Malvolio View Comments 
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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
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Oct 26, 2009
at 3:36 pm
Anyone use an EBT? I'd not heard about these dodgy off-shore tax schemes before… thanks to Malvolio for some interesting thoughts on this.
Oct 27, 2009
at 10:10 am
This is the first I'd heard of these schemes and they do sound unreliable. I think your analysis is sound, handing anyone else your salary is surely walking on thin ice.
Are you really troubled by moral concerns here though? Schemes like this, if they worked, would make the exploits that Lord Sainsbury, Richard Branson, the Barclay brothers etc. are using to massively cut their tax bills availiable to more people. Grubby perhaps but I'd prefer these to techniques to be universally available, if only so HMRC dealt with them more seriously.
Oct 28, 2009
at 8:03 am
Hmmmm… My worry with that argument is that HMRC will crack down and the smartest and the richest will find some other new method of tax <strike>evasion</strike> efficiency.
Brandson will probably move all his cash into space! :)
Oct 28, 2009
at 10:23 am
Yes they probably will, but is that a constructive or destructive thing to happen?
Arguably the quicker this cycle runs, of tax schemes being developed, becoming widely available then closed down, the greater the pressure for deep, structural changes to taxation, economics etc. HMRC and the evaders / efficiency seekers are driving economic evolution, which, like medicine, dentistry or renewable energy, I would like to see develop as quickly as possible.
Oct 28, 2009
at 11:44 am
The problem is that these schemes exist because people don't want to pay any more tax than they need to. If somone says “Do this and you get to keep more of your income”, there will always be people willing to join in. Usually they are probably the least informed people out there and so the least suitable to evaluate the risk My objective was to highlight just how short-sighted that can be and how severe and expensive the results can be.
These schemes work almost exclusively by transferring your income offshore and then applying local (and quite possibly irrelrevant) taxation rules and paying you something back. You get income in this country but you sort of pretend you have already paid taxes on it at the correct level; just not to HMRC…
Any government is not going to look kindly on any of its citizens who try to avoid paying tax in this country if they live here and earn their money here. The turnover of all the various schemes, and the continual appearance of new, ever more imaginayive ones, will continue. They will not stop until HMG persuades us that we should pay taxes in this country, and that such taxes are proportionate and fairly calculated. But as long as prominent figures can declare £1bn dividends on profits that are not yet realised and payable to their Monaco-resident spouse, and still enjoy the benefits in this country without paying any tax at all, then HMG are going to have a problem doing so.
May 29, 2010
at 4:37 am
Great article, a lot of useful information. Having a strong Debt Consolidation plan is always an important element of dealing with taxes and finance in general that some businesses don't realize the importance of.
Jul 5, 2010
at 8:26 am
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