Recruitment businesses which use ‘EBTs’ (Employee Benefit Trusts) or ‘EFURBS” (Employer Funded Retirement Benefit Schemes) as ‘solutions’ to help their highly paid staff avoid income tax, or which engage contractors employing such schemes, may now find themselves in a very expensive hornets’ nest.  

For many years, ‘EBTs’ and ‘EFURBS” have been especially popular with highly remunerated individuals such as footballers and entertainers.  In more recent times, they have attracted computer contractors (especially in the IT, banking and financial sectors) including those running profitable private companies.

These schemes are commonly used:

1.  Either to convert large bonuses (which should be taxed at 50%)

2.  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)

HM Treasury estimates at least 5,000 employers and 50,000 employees (many being computer contractors) are immediately affected by the new legislation preventing them from using ‘EBTs’ and ‘EFURBS’ to mitigate, reduce or defer income tax liabilities.  

To bring in about £500 million a year in extra Recruitment businesses which use ‘EBTs’ (Employee Benefit Trusts) or ‘EFURBS” (Employer Funded Retirement Benefit Schemes) as ‘solutions’ to help their highly paid staff avoid income tax, or which engage contractors employing such schemes, may now find themselves in a very expensive hornets’ nest.  

tax (although commentators believe the real gain will probably be closer to £2 billion), HM Revenue and Customs has closed a loophole, which allowed individuals to use these schemes to dramatically reduce their tax bill.

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 prior to 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 computer contractors 90%+ net income retention from what are claimed to be “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 (and their agencies) 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. Agencies and contractors who are directly or indirectly involved in ‘EBTs’ and ‘EFURBS’ should seek advice from a regulated advisor, such as a chartered accountant, who is duty bound to present the risks as well as the potential benefits.