The latest IT Contractor News from Contract Eye

The Government's plans to clamp down on 'disguised remuneration' via the Finance Bill 2011 will put an end to the viability of contractor EBT schemes as tax saving vehicles.

As part of the Coalition's main objective of creating a 'fair' tax system, the new anti avoidance measures were first mentioned in George Osborne's Emergency Budget in June 2010.

Summary of the planned legislation

Contractor EBT (Employment Benefit Trust) schemes, many of which offer returns of 80% or over on contract income, typically offer members a small salary with the bulk of income in the form of loan payments (which are never paid back).

To close this tax avoidance loophole, legislation will be introduced from 6th April 2011 to ensure that any loans or rewards paid in connection with employment are subject to an income tax charge.

The changes will come into force via an amendment to the Income Tax (Earnings and Pensions) Act 2003.

As a result, the attractiveness of contractor EBT schemes will be reduced massively to new entrants, with the limited company model the most likely alternative for current EBT users from now on.

In addition, anti-forestalling provisions have been put in place, which apply to loan and other payments made between 9th December 2010 and 5th April 2011 which would be caught by the new rules if they were made after 6th April 2011.

Contracting industry reaction

Jonathan Margrave, Head of Sales and Marketing at accountants JSA, commented:

"Disguised Employment and Remuneration has been prevalent within the contracting industry for some time now and I am delighted to see that HMRC are now tackling directly those providers who promote their services to contractors as tax avoidance specialists."

EBTs and retrospective taxation

It is unknown whether or not the new rules will apply retrospectively. This would be a controversial move, and could be seen as being an 'inherently unfair' measure.

The recent Huitson / Montpelier BN66 tax case, in which a contractor claimed that HMRC's demand for retrospective tax liabilities arising from the use of an offshore tax vehicle breached his human rights (and lost), has been followed closely by many within the contracting industry.

In July 2011, the Court of Appeal rejected a bid by Huitson to overturn the original January 2010 ruling. The Appeal Court found that the retrospective tax claim against Huitson was lawful, and that his human rights were not breached by HMRC.

Further Resources

HMRC released updated FAQs on the disguised remuneration legislation on 5th July 2011. Read more here.

HMRC outline on 'disguised remuneration' - here (PDF).

HMRC 'Spotlights' - advice on tax avoidance schemes - here.