Working Through Employee Benefit Trust (EBT) Schemes

An employee of a company running an Employee Benefit Trust (EBT) scheme is an employee of an offshore company, and will pay normal UK income tax and national insurance (NI) contributions on their salary from that company.

Often, the salary paid by the company will be very low, probably around the minimum salary level (currently - November 2013 - this equates to about £7700 per year for a full-time job. See the www.direct.gov.uk web site for more information).

By doing this, the amount of tax and NI the employee has to pay on their salary will be negligible or even nothing at all. Of course, the offshore company will have received much more than £7700 per year from invoices for the services provided by the contractor.

In being an employee of the offshore company, the contractor is eligible to participate in an EBT scheme, which makes payments to company employees. This is quite legitimate and is seen as a way of rewarding key staff. EBT payments are based on the profit the company has generated from employing the contractor, which is effectively the difference between the amount invoiced for the services of the contractor and the cost of employing the contractor (£7700). For legal reasons, to remain free from taxation these payments from the EBT cannot be guaranteed - this is the financial risk associated with an EBT scheme.

Are EBT Schemes Legal?

Yes, they are, but it is when they are effectively being abused that the water gets a bit murky and where the difficult bit comes in for IT contractors. Will the tax man come after you if you work through an EBT scheme?

The EBT route has been in use for many years during which there have been several changes in legislation attempting to block this option, but many of the offshore companies that offer an EBT scheme have modified their procedures to remain within the law. It is still essential to review the legal opinion of any company offering an EBT pay scheme for contractors. The well known saying... if it looks too good to be true, it probably is... applies here as well as anywhere else. You should always ask yourself the question: do I feel that I am getting away with (or trying to get away with) not paying the correct amount of tax? If the answer is 'yes', you need to be able to convince yourself that it is a risk worth taking.

If you are being paid through an EBT scheme you will have to enter a tax avoidance reference number on your self assessment tax return, which will be supplied to you by the EBT scheme provider. This may well put you in HMRC's sights and it's quite possible you will receive a letter from them each January stating that they intend to enquire into your self-assessment tax return.

If HMRC deem a tax avoidance scheme to be illegal at some stage in the future, there is a risk that you will be hit with a bill for back-dated tax potentially going back several years.

How Much Will I Pick Up If I Work Through an EBT Scheme?

As an employee of a company offering an EBT scheme, you can expect to pick up more than 80% of the amount you invoice.

How Long Will I Have to Wait for Payment?

EBT schemes do not generally pay out each month and you will probably have a gap of a couple of months or so between payments. Your salary (for example, £7700 per year) may well be paid to you on a monthly basis.

Go back to MyBookkeepingManager User Guides home page