If yes….. Brace yourself – you might have a large tax bill on its way.

We have seen an increasing number of Tax Enquiries from HMRC recently that relate to historic Employee Benefit Trusts (EBT) bought by contractors and freelancers. Such schemes were usually sold to contractors by salespeople and often the original company offering them is long gone leaving the client to fight alone.

Beware the 85% retention headline!!

Generally the old EBT schemes and their new alternatives advertise a ‘net return’ figure of 85-90% with taxes paid. In our experience what this actually means is as follows:

  • 10% fees –   think mostly profit for the provider
  • 5% tax – to HMRC and this is often a generous assumption!

So for the unlucky people who find themselves subject to enquiry, they end up paying pretty much the tax that they would have paid in the first place, PLUS the 10% in fees mentioned above.

This ignores potential penalties from HMRC and the expenses of a Tax Adviser if your original provider has ridden off into the sunset. The end point could be much, much worse!

What are the alternatives?

The thing that we find most frustrating is that a well-run and legitimate Personal Service Company, for example, can often get not far off this 85% retention anyway!  So ask yourself the question ‘is it worth the hassle of years of on-going uncertainty, dealings with HMRC, costs of defence, additional cost/tax burden and the possibility of a large penalty if you lose’?

Without wanting to get too bogged down in the technicalities, the recent enquiries that we have encountered have been opened under the discovery provisions of section29 of the Taxes Management Act of 1970 and are accompanied by a big tax bill.

From what we can see, HMRC get to the end of the period under which they can challenge users of the scheme and extend their time by using this ‘discovery’. There was a case recently that may or may not impact on this in certain circumstances – well worth checking before you sign a big cheque!

We do not believe that all the old EBT offerings and the next generation of offshore payroll are ‘schemes’, but some clearly have been (and still are) and the downsides are seldom explained. If your name appears on a list somewhere and HMRC are running out of time to enquire, you may just get the dreaded ‘discovery’ letter. Some who get this letter appeal, other just pay up!

What should you do if you are under enquiry?

If you do find yourself caught by such an enquiry step one is – do nothing – no letters, calls or e-mails to HMRC !  Then quickly pick up the phone (you have 14 days to state your intention to appeal to HMRC – so be quick) to a reliable contractor accountants who have organised defence for multiple clients in similar situation.

You need a specialist accountant that understand the buyers of this kind of scheme very well and know how to prevent their clients becoming unwitting victims.

Now, what most people think of as ‘Contractor EBT’s’ are gone and this problem should have died with the Disguised Remuneration Provisions. EBTs may be largely gone but the problem for Contractors is not, the schemes have been re-incarnated by the clever operators in another form and contractors still see ‘Retain 85%’ adverts everywhere.

Before signing, think – Is it really worth it?

So to summarise, if you read a post from an Umbrella Company or an offshore trust or payroll provider promising you that you can keep hold of 85% of your income – think before you sign.

Ask questions, explore the potential downsides and be aware that not everyone is the same. After all, what is right for your friends might not be right for you and ignorance is never a defence. You can find more insightful contents about contractor accountants, contractor calculator, Umbrella Company and lots more by visiting this blog.

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This insightful content was written by John Smith, who enjoys sharing his wealth of knowledge about tax related problems.