on beneficial loans offset	Yes	No	Yes	Yes - limited	Yes - limited
Voluntary restitution	Yes - unless sufficient information provided	No	No	Yes	Yes
Statutory interest	Yes - allowed 30 days interest free to agree settlement	Yes	Yes - allowed 90 days interest free to agree settlement	Yes	Yes
Double taxation	Yes	Yes	Yes	Yes	Yes
Inheritance Tax	Yes	Yes	Yes	Yes	Yes
Penalties	Same treatment	Same treatment	Same treatment	Same treatment	Same treatment
Corporation Tax set off	Yes	Yes	N/A	Yes - limited	Yes - limited
Can employees of employers settle	Yes	No	N/A	Yes	Yes

The terms used are defined below:

BIKs on beneficial loans – if the individual or employee paid Income Tax on the basis of receiving a beneficial loan from the scheme HMRC gives relief for this in settlement (providing the tax year is in time to be amended or an overpayment relief claim has been made.)

Voluntary restitution – Late payment interest is due for protected years. Where HMRC has not protected an amount of tax due then any payment of this is classed as voluntary restitution and no late payment interest is charged in settlement.

Statutory interest – Interest is due from the date the Income Tax should have been paid subject to our agreement not to charge this where customers are in ongoing settlement discussions under the November 2017 terms.

Double taxation – DR schemes can give rise to more than one Income Tax and NICs liability on the same underlying income. Double taxation provisions ensure there is no double taxation on the same sum or asset.

Inheritance Tax – IHT can arise when there is a payment, or disposition, resulting in a loss of value to a trust. Broadly, IHT liabilities which have already arisen at the date of settlement must be paid as part of the settlement amount.

Penalties – Penalties can apply where a person has made a return which contains an inaccuracy which leads to an understatement of liability to tax or NICs. HMRC has generally not charged penalties on settlements except in exceptional cases or fraud.

Corporation Tax set off – Employers can claim a Corporation Tax deduction for any Income Tax and NICs they pay under the settlement agreement which is not made good by the director. Further detail was set out in our previous response.

Employee settlements – HMRC allows employees to settle by paying their proportion of their employer’s liability if the employer does not want, or is unable, to settle.

Settlement contracts

The Disguised remuneration: detailed settlement terms published on 7 November 2017 set out the standard settlement terms available to DR scheme users. The terms vary according to whether the scheme user is an individual, employer or employee. This is because settlements with employers typically include Class 1 National Insurance contributions (NICs) and Corporation Tax elements.

The settlement agreements are structured so that they settle the underlying tax liability from when the DR scheme was used, which means the loan charge does not arise. When the parties enter into the settlement agreement, this means that, in the case of protected years, the enquiries into the underlying tax liability are closed, and any assessments discharged.

Individuals

The redacted agreement provided by the Review is indicative of settlements with individuals.. A simple contract is used when liabilities are entirely protected or partially protected and unprotected. A deed is used when the agreement only includes voluntary restitution for unprotected years.

The templates are designed in such a way that caseworkers can include the settlement of employment income scheme usage, trading income scheme usage or both. The text in green relates to employment income, the text in red to trading income. Square brackets and asterisks denote options for the caseworker to choose as appropriate. There are different versions of the template according to whether the agreement was to be entered into before the end of 5 April 2019, when the loan charge had not yet arisen, or after 5 April 2019.

Where an instalment arrangement is required, a different version is used that sets out the instalment arrangement as an appendix. Where the individual is benefitting from a 5 or 7 year instalment arrangement, the main body contains an assurance that the individual meets the eligibility criteria for this arrangement.

Employers and employees

In contrast to individuals, employers, and employees settling on behalf of their employer, settle by way of a more detailed agreement recorded in a contract or deed. This was considered more appropriate for the higher value, more complex arrangements being used by employers.

There are two main types of settlement agreements, a “long-form” which was the only one used until the end of 2018, and a “short-form” used from 2019 alongside the “long-form”. The two are worded differently, but the substantive terms are the same. The “short-forms” were designed to be easier for caseworkers and employers to use and quicker to complete.

The detail of the agreements differs according to whether: * the agreement is made with the employer, the employee or both together; * the agreement covers protected and unprotected liabilities or unprotected liabilities only; * the scheme used involves a standard EBT, EFRBS or a so-called “EBT Lite” (where no Corporation Tax deduction was claimed for the employer’s contribution into the trusts); * the agreement was made before or after the 5 April 2019 date on which the loan charge arose; and * the employer is insolvent at the time of entering into the agreement.

Each of these circumstances require a slightly different template agreement with slightly different terms – there are approximately 19 different template settlement agreements currently in use for settlement with employers and employees.

More generally, the template agreements have been amended and updated in places on a number of occasions since the settlement terms were published. These updates have been made in response to feedback from caseworkers, tax agents and employers. However, the substantive terms have remained largely the same.

Go to section 13: Settlements.