Tax Avoidance Schemes for Contractors

The Finance Equation’s opinion is that in the current climate contractors should avoid EBT  (Employee Benefit Trust) and other offshore set ups. 

EBT’s worked well in the past and were normally set up in the Isle of Man and other channel islands. The aim was to reduce the overall percentage of tax paid by the contractor to between 10-20% which was very attractive for the higher rate tax payer. Basically how EBT’s work is to pay the contractor a very low salary (normally enough to pay the contractors basic costs) that would be taxed in the UK and the rest of the profits paid as a non repayable loan by the EBT to the contractor.

On 6th April 2011 legislation was introduced to target the above mentioned schemes which made loans made post 9th December 2010 taxable if not repaid to the EBT. Loans made post 6th April 2011 were automatically taxable and the contractor having to account for National insurance and income tax via the PAYE system . HMRC invited all users of such schemes to settle without recourse or litigation, although no specific deadline for this incentive HMRC will assume that if users did not contact them by 31st December 2011 that they did not want to engage with them, HMRC would then progress enquiries formally.

This legislation means the effective closure of such schemes and we do not recommend clients to use them. Many providers of such schemes are now closing them down. HMRC is likely to continue to aggressively close high risk tax avoidance schemes.