With Employee Benefit Trusts under the spotlight again it's well worth taking the time to go over what precisely an EBT is. What started of with noble intentions has turned into a nightmare.
Thousands of self employed contractors plus further high net worth individuals have taken advantage of the elevated rates of remuneration that can be accomplished through the exploitation of an Employee Benefit Trust payroll solution. Where as a usual Umbrella Company provides a gross to net contract ratio of about 65% various Employee Benefit Trust options offer a yield of up to 85%. The chance to hang on to an further 20% of YOUR pay has been seen as a huge bonus to high earners.
EBTs also were to become popular because of the additional safety they presented. By using an EBT and becoming an member of staff scheme members ended up being granted full legal employment rights and benefits. For people who wish to spend further time generating in addition to less time filling out paperwork this solution was ideal. The improvement over those that chose to use an Umbrella or even setup their private company was massive. At this point you’re probably thinking that an EBT looks too advantageous to be real, how come everybody isn’t using them?
The answer to the second query is easy. Plan providers vary the level at what they agree to as minimum salary, more often than not this hovers in the order of 50,000 a year. In essence it comes down to risk. EBTs were so tax efficient because of the type of the loan payment that was given to the member of staff (i.e. the contractor). The contractor was paid a basic salary and the rest of the money was “loaned”. Since this was compensated as a loan (and not as salary) there was no guarantee that the loan wouldn’t be called in. This is all brilliant except if the person managing the payroll experiences cash problems and perhaps has to sell the loan on. Is there any example where a business that has bought a debt wouldn't ask for the money back? The general consensus appears to be that those that are established onshore are not effective whilst those offshore were effective.
Despite the benefits of an EBT their popularity has been on steady decline. A lot of contractors perceive the risk of using an EBT as outweighing any potential savings. A situation that has not been assisted by some scheme providers being investigated by HMRC. But what alternatives are there? Government feelings in the direction of contractors appears confused at best, perhaps baffling if being honest, there is no encouragement. How can you assume individuals to take the disadvantages associated with working for yourself if the bottom line is no better than being employed to perform the identical job(minus paid holidays, pension)?
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For further information regarding the world of offshore finance and Employee Benefit Trusts in particlular please have a look at the Employee Benefit Trust website.
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