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Following the news that Rangers FC has gone into administration, a specialist contractor accountant has warned contractors that offshore EBT schemes can prove very expensive in the end.

In the past, Rangers paid players in staff via a network of Employment Benefit Trust (EBT) schemes, saving millions in tax and NICs int he process. However, HMRC challenged the club's use of such products and levied a claim of £49m to cover a whole decade of payments.

In fact, the total bill to the club could end up at £75m after penalties and interest are added on.

Contractor EBTs

EBTs have been heavily marketed to the contracting community in the past, although new rules were introduced in April 2011 to negate the tax benefits of new schemes.

Such schemes would claim to 'guarantee' contractors take home pay of 80% or more (far more than the amount you could reasonably expect to achieve via a limited or umbrella company).

The infamous BN66 rules have also allowed HMRC to tax users of offshore EBT schemes retrospectively.

Contractor accountants, Freelance World, estimate that an oil and gas contractor on £540 per day, using an EBT over a ten year period, would be liable to almost £150,000 in back taxes if HMRC deemed the use of the EBT to be tax avoidance. The bill would rise to £225,000 if similar penalties were applied as in the Rangers case.

Ironically, the club didn't go into administration this week as a result of its use of EBTs in the past (although this would have eventually caused the same outcome). HMRC is initially claiming £9m in unpaid VAT, PAYE and NICs since Craig Whtye took over in May.

HMRC in zero tolerance mode

Commenting on the case, Alasdair McGill, MD of Freelance World, said

"I've seen a few SME businesses go down this route over the years, and in these recessionary times when bank funding is difficult to get your hands on, I would expect more to follow. But as HMRC have shown here, it won't be tolerated and you'll be in court facing a winding up order before you can say Super Ally!"

"Our advice is that as soon as you think you may have cash flow problems, speak to your accountant. We're trained in how to deal with these situations and can guide you through the maze. It was no surprise to hear that Rangers had been working with their Administrators for several months as they tried to work their way out of the mess."