Employee Benefit Trusts, or EBTs (also known as offshore employee benefit schemes) are complicated – and finding unbiased information is a challenge. We share HMRC’s stance on EBTs, along with some advice and tips to keep you compliant.
What does HMRC say about EBTs?
HM Revenue and Customs state that the purpose of an employee benefit scheme (EBS) is…
“To provide employees and directors with specific kinds of benefits such as loans, shares in their employing company, pensions and other retirement benefits, accident benefits or healthcare benefits.”
They also go on to say. . .
“EBTs have increasingly been used for avoidance purposes, with the aim of providing employees and directors with benefits in ways that aim to minimise or avoid liability to income tax (and PAYE) and employers’ National Insurance Contributions (NICs).”
Well, that’s pretty clear.
How do employee benefit trusts work?
A number of companies make some ambitious claims about the level of take-home pay that can be achieved by using an EBT, some quote rates as high as 85% of your contract.
Typically if you use an EBT provider you will receive a small basic salary, with the remainder of your income coming to you via a loan. HMRC issued a brief outlining the 2019 loan charge for disguised remuneration, which allowed any outstanding loan balances to be detailed by 30 September. HMRC has also requested that 2018/19 tax returns for those affected are filed by 31 January 2020.
If your loan or EBT is written off, the loan becomes taxable and you immediately become liable for any back taxes. The loan provider may inform you the loan is never written off, but that is only true if it remains with the same provider. You will remain liable for the repayment of the money.
Additionally, as the loan is a benefit in kind (BIK) you’ll have to declare it on your tax return as income, which means you’ll have to pay the tax and potentially still be liable to repay the loan.
HMRCs checklist for EBT schemes
HM Revenue and Customs have a checklist that may help to ensure you don’t get caught out. HMRC states that when forming an EBT scheme, you must AVOID the following:
- Payment of bonuses via an offshore trust.
- Payment of remuneration by way of loans, which may be written off before they become repayable.
- Create an offshore ‘moneybox’ for director/shareholders of close companies.
- Allowing employees to use assets (such as cars) owned by the EBT, the costs of acquiring which would be capital expenditure if they were owned by the employing company.
- Providing benefits in the form of shares (not in the employing company) whose values can be most easily manipulated before or after they are transferred from the EBT to employees or directors.
While EBTs are legal, the benefits listed above can be called in and collected from you at any point.
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EBT scheme providers are not liable. You are.
If you work in the UK and use an EBT each month, you will receive your small salary and the remainder of your ‘wages’ in the form of a loan or another form of benefit. With your EBT headquarters offshore, you bear the financial risk. Any form of payment that is not included in your monthly wages or recorded for HMRC places you at risk of avoiding tax payments, not the offshore holders.
There are a great many legitimate schemes out there, however, they have mostly been developed for a very specific purpose. Contractors have been caught out in the past, and are quite vocal about the effect it’s had on their lives.
One contractor recently wrote: “Please add one more frustrated, sick and naive con to the list. I had a letter arrive Thursday and it knocked me sick. Stressed about it all day Friday only to find another when I go home. Not the most settled of weekends”.
We urge anyone considering an EBT to take a step back and consider if the scheme really makes sense. If you are at all concerned – call your local tax office and discuss the scheme with them. You may also find our offshore tax schemes or UK limited company page helpful.
Is there an alternative to EBTs?
Yes, there are alternatives. The most commonly used alternative is to trade through your own legitimate UK limited company, in which returns could be as high as 75% – 80%.
With only a 5% increase, is investing in an Employee Benefit Trust really worth it? UK accountancy fees are nowhere near as expensive as offshore providers. SJD Accountancy only charges a fixed fee starting from £120 plus VAT per month. Check our packages for more detail. So for a small fee, you can gain guidance and avoid any tax issues in the near future.
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