Off shore 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 10-12% 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 50,000 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.
It is inevitable that the demise of EBT's will continue to grab headlines over the next few years, as old users are forced to pay large tax demands and new schemes are closed down.
The legislation is very complex, highlighted by the fact that it takes 59 pages to cover the points. Our view remains that these schemes should be avoided. With proper tax planning it is possible to achieve high income retention, 80% is not unheard of and without the sleepless nights.
Please refer to our separate EBT Guide for more details.
Nixon Williams has never offered EBT or any off-shore schemes.
