A regular visitor to the forum is the contractor, usually a fairly new one, asking about Employment Benefit Trusts (EBTs) and “this scheme that promises 85% retention”. Followed, usually, by howls of outrage and “Don’t be so silly, your children will be destitute”.  Clearly these schemes work or they wouldn’t exist. So why are they a bad idea for the standard contractor?

Basically there are two flavours. This is my understanding, not a detailed analysis incidentally; finding out the details is tricky, since invariably the scheme providers will tie you up with an NDA before you sign up, in itself something to be concerned about, if you think about it. That said, typically either you become a beneficiary of an Employees Benefit Trust or you get an interest-free loan (for a fee…) that you don’t have to repay.

The EBT schemes mean you are handing over your whole income to an offshore company (has to be offshore, onshore ones were outlawed recently) and paying them to save it on your behalf and pay you the  benefits on a fairly regular basis. You get a small nominal salary on which you do pay tax, plus you pay an administration fee, but the benefit returns are tax free. The big risk, of course, is that you have no control over your money. The provider is not even under UK jurisdiction and if they do disappear overnight – which has happened – you have no comeback. Plus HMRC are looking at these schemes and when they can work out how, they will try and close them down.

The loan schemes involve you “investing” your money with someone who will then loan you back a percentage of it and sort of forget to ask for it back. When the loan falls due, you invest some more money and a new loan magically replaces the old one. The risk here is that one day they may not reset the loan but simply ask for their money back: that has also happened recently. Also, tax is still due on the benefit value of the loan when it is finally closed off. Even if you don’t fall foul of that during your working lifetime, it is still tax owed and eventually it will come out of your estate.

Still feel they are a good idea? They do what they say, but there is a significant risk you will either lose your money or be presented with a bill you  can’t pay without selling the children. If you do go in for one of these schemes, I suggest you get a very good risk assessor to give you an opinion.

There is another point to consider. It’s more of a  moral one, but sadly one that HMRC quite like to take on board. If you work in this country, and live in this country,  aren’t you liable to pay taxes in this country? HMRC certainly think so, and are busy trying to ensure that you do.

Finally you don’t actually save a huge amount of money compared to a carefully managed boring old Limited Company, certainly not enough in my view to take on the additional risk. Certainly you will gain compared to being  an umbrella user of course, but they are really the last people to try and use a scheme that is primarily aimed at high earners with multiple income streams.

Incidentally, wrapped up in all this is something called BN66. That is, in effect, an attempt by HMRC to change the rules retrospectively, stop something that’s been running unchallenged for years and tax people for income from the schemes they used to be in. I rather hope that one fails, since it sets far too many bad precedents, but that does not mean that HMRC won’t continue to attack EBTs and similar schemes aggressively and effectively. After all, it’s only fair…

By Malvolio

Image by John C Abell

Do you use an Employment Benefit Trust (EBT)? Do you think offshore tax schemes are immoral? Leave a comment below