For sure, offshore employee benefit schemes are complicated and finding useful unbiased information is a challenge. Find below information we hope will clear the mist and give you the information you need to make a decision.
What do HM Revenue and Customs say?
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 schemes 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 (something around the minimum wage level) with the remainder of your income coming to you via a loan. Now even to us, this sounds a little strange, imagine what HM revenue and customs will think about it if you are ever investigated – ‘so you receive a small salary and the rest of your money via a loan?’ but it doesn’t stop there, what happens if / when the loan is written off? Once written off, the loans become taxable and you immediately become liable for the back taxes. Now the provider may say ‘don’t worry the loan is never written off’, well that’s ok providing it’s always the same provider, however, this doesn’t detract from the fact that you do and always will owe the money which will mean you may or may not be asked to pay back (it’s probably not something you’d like hanging over your head for eternity).
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 at some stage also have to repay the loan.
Like we said EBT’s are complicated and as with all complicated things there are specialists out there who will be able to answer all your questions and provide what may seem to be valid and compelling answers to help you make your mind up that they are the best thing since sliced bread.
HM Revenue and Customs have a little checklist that may help to ensure you don’t get caught out, they state 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.
Any of the above offers sound familiar? I am sure websites have reassured you that EBT’s are 100% legal, which they are, however, I bet they forget to mention that any of the above so-called ‘benefits’ being offered to you can be called in and collected at any point.
You are liable NOT the scheme provider
So 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 some other form of benefit. Now with your EBT headquarters offshore, who do you think is potentially at risk? You or them? You of course! Any form of payment that is not included in your monthly wages or recorded for HM Revenue and Customs 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, however, this doesn’t stop some companies from re-thinking their structure and promoting them to others. 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”.
Please take our advice and step back for a second 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.
There are alternatives, the main and 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.
If you would like to understand more about how to work through your own limited company and what you could be taking home, please visit the following pages:
Two-minute guide to contracting through your own limited company
Take home pay through a limited company
For all the latest contractor news, views, debates and competitions, why not join us on Facebook.