The Pensioneer Trustee Company (Guernsey) Limited
T +44 (0) 1481 743760
HMRC is currently sending letters to companies that have made contributions to Employer Financed Retirement Benefit Schemes (EFRBS) that outline an opportunity to settle the taxation treatment of these contributions under one of two possible treatments. These letters specifically concern cases in which corporation tax deductions have been claimed for contributions to an EFRBS without a corresponding income tax charge on beneficiaries.
In these situations, the availability of corporation tax relief depends on the interpretation of a specific piece of tax law. This legislation has been widely interpreted as allowing a corporation tax deduction in situations where a payment was made “under an EFRBS” regardless of whether or not such a payment triggered an income tax liability. Accordingly, corporation tax relief has often been claimed in situations whereby a payment has been made under an EFRBS, such as to a trust, or an investment wrapper, that does not trigger an income tax charge on a beneficiary.
In its 2009 Spotlight 6 publication HMRC stated its view that corporation tax relief is only available if beneficiaries have received payments that are subject to an income tax charge, but Spotlight 6 does not carry legislative weight. While HMRC has investigated a large number of these cases, none have so far made it to court. This means that HMRC has not successfully argued its position in court, but equally the counter-position has never been successfully defended. It is worth noting that HMRC has subsequently changed the relevant piece of legislation to be certain that its interpretation is correct going forward.
In the last year, HMRC has in some cases tried another attack by arguing that the payment under an EFRBS should be subject to an income tax charge. This would allow the corporation tax deduction to remain but at the cost of a larger income tax liability. Interestingly, in its settlement letter HMRC does not seem at all sure of the validity of this argument. On the face of it, the second treatment available under the settlement option is based on this argument, but the settlement letter uses a subtly different approach.