What is an EBT?
Employment Benefit Trusts (EBTs) materialised in the late 1980’s. Their original design was to allow employers to provide employees with benefits such as setting aside funds to pay redundancy and other benefits on termination of employment. An EBT is a form of discretionary trust, meaning that it is at the discretion of the trustees to make payments to a beneficiary. However, EBTs have increasingly been used for tax avoidance purposes and in turn this increases chances of being scrutinised by authorities. Example of this includes:
- Paying bonuses via an offshore trust to avoid national insurance
- Remunerating employees by the way of loans, written off before they become repayable
- Providing loans in a depreciation foreign currency, resulting in a foreign exchange gain before the loan becomes repayable
How might EBTs affect me as a contractor?
There are several schemes designed for contractors, the most common operate via an umbrella company or a personal service company/consulting fees. The common threads throughout such schemes are:
- The contractor will never receive 100% of the contract income. It is either paid to the offshore trust direct or via a personal service company and then extracted by way of consultancy fees.
- The contractor will receive a small salary/directors fees usually at the minimum wage level or up to the lower earnings level for national insurance purposes.
- The remainder of the contract income less trust fees is then paid over to the contractor by way of a repayable loan (time specific or on demand).
It is the use of the loan vehicle for payments to contractors that has resulted in EBTs coming under even more scrutiny by HMRC. The issues are:
- Should the consultancy fees qualify for a Corporation Tax deduction if the contractor is not suffering taxation on the loan payments received?
- Are these loan repayments disguised remuneration. i.e salary or dividends?
The disguised remuneration rules introduced in April 2012 effectively rules out loans as being a tax effective method of remuneration from an EBT.
What might happen to EBTs in the future?
Due to the widespread use of EBTs in tax avoidance and the high level of public attention that such schemes receive the government has already legislated, and will continue to legislate, heavily in favour of the tax authorities i.e DOTAS, disguised remuneration, and continuing evaluation of the need for EBTs.
EBTs will undoubtedly exist in the future but not in its current format, it will have to revert back to its original intended use, undoubtedly another scheme will come along that will try to avoid the tax rules and regulations and the battle will continue between the tax authorities and the providers, leaving the individual tax payer stuck in the middle.
Why choose an EBT?
Some people still choose an EBT for the following reasons:
- They are willing to take the risk
- They have no choice – their personal circumstances determine their income level
- They are reassured that it is in accordance with HMRC regulations by the provider
- Historic reasoning – “I’ve been involved in this type of thing in the past and never been caught”
It is important to remember that most schemes will only cover the client up to first tier tribunal stage, however these cases usually go to the House of Lord, so deep pockets for legal fees will be required. The individual who benefits from EBTs will be liable for the tax, national insurance, penalties (up to 100% of the monies owed) and interest, not the company providing the EBT.
So what alternatives are there to using EBTs?
The alternatives are very simple:
- Become an employee and suffer tax and national insurance
- Become self-employed and suffer tax and national insurance
- Contract via a limited company. This means you will pay corporation tax and determine your own remuneration levels therefore controlling your personal tax exposure
If you would like to speak to someone and discuss your options then please feel free to contact us.