Taxpayers can still settle their affairs, but since the EBTSO was withdrawn on 31 July 2015, the treatment of any agreement will be different.

EBTSO only applied to users of employment benefit trusts (EBT) before the introduction of the rules at part 7A Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), but it is still possible to enter into an agreement that meets the conditions of paragraph 59 of schedule 2 of Finance Act 2011.

The guidance sets out the general principles that will apply to settlements and provides a table showing a comparison of the terms of settlement both before, and after, the withdrawal of the EBTSO.

Under EBTSO, income tax and class 1A National Insurance contributions (NICs) paid on beneficial loans from the EBT could be offset against the total liability even if the income tax and NICs paid on the beneficial loans were out of date for an overpayment relief claim.

In contrast, income tax will now only be offset for years which are open, or for which a valid overpayment relief claim can be made. The class 1A NICs can only be offset if it is possible to make a valid application for return of contributions paid in error.

Previously, a para 59 agreement provided part 7A relief on the investment growth on both the earnings and the amount representing secondary Class 1 (employer) NICs within the trust.

Following the withdrawal of EBTSO, the para 59 agreement will, for agreements reached before 31 March 2017, give part 7A relief on the investment growth on the earnings but not on the investment growth on the secondary Class 1 NICs.

When the investment growth on the amount representing secondary Class 1 (employer) NICs is distributed, it will trigger a part 7A charge.

Charges and interest

Unlike previous arrangements, full settlements must include recovery of County Court fees incurred in protective proceedings for NICs. Interest will be calculated on a strict basis with repayment interest calculated separately on any repayment amounts.

Prior to July 2015, taxpayers were allowed para 59 relief on contributions to the EBT without paying the earlier earnings charge where ‘sufficient information’ had been provided. This would apply where HMRC had been provided with sufficient information to raise assessments/determinations under normal time limits but did not do so.

HMRC now says that settlements must still include all protected years and it will continue to invite voluntary restitution for years without assessments and/or determinations.

Any unprotected years where voluntary restitution is not made will not be covered by a para 59 agreement and will not have relief from a subsequent part 7A charge.

The guidance makes clear that some aspects of the settlement arrangements remain unchanged including the way in which earnings are calculated and the handling of inheritance tax (IHR) liabilities.

As was the case before July 2015, any inheritance tax (IHT) liabilities that existed at the time of the settlement can be settled alongside the PAYE and NICs’ liabilities as part of one settlement.

Where the deed permits, or allows the trustees to pay income tax and NICs, a payment made to settle that liability was granted relief from IHT exit charges in a similar way to a deed which obliged the trustees to settle the income tax and NICs liability.

This applied where a trust settles that liability, and payment would not be subsequently recovered from another party.

This remains the case, and HMRC says that any effect on 10-year anniversary charges would continue to be determined on the facts of each settlement.

Click here for HMRC Guidance on Employee Benefit Trust settlements effective from 31 July 2015.