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A City law firm is warning of an "increasingly aggressive" approach by HMRC to investigations into high-earner contracts, including those awarded to expats in the banking sector

New rules concerning so-called "disguised remuneration" have been introduced to prevent people avoiding tax on income by having money paid into Employee Benefit Trusts (EBTs). Law firms now fear that public sentiment towards high-earners is encouraging tax inspectors to take an aggressive stance against disguised remuneration, even on legitimate contract structures.

"Many expats will have benefitted from Employee Benefit Trusts, or other income tax planning arrangements, and assumed that they have no risk of a personal liability. However, in some cases employees will not be insulated from HMRC enquiries and claims, so will be at risk," said Damian Bloom, tax partner at law firm Berwin Leighton Paisner (BLP).

The recent investigation into Glasgow Rangers shows that HMRC is taking a much tougher line on the use of Employee Benefit Trusts to pay high earners, a practice that is in widespread use among banks and hedge funds in particular.

BLP believes that nearly 300 similar investigations are currently underway across a broad range of sectors, not just limited to the sporting world. Tax inspectors are using new powers of investigation to crawl through structures set up years ago and accepted at the time as legitimate tax planning.

Rangers used EBTs to pay players' wages into offshore trusts in order to avoid national insurance. HMRC is claiming that because the EBT was written into employees contracts, it is not discretionary and found the club owed 43 million in tax, forcing the club into administration. The potential penalties for banks and funds could be significantly higher.

"There has also been a worrying shift in attitude by HMRC in a number of civil investigations it is using language normally reserved for criminals, which is symptomatic of its increasingly aggressive approach," said Neal Todd, another tax partner at BLP.

The firm is currently working on a case defending a banking client against a charge of disguised remuneration. The outcome of that case will determine whether or not other firms employing expats are at risk of similar sanctions.

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Tax warning to expats in banking sector