To bring in about £500m a year in extra tax (although commentators believe the real gain will probably be closer to £2bn), HMRC has closed a loophole which allowed individuals to use ‘EBTs’ (Employee Benefit Trusts) to dramatically reduce their income tax bill.

‘EBTs’ and ‘EFURBS” (Employer Funded Retirement Benefit Schemes) have been used to either convert large bonuses (which should be taxed at 50%) or to divert regular income (which would normally attract higher rate tax) into loans taxed on the employee at low or no tax rates (depending on whether interest was being charged or not).

They have been popular with footballers, entertainers as well as computer contractors (especially in the IT, banking and financial sectors) – including those running profitable private companies.

Recruitment businesses, who either use these ‘solutions’ to help their highly paid staff avoid income tax or who engage contractors employing such schemes are well advised to seek independent regulated advice as a matter of urgency. HM Treasury estimates at least 5,000 employers and 50,000 employees (many of whom are contractors) are immediately affected by the new legislation preventing them from using ‘EBTs’ and ‘EFURBS’ to mitigate, reduce or defer income tax liabilities.   

Although large corporations and a few individuals whose facts and needs fit the new rules can continue to benefit from ‘EBTs’ and ‘EFURBS’, many schemes from 9 December 2010 are already on HMRC’s radar and associated loans to individuals in those schemes will not escape a liability for income tax in the future. Equally important, recruiters have to understand they could become exposed to a significantly damaging risk of third-party debt transfer! 

The general consensus amongst regulated tax advisors is that HMRC will group together many different types of ‘EBTs’ and ‘EFURBS’ where loans and benefits were paid pre-9 December. This will leave many beneficiaries facing an investigation lottery, depending on how their particular trust was set up and operated.  If recent case law (HMRC v Aberdeen Asset Management plc) is anything to go by, purchasers of ‘Disclosed Schemes’ will be most at risk.

If one ‘Googles’ “EBT”, there are still offshore companies offering 90%+ net income retention from “safe, secure, fully-compliant, HMRC approved, ‘EBT’ schemes”. Do not be fooled. HMRC are on to them. Even if an ‘EBT’ provider proposes an alternative arrangement or a replacement scheme, contractors must bear in mind HMRC can successfully scupper this from the date of the Finance Bill 9 December 2010.

In most instances, contractors are best served by contracting their services through their own personal service company as it is the most tax efficient and legal way for them to operate in the UK.

In summary, effective tax planning can never be a guaranteed science. However, the likelihood of success is greatly enhanced by the choice of advisor. Agencies and contractors who are directly or indirectly involved in ‘EBTs’ and ‘EFURBS’ should swiftly seek objective and independent advice from a regulated advisor who is duty bound to present the risks as well as the potential benefits.