Off shore and Employee Benefit Trust (EBT) schemes are heavily promoted by organisations usually based in the Isle of Man, the Channel Islands and even Switzerland. A common boast is that a contractor can retain up to 85-90% of their income.
Although many schemes claim to have unique features, they all essentially work the same way. The contractor will receive a low salary of say £12,000 per annum; this will be subject to UK income tax and national insurance. The payment of a relatively small sum of tax does not legitimise the scheme! After the retention of a large fee by the scheme provider (usually 10-15% of your income), the remainder of the funds are provided in the form of a loan.
- Usually the tax and national insurance paid on the salary is the only tax that is paid, probably no more than £1,500 per annum. This probably equates to an overall tax rate of no more than 2%!
- If a scheme makes promises that a contractor will retain 85% of their income, the fees paid to the scheme provider will probably be 12% of the contractor's income.
- You will be subject to tax on the loan until it is repaid or written off.
- The scheme provider will promise not to ask for the loan to be repaid, ever. This is clearly a big risk to take on trust alone.
- If the loan is written off, it becomes fully taxable.
HMRC estimate that there are 100,000 contractors using these schemes.
Legislation from 6th April 2011 has made these schemes futile, in addition measures have also been introduced to bring the rules into effect for any loan made from 9th December 2010.
Scheme providers will often quote that their scheme is 'QC approved' or 'legally backed' and even 'HMRC approved', none of these will protect a user when HMRC start to investigate. At the end of the day it is the user that is liable to pay the taxes, not the scheme provider or any legal advisors.
In the 2013 Budget, HMRC have announced a stategy to close down these schemes.
Clearly the days of being able to use these aggressive tax avoidance schemes, is now limited.
The Government has started a consultation process to be followed by legislation in the 2014 Budget, to close down these schemes.
HMRC are currently pursuing current and past users of offshore schemes, collecting underpaid taxes, interest and penalties, often running into tens of thousands of pounds.
Nixon Williams has never offered EBT or any off-shore schemes.