The First-tier Tribunal has again sided with HMRC in a contractor loan scheme case, confirming that amounts paid into an employee benefit trust and returned as “loans” were taxable earnings.
In O’Brien v HMRC, the Tribunal held that income tax arose when the taxpayer’s remuneration was redirected into an employee benefit trust (EBT), even though the sums were later advanced to him as interest-free loans. The decision follows the Supreme Court’s approach in RFC 2012 plc v Advocate General for Scotland (the ‘Rangers’ case), which established that a tax charge arises where earnings are paid to a third party with the employee’s agreement.
The arrangement
The taxpayer, a contractor, became an employee of an Isle of Man company. The company invoiced his clients, paid him a modest salary and paid the balance of his remuneration into an EBT. The trust then made interest-free loans to the taxpayer, which were unlikely ever to be repaid.
PAYE and NICs were applied only to the salary element. The EBT contributions were not returned as taxable income. On his self-assessment return, the taxpayer disclosed his salary and the beneficial loan position, but not the underlying EBT payments. He also failed to include the scheme’s DOTAS reference number.
The Tribunal had little difficulty concluding that the EBT payments were earnings. The tax point arose when the sums were redirected to the trust. Describing the later payments as loans did not change their character.
Discovery assessment upheld
The more contested issue was whether HMRC was entitled to issue a discovery assessment under section 29 of the Taxes Management Act 1970.
The Tribunal found that the taxpayer’s return did not contain enough information for a hypothetical HMRC officer to have been reasonably expected to appreciate that the return was insufficient. The limited disclosure, combined with the omission of the Disclosure of Tax Avoidance Schemes (DOTAS) reference number, meant HMRC satisfied the statutory conditions.
Although the scheme had been disclosed by its promoter under the DOTAS regime, that did not cure deficiencies in the taxpayer’s own return. The Tribunal also indicated that partial or selective disclosure may be more misleading than helpful.
Why this matters for businesses
The decision does not break new ground, but it reinforces two points that remain live for business owners and employers: routing remuneration through trusts does not prevent a charge to income tax where earnings are redirected with the worker’s agreement, and sparse disclosure on a tax return is unlikely to block a later discovery assessment.
For employers, particularly those who have used contractor loan or EBT-based structures in the past, the case is a further reminder that form will not displace substance. For directors signing personal returns, the adequacy of disclosure remains central to managing long-tail tax risk.
The litigation trend continues to favour HMRC in this area.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
