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Draft legislation signals end of IT contractor EBT schemes
Posted Dec 13, 2010
The Finance Bill 2011 is set to spell the end to the viability of EBT schemes (employment benefit trusts), which have been heavily marketed to contractors in recent years.
On top of this, anti-forestalling legislation has already been enacted from 9th December to prevent upfront payments being made from after this date.
Disguised Remuneration
The targets of the planned measures are "employers, directors, and employees who use arrangements involving trusts and other vehicles to avoid, reduce, or defer liabilities to income tax on rewards of an employment or to avoid restrictions on pensions tax relief."
In the case of many EBT schemes targeted at IT contractors, member of such schemes would derive most of their income in the form of a 'loan' - which is never repaid, and thus avoids income tax and National Insurance.
You can download the full details from the HM Treasury site here (PDF).
Anti-Forestalling Measure
In addition, anti-forestalling provisions already apply to the "payment of sums and the provision of readily convertible assets for the purposes of securing the payment of sums (including loans) where the sum is paid or the asset is provided between 9 December 2010 and 5 April 2011 where, if paid or provided on or after 6 April 2011, they would be caught by the legislation."
Effect on contractors
The Treasury expects to reap a further £500m in additional revenues as a result of these measures, and estimates that 5,000 employers and 50,000 workers will be affected.
Clearly, this will be dramatic news to providers of IT contractor EBT schemes, and any contractors using them. We have warned readers about the longterm viability of these schemes on Contract Eye in the past, and the demise of the EBT model will not come as a great surprise to many industry experts.
The end of the EBT model will most likely result in a significant rise in the number of limited companies formed by contractors in 2011, with a smaller number electing to join a traditional PAYE umbrella scheme.
We await industry reaction to this news with great interest.
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