According to HMRC, Employee Benefit Trusts (EBTs) are used to give directors and employees benefits such as shares in the company they work for, loans, pensions and other advantages during retirement, or benefits related to accidents or healthcare. However, these offshore trusts are being used increasingly to help employees avoid the payment of relevant duties, Pay As You Earn income tax, and National Insurance. As an employee or director, you would typically receive a small salary that is covered by your personal allowances, and the remainder will be paid either as a benefit or a loan.
How does an EBT work?
An Employee Benefit Trust is an offshore trust based in Gibraltar, Switzerland or the Isle of Man – all popular tax havens. A small salary is paid to the employee, which will either be covered by the due personal allowances or will be subject to a minimal payment of National Insurance and income tax. The remainder of the salary is paid as a benefit or a loan. Interest may be deducted from the loan, but the sum isn’t subject to PAYE deductions. As a result, the employee has a greater net salary than they would otherwise receive.
Drawbacks of an EBT
There are disadvantages of an Employee Benefit Trust. There’s a history of trusts being associated with tax avoidance and complex regulations must be adhered to. Specialist knowledge is required to understand the rules of operating an EBT, as tax charges may arise in some situations. You are personally liable for any tax which HMRC deems to be due, not the scheme provider. HMRC is clamping down on tax avoidance and will be looking closely at Employee Benefit Trusts. As it is widely believed that most members of an EBT are higher rate taxpayers, HMRC will collect more tax. If a scheme is closed by HMRC, the employee or director – rather than the scheme organiser – will be responsible for any outstanding liability, including amounts owed for previous years.
What to avoid
Although an EBT is a legitimate option for employees, it is also used for tax avoidance in some cases. For this reason, it is advisable to seek professional advice before signing up to an Employee Benefit Trust. According to HMRC, there are some things that must be avoided when an EBT scheme is being formed. They include bonuses being paid using an offshore trust, and providing shares as benefits when the values can be easily altered either before or following transfer from the EBT to the director or employee.
There are many other scenarios which, according to HMRC, should be avoided.
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