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Contractors who used Employee Beneficiary Trusts are in HMRC's sights

Think you're alright because it was all over years ago? Nope

The British Government closed a window of opportunity for tax-efficient folk about a year ago that was beneficial to, and widely used by, contractors: the Employee Beneficiary Trust.

Only now, though, has HMRC begun chasing those who had employed this shelter.

A demand for money on income generated five years ago dropped through my post box in early June.

Essentially, in the letter, I was accused of not paying the proper amount of tax for the financial year 2010-2011. I was offered the opportunity to resolve it by paying several thousand pounds. It was during that year that I’d been a contractor and utilising EBT. The letter was a surprise given that I, with many others, all paid the taxes we owed and had moved on – or so we thought.

A cursory glance at these contracting forums will give an idea as to how big this issue has become of late, with several contractors I know who’d used EBT arrangements for years before 2010 now being chased for five or even six-figure sums.

Some have stated the only way to resolve this is in their cases is bankruptcy because of the “HMRC does not negotiate” stance. If bankruptcy is a real possibility (and can be proven), only then wil HMRC discuss options as they would much prefer some money to no money at all. If you can afford to pay, HMRC will accept a payment plan. Luckily, I was able to pay from my current company’s dividends.

HMRC has, I believe, been exceptionally aggressive in the collection of these alleged debts accrued under EBT, even threatening to send in debt collectors if the amount isn’t paid in full – usually a few weeks after the initial nasty letter.

For the uninitiated, and those who used EBTs but had moved on and those using similar schemes, today, here’s a brief refresher.

As a contractor, rather than have a direct contract with their client, a third party – usually based in Gibraltar or the Isle of Man – would take on the contract and the contractor became an employee of that third party. The contractor submitted time sheets for billing and got paid as an employee. Your pay was normally pegged at a level where it would ensure your NI contributions were met for pensions and benefit entitlements but not much beyond that. The offshore company would provide the rest of the outstanding money (contract value) to the contractor as an interest-free loan.

What is proving particularly brutal now is the fact that some of the affected people using similar schemes to the one I was in have been hit with an Advance Payment Notice. An APN is where HMRC have decided that you owe them money. They even send you a nicely worded letter, like this one posted online by its recipient.

An APN is effectively a way to get you to pay “right now”. Should it go court and you win, you will get your money back but in the meantime you will have to give HMRC that money to “hold onto”.

Most people I know could not really pony up £20,000, or potentially more, within thirty days without major pain. HMRC will bluntly tell you that they expect you to sell your assets to meet the “debt”. Those Italian motor exotica you have cherished for years are just piles of banknotes to HMRC where debts are concerned.

The amount demanded includes simple interest on the sum in question since 2010, which is added daily. There are, however, a number of cases contesting the legality of the APNs on the basis of it being unreasonable and exceptionally punitive. These test cases are due to be heard within the next few months.

The situation is made more difficult because HMRC won’t actually state that you’ve done anything wrong – or lay out the case as to why they believe you have done wrong. Just that HMRC believes the scheme you participated in was non-compliant. HMRC won’t lay out the case until courtrooms figure large in the discussion.

You’d be forgiven for thinking of this as a bit one-sided.

Should you doubt the power of HMRC, consider it has the legal ability to go directly to your bank and demand any and all documentation it has on you – and you will be none the wiser. Your bank will not tell you. Also, it has the power to take the money directly from your account, should they deem you are non-compliant on paying. That said, you have to be pretty far down the road with HMRC to get to this stage.

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