Contractors currently using trusts and other financial vehicles as tax-avoidance schemes may find their income subject to income tax and National Insurance Contributions (NIC). This news follows the announcement of new laws that come into force from April 2011, potentially signalling the end of the lucrative option for contractors who choose to use Employee Benefit Trusts (EBTs).
The Treasury has published draft legislation of an amendment to the Income Tax (Earnings and Pensions) Act 2003. Called ‘Employment Income through Third Parties’ and designed to tackle ‘disguised remuneration’, it is due to be introduced as part of the Finance Bill 2011. The rules also contain anti-forestalling provisions which mean that from yesterday, 9th December 2010, contractors using EBTs will see their tax bills increase.
It is not clear from a first reading of the legislation whether or not there might be a retrospective element to the new rules, and this is likely to be clarified over the coming weeks.
According to the Treasury, the legislation will “ensure that where a third party makes provision for what is in substance a reward or recognition or loan in connection with the employee’s employment, an income tax charge arises”. The Treasury estimates that 5,000 employers and 50,000 workers, including many contractors, will be affected, as it expects many such schemes to be “discontinued”.
Many contractor Employee Benefit Trusts take advantage of existing tax laws that permit a trust created for the benefit of employees to advance contractors ‘loans’ that do not attract income tax and NICs, but will in effect never be repaid by the contractor because the terms of the trust would not allow enforced repayment.
EBTs have gained considerable notoriety in the national media as a result of their use by professional footballers to avoid paying tax on high incomes. Once contractors and others who use such schemes cease to gain any financial benefit from them, it is possible limited company and umbrella company trading solutions will see a surge in popularity among ex-EBT contractors.