There has been a lot of HMRC attention directed at Employee Benefit Trusts (EBTs) hitting the news recently, with cases such as Ranger’s being widely reported even in the non-taxation press. HMRC have also been pushing their settlement opportunity as well as putting pressure on EBTs with outstanding loans to beneficiaries.
This does not mean that all EBTs should be viewed as tax avoidance. There are still some EBTs in existence being used for the purposes they were intended, such as incentivising employees and aligning their interests with that of their employer by encouraging share ownership.
It is always a good idea to speak to your adviser well in advance of selling your business, but this is particularly important where there is an EBT.
Purchasers may have concerns where a vendor has an EBT outside of an approved shares scheme, and this can cause delays in the due diligence process. It can also add pressure on the vendor to reduce the sale price rather than dealing with exposure to potential tax charges through warranties and indemnities.
It is arguable that the risk attached to EBTs is not high, in the sense that HMRC’s views are well known and there are no nasty surprises left. The tax consequences of them are well known and can be easily quantified. It may not be good news, but it is unlikely that there is further bad news to come.
Nevertheless, the perception is that having an EBT is buying an argument with HMRC, so it may take time to persuade a nervous purchaser that all the risks have been identified and walk their advisers through the issues to achieve the best possible price. There are a host of practical matters to be dealt with even in the most straightforward of cases;
• Who will be party to the warranties and indemnities?
• Is an indemnity from a trustee worth anything or enforceable?
• Will the trustees need their own legal and tax advisers?
It may also be the case that preparing for sale brings issues out of the woodwork that need to be put to bed: improperly executed trust deeds, payments made without the right documentation or to the wrong people, or tax disclosures that have to be made to HMRC in the light of their changed approach.
There may also be planning to put in place for the vendor. Although the tax advantages of EBTs have largely gone, it is still important to review arrangements to ensure that double tax charges do not arise.
The EBT trustees may prefer to participate in any potential upside to the deal by taking shares in the purchasing company instead of cash and will have to consider the tax implications of doing this when there are several layers of complex anti-avoidance legislation to deal with. If the trustees elect to take a cash payment, this may give the EBT liquidity to make awards for the first time. These will have tax consequences for the company which would have to pay income tax and national insurance contributions on those payments. This is a tax charge that will fall on the target company after the sale is completed and so making it a liability faced by the purchaser. This tax costs would have to be considered under the sale and purchase agreement either through warranties and indemnities and / or require an adjustment to the purchase price.
Early prepping for sale is vital. It is worth talking to an adviser even if your timeline is a sale in two years’ time. Aside from EBTs, there are valuable tax reliefs that rely on a two year holding period in order to claim them, so the earlier any problems spotted, the easier they are to correct.