How are Employee Benefit Trusts Taxed?

If you are an employer who is interested in incentivising the employees of the company while also minimising the tax obligations, you are on the right page. This guide can also help if you are already using the employee benefit trusts and just want to make sure that you are meeting all the tax requirements in the UK.

It is a win-win case either way because you can attract the top talent in the industry by offering rewards and benefits while also retaining them in the longer run. This will also allow you to reduce the burden of your tax liabilities. So, let us dive into the discussion and get the most benefits of the EBT to retain the top talent of the industry.

 

 

What is an Employee Benefit Trust?

In simple words, employee benefit trust is set up for the benefit of the employees by their employers. This way the companies ensure that they reward the efforts of employees and incentivise them accordingly as well. Also, this will bring in tax benefits.

In most cases, the employers make regular contributions to fund the EBT. This kind of trust is often managed by several trustees. There is a mutual understanding of using the fund to the benefit of employees. This can include disability allowances, life insurance and shares of the company as well.

There are multiple types of EBT, which include

• Discretionary EBTs which decide how much every employee should receive
• Hybrid EBTs which are known to be a blend of discretionary and non-discretionary benefits for the employees
• Non-discretionary EBTs give the same benefits to all the employees of the company

Moreover, the purpose of  the EVT is purely to provide benefits to the employees of a company, however, it can also be used

• To offer the tax benefits to the employees
• To motivate the employees by offering different kinds of incentives
• To attract top-notch employees to work in the company and ensure to retain them

This scheme is different from the other schemes for employees like the share option scheme and pension scheme. This is because they have the option to offer a wide range of benefits through one scheme and that makes them flexible enough to implement in this regard.

How are Employee Benefit Trusts Taxed?

When we talk about the taxation treatment of employee benefit trust, the affair can be daunting to navigate. The process may seem to be playable for the employees but when the employer is liable for all the details, that is where the complexity comes in. The rate of tax implemented on each employee is dependent on the income tax bracket of every individual.

i. Capital Gains Tax Implications

Capital gains tax is payable in this regard only if the investment made in EBT gets an increase in value. If there is a gain on the investment, CGT will be charged immediately in this regard. In this scenario, the rate of tax will depend on the kind of investment and what is the CGT allowance given to the employee.

ii. Tax Relief on Contributions

The contributions that are made to the EBT can be inclined towards tax relief. If the employer has a Corporation Tax liability, this relief is normally given in this case.

iii. VAT Implications

In normal scenarios, the value-added tax does not apply to the kind of benefits that an employee is getting through EBT in the UK. Value-added tax is only implemented if the EBT benefits include some kind of services or goods.

What are Tax Avoidance and Anti-Avoidance Measures in this Regard?

There are some employers in the record who are observed to use the EBT benefits for the sake of not paying tax or being liable for it. This can include National Insurance Contributions income tax etc. Routing payment is normally involved in this to avoid paying the tax.

i. HMRC’s Approach to Tax Avoidance

HMRC has come up with beneficial measures to keep a check on tax avoidance by employers in this regard. However, HMRC has come up with a dim view still. This will allow us to prevent tax avoidance. This approach is normally challenged by other schemes to control tax avoidance in the UK.

ii. Penalties for Non-Compliance

There are strict penalties for the kind of employers who avoid paying tax by using multiple schemes and through this, they might fail to comply with the measures for anti-avoidance of tax payment in the UK. This can also include the unpaid tax as well as the interest and fines.

 

 

The Bottom Line

In conclusion, there is no doubt that there are complex taxation treatments for employee benefit trusts in the UK. This is because the employers will have to deal with the VAT implications, corporation tax, CGT, and income tax while they are trying to set up the management of EBT in the UK.

Moreover, by getting to know the taxation of EBT, the employers can ensure that the benefits are offered to their employees and this will minimise the tax obligations as well. In either case, it is essential to get in touch with professionals to make sure that the EBT is properly managed and set up according to the standards and requirements of the UK. This will also help to attract the top talent of the industry and retain them by making gentle offers of benefits in the long run.