We are aware that HMRC have opened a large number of enquiries into the tax affairs of Contractors who do or have been operating through EBT schemes. This could be catastrophic to contractors who have used these schemes in the past. The tax at stake plus any penalties and interest now owing is likely to be very significant. It would appear that many intend to defend themselves against these enquiries, a move likely to be very stressful and unpleasant.
If you are wondering what all the fuss is about then please read on to understand more and why you are always better off in the long run operating through a personal service company which is an accepted and tax efficient way of operating.
What are EBTs
EBTs generally operate by the trust giving the participant (i.e. the client) a non repayable loan or a loan on favourable terms, which scheme providers have marketed as a legitimate tax planning arrangement but HMRC will argue that the majority of these type of structures are tax evasion.
EBTs have been around now for about twenty years, and are predominantly used by higher earning individuals. They tend to operate from a low or no tax jurisdiction where there is no tax charge on the user until the money benefit has been distributed from the trust. There have been many iterations of EBTs often involving loans, non repayable loan, gifts and shares.
What are the risks?
The participants that we have come across, tend to have gone into the schemes in good faith, often as a result of slick marketing and sales patter, and have been left with little support when challenged by HMRC, a large legal bill, and the prospect of a large tax bill hangs over them.
Increase in enquiry levels recently.
As mentioned at the start of this article this is a hot topic for HMRC who have upped their game in their perpetual battle with offshore tax planners who market tax schemes to contractors.
The future for EBTs
EBTs are no longer effective as a tax planning vehicle from December 2010 as legislation was effective from then, with HMRC’s arguing that many were never effective, but tax evasion.
Schemes will be promoted in the future, and it is probable they will have a QC’s opinion and the provider will tend to be secretive about disclosing information to you about it. What you can be certain about is HMRC will target schemes that consider to be scams and it will be the client of the scheme who is left with the tax investigation. Don’t let that be you!