How do employee benefit trust schemes (EBTs) 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.
Don’t get caught out
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 of 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
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? 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.
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