Please note: If you are a contractor who has been using an EBT and need advice about your options moving forward please call 020 7251 8690 or request a consultation now.

EBT (Employee Benefit Trust) loophole closed with immediate effect

HM Treasury cracks down on PAYE and NI avoidance schemes

On the 9th of December 2010, HM Treasury released the Overview of draft legislation for Finance Bill 2011 announcing legislation targeting schemes to pay remuneration through Employee Benefit Trusts (EBTs). The legislation will be introduced in the Finance Bill 2011, and become effective from 6 April 2011 onwards. The inclusion of anti-forestalling measures that became effective on the 9th December 2010 mean that from now payments of this type fall within the scope of the new measures.

The proposed legislation states that sums earmarked by trusts or other intermediaries will be treated as though it is a payment of income that is liable to PAYE tax.

HM Treasury estimate that at least 5,000 employers (including many in the financial services sector) and 50,000 employees (most of whom are contractors) will be affected by the changes.

What does this mean for contractors?

For contractors, the continued use of EBTs will subject their entire income to PAYE tax and NICs (by far the least tax-efficient arrangement available to contractors) in addition to the substantial percentage fees typically charged by Employee Benefit Trust scheme providers.

In most cases, their best EBT alternative will be operating through a compliant limited company structure. This often confers net pay rates almost as high as those achievable through EBTs and similar offshore schemes without the risk.

Contractors should contact regulated, UK-based professionals such as planIT to begin the transfer process as quickly as possible and no further payments should be made via the EBT structure.

Where their EBT providers suggest alternative arrangements or a new scheme, contractors should be wary. In January this year, HMRC successfully tested BN66 and established the ability to rule schemes illegal and apply taxes and penalties retrospectively in their case against Robert Huitson. This renders the strategy of jumping from one scheme to another until each is closed ineffective.

planIT Services Limited is a London-based firm of Chartered Accountants established in 1996 which provides a range of fully compliant contractor payment vehicles in the UK. We have never provided payments through EBTs.