News update – Landmark tax ruling backlash

Employers could be liable for substantial tax charges if they made payments into an employee benefits trust (EBT) before 2002.

According the House of Lords’ judgement in Macdonald (HMIT) v Dextra Accessories Ltd, which was published in July, employers are not eligible for tax relief unless the EBT made taxable payments to employees. Previously, all payments were considered to be tax beneficial.

Nicholas Stretch, a partner in the employment, pensions and incentives department at law firm Norton Rose, said that the rules governing EBTs changed in 2002, so only contributions made after 27 November of that year would be affected: “This is an example of how a decision in 2002 is going to affect something in 1998/1999 depending on how far the Revenue can go back. It’s obviously a concern for companies because it’s something they thought they got tax relief for and suddenly they haven’t.”

However, he added that the Dextra case was based on a set of very specific facts, so employers should determine how the facts of their arrangements differ from the trusts used in the House of Lords case.

Firms, such as investment banks, which operated bonus arrangements for large numbers of staff in the late 1990s are the most likely to be affected.