Employee Benefit Trust
EBT Scheme – Is There an Alternative for Contractots
Employee Benefit Trust (EBT) – Reduce Your Tax
With the introduction of an amendment to the Income Tax Act 2003, which was introduced in April 2011, disguised remuneration received by contractors through an employee benefit trust (or EBT) became subject to tax and NIC.
Employee Benefit Trust (EBT) Legislation
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The draft legislation was announced on the 9th December 2010 and contained anti-forestalling provisions, which meant that the new rules to all intents and purposes came into effect as of the date of the announcement. In fact many such EBT schemes closed down as of that date.
The new legislation is designed to treat income such as interest free loans from an employee benefit trust as though it were employment income, so that income tax and National Insurance Contributions would then apply and be collectible by HMRC.
How did Contractors Benefit from an EBT Previously ?
Typically the contractor would be employed by an EBT scheme provider based offshore – such as the Channel Islands.
As an employee, the contractor would be paid a salary which would attract tax and NIC in the usual way. However the scheme provider would also make significant payments into a trust which would then loan the money to the contractor indefinitely – the loan element not being subject to tax and NIC.
Unfortunately such EBT schemes were caught by the new legislation introduced in April 2011, and recently employers were encouraged to contact HMRC to see how they sat with the new legislation.
Employee Benefit Trust – An Alternative ?
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Fortunately, when one door closes another one opens, and there still exists a highly tax efficient solution that enables contractors to retain up to 85% and above of their contract value.
With Employee Benefit Trust (EBT) schemes in the past, contractors had to become employees in order to benefit from payments distributed by the trust. The new legislation targets such employees.
However in the alternative solution I found, a Trust (not an EBT) has been established specifically for self-employed contractors as beneficiaries. Its safe, simple and compliant.
So forget high taxes and IR35 worries from HMRC
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Employee Benefit Trust – HMRC Announces Amnesty
Employee Benefit Trusts have long been used by companies to avoid paying tax on bonuses. In addition they have been a popular vehicle for IT contractors and others to receive remuneration in a tax efficient way by taking loans from the trust.
Employee Benefit Trust – Finance Bill 2011
With the publication of the Finance Bill on 31 March 2011, which included retrospective changes to employee benefit trusts from 9th December 2010 when the draft legislation was first announced, many contractor umbrella organisations, for IT contractors especially, were caught on the hop, and had to close their employees benefit trust schemes down pronto, since remuneration distributed this way became immediately subject to tax and NIC just as if it had been paid to the employee directly.
It wasn’t just umbrella companies who made use of an employee benefit trust to receive tax free loans.
by fostersartofchilling
Rangers Football Club made use of the scheme to provide tax-efficient payments to employees.
In the confusion, some umbrellas ignored the announcement of the draft legislation and continued making payment to contractors,
while others switched the contractors involved to other schemes which they had on offer, or through associated companies, such as standard PAYE umbrella arrangements or self employed basis schemes –
as an aside the self employed route works quite well, after expenses are offset against tax, and at least the self employed NIC is a lot lower than for an employed person (good for single contractors who can’t share company profits with their spouse to mitigate taxation).
But I digress..
Employee Benefit Trust Amnesty
Recently HMRC offered an amnesty to employers previously operating an EBT scheme by giving them the opportunity to resolve outstanding enquiries. HMRC were never happy about such schemes and the purpose of the new legislation was to put the matter beyond doubt.
The offer by HMRC is basically to allow employers to settle without recourse to legislation, thus keeping down costs for both parties and freeing up resources. This has the benefit of at least offering closure on what might have been or become a long drawn out legal process.
HMRC have stated that they are keen to avoid the process of litigation with employers if at all possible and wish to be pro-active in encouraging companies to come forward to discuss how they sit with the current proposals.
Fortunately some organisations had the foresight to anticipate these recent events and long since set up financial structures which have emerged as remaining tax efficient vehicles despite the new legislation.
Employee Benefit Trust – An alternative?
Fortunately after the employee benefit trust scheme I was on was closed down, I did find a highly tax efficient solution that returns up to 85% of my income:
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Surge in Employee Benefit Trusts
Employee Benefit Trusts Surge
Employee Benefit Trusts are a suitable means of remuneration under the new FSA rules as they are often linked to length of service, and those who leave under a cloud can be excluded.
In consequence Kleinwort Benson is predicting an increased demand for EBTs so that firms can avoid the pitfalls of the new remuneration rules that the Financial Services Authority are introducing.
Many financial services businesses are currently in the process of implementing the requirements of the FSA’s Remuneration Code. The Code puts pressure on some employers to defer a proportion of variable cash bonuses and to award some bonuses in the form of shares.
The new rule surrounding reward in the financial sector is to affect an estimated 2,500 companies in the financial sector, consequently they are searching for alternative reward strategies to get around the restrictions that are to be placed on bonuses by the FSA’s new rules.
Attendees at the recent Great Employee Benefit Trust Debate learned how EBTs could be utilised to reward and retain staff.
Speaking at the EBT debate Andy Goodman, a Tax Director with BDO, the world’s fifth largest accountancy organisation, commented that although Employee Benefit Trusts are an affective, tax-efficient method of remuneration, the main driver for introducing such share schemes should not be the tax savings.
But rather, he said that companies should put their main focus on the motivational aspects of giving employees a stake in the business.
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Who am I ?
Hey, Adrian here. I've been a contractor for 33 years and am always looking for the best way to reduce the burden of taxation.