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

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 …

  1. Simon Watson

    Pay your tax like everyone else

    Whilst HMRC's approach is particularly brutal, it's hard to have sympathy with people exploiting loopholes to avoid paying tax any direct employee would reasonably have to pay.

    1. Gordon 10 Silver badge

      Re: Pay your tax like everyone else

      I know someone who is in this situation. He has letters from HMRC from around the time he did it confirming it was an approved scheme (or some such wording).

      AFAIK this is a clear case of HMRC trying to move the goalposts after the fact, and is functionally no different from an employee avoiding tax using a pension for example.

      And yes - its the same HMRC that screws over the little guy whilst making crafty backroom deals with the FTSE 100.

      1. tony2heads

        @Gordon 10

        I have met other government departments that change the goalposts. Their motto is: I am alering the deal. Pray I don't alter it any futher

      2. Rol Silver badge

        Re: Pay your tax like everyone else

        The goalposts have not moved.

        An interest free loan is still a loan. It is a debt that you have to finance, and one that you would expect the creditor to still be keen to get back.

        When it becomes obvious that none of the normal considerations for debt management have been met by either party, then HMRC can quite legitimately call into question the validity of the contract.

        Remember, a contract has to have consideration on both sides, otherwise it's a gift, and thus taxable as such.

        If only the grubby, thieving bastards had shown some repayment consideration or at least remembered to mention they still had this debt in subsequent tax returns.

        I wonder how many people died through a lack of state financing for the NHS, during this scam?

        1. Gordon 10 Silver badge

          @Rol Re: Pay your tax like everyone else

          Yes I for one am going to give all my income to the NHS. I'm sure no-one will ever die if we all do that.


          1. Rol Silver badge

            Re: @Rol Pay your tax like everyone else

            Sorry to hear that cloud cuckoo land has renewed your passport Gordon 10, but I do believe the current system whereby people are queued up to await life extending treatment, because there isn't enough money to save them all, is still in operation.

            Obviously, the more money the exchequer has to throw around, the more these critical services can expand, and maybe, one day, never again will people needlessly die on a waiting list.

            Of course, that relies on many factors, one being, people pay their rightful contribution to society, but as we all know, greedy twonks (sorry I had to use that term as it is so not, twatish) just don't know when to stop feeding.

            1. PNGuinn

              Re: @Rol Pay your tax like everyone else

              Yeah, right.

              You've do realise that HMG urgently needs another £<hellofalot> to feed the essential work being done to get the new universal credit system completed on time and to budget, don't you?

              I mean .... contractors .... I mean kittens may die etc etc ....

              Being serious ....

              I'm not a contractor - never have been one - and I'm almost totally ignorant of "tax avoidance schemes"

              My problem is not that this is construed by some / all as a dodgy scheme, rather that it seems to have been proscribed only recently. Ok - if anyone is trying it now they deserve to get hammered but if they were only doing what was considered ** at the time ** acceptable and legal it seems doubly dodgy to me if HMRC are looking back before the "kill" date. Retrospective legislation and all that.

              Ok - I'm self employed. That means that I can set against tax a set of defined expenses. (Materials, travel, office costs, professional fees, capital allowances etc). Now these things do change a bit from year to year. As long as I get it right each year I quite reasonably assume I'm ok.

              Should HMG decide to disallow any of these, should HMRC be able to go back x years and claim unpaid tax?

              What about eg mortgage interest or pensions relief?

              Or perhaps I'm totally misunderstanding the article.

              1. dotasscandal

                Re: @Rol Pay your tax like everyone else

                You are understanding correctly.

                It's about moving the goalposts AFTER the game, and removing any sort of certainty in law.

                The fact that they are targeting contractors is only for "divide and rule" purposes.

                And judging from the responses to the article (99% of them being knee-jerk "good on you" reactions that completely misunderstand the situation), it is working wonderfully.

                See to learn more about this scandal of a legislation (don't worry, this site has nothing to sell you)

              2. streaky Silver badge

                Re: @Rol Pay your tax like everyone else

                "Should HMG decide to disallow any of these, should HMRC be able to go back x years and claim unpaid tax?"

                It is somewhat the cost of doing business, tax systems work like this - I don't know if they should or not but they do. Just be happy you live in a country where you can't be jailed for it; directly.

                Also by the way the rules on retrospection only apply in criminal law.

        2. kraut

          Re: Pay your tax like everyone else

          I wonder how many people died through a lack of state financing for the NHS, during this scam?

          Given that the state had plenty of money to keep financing Trident, not to mention fighting several counterproductive wars (at least one of which was illegal): None.

        3. neil-t

          Re: Pay your tax like everyone else

          I wonder how many people in the middle east have been killed as a result of people voting labour. A logical fallacy just like your NHS argument.

          Your analysis of complex tax law is hopeless.

          1. streaky Silver badge

            Re: Pay your tax like everyone else

            I wonder how many people in the middle east have been killed as a result of people voting labour.

            Roughly zero pretty much any way you look at it? I don't see either John Major or Hague responding any different to 9/11 nor Hussain's nonsense down the road of that's your argument.

            Not for nothing but back on topic nothing about being a contractor (and self-employed) is intended to stop people paying their fair share of tax or to make it easier to avoid or evade tax. Yes it's riskier, but nothing about the tax system is there to reduce that risk: everybody is under some risk of not working next week; it's the decision you make.

      3. Doctor Syntax Silver badge

        Re: Pay your tax like everyone else

        Can your friend prove that HMRC had full and accurate details of the arrangement which they'll probably deny.

        HMRC have an unlimited supply of brass neck. IIRC iIn the LimeIT case the investigator wrote a 2 page apology to the tribunal admitting he handled the case wrongly but still insisted that he was right.

      4. SJG

        Re: Pay your tax like everyone else

        Loans are designed to be repaid. The fact of non-repayment can only be established over time. We can hardly blame the revenue for not realising that there was no intent to repay. I'm pretty sure that no-one explicitly stated that the loan would never be repaid when getting the scheme signed off by the revenue. Similarly it would only be after a number of tax returns showing no repayments that the HMRC could justifiably become concerned.

        1. Anonymous Coward
          Anonymous Coward

          Re: Pay your tax like everyone else

          "We can hardly blame the revenue for not realising that there was no intent to repay."

          Quite so, and indeed that was my point. HMRC have no crystal balls, and not that many lawyers either.

          Consequently, when many years later it becomes abundantly clear that in many similar cases there's been no significant loan repayment, and quite likely never would be, we can hardly blame HMRC (on behalf of honest taxpayers across the UK) for wanting their pound of borrowed flesh back, can we.

          And those supporters/users of these schemes, saying "HMRC isn't playing fair", don't have a credible leg to stand on, not that the supporters seem to understand what "fair" is supposed to mean anyway.


        2. neil-t

          Re: Pay your tax like everyone else

          Way too simplistic analysis of a complex area of tax legislation...

          The schemes that people signed of were never 'signed off' by HMRC. They were notified via the DOTAS rules with a SRN number declared on tax returns. See 2004 finance act.

          1. Anonymous Coward
            Anonymous Coward

            Where do you see "SRN means scheme is legit"?

            "They were notified via the DOTAS rules with a SRN number declared on tax returns. See 2004 finance act."

            So what. The existence of an SRN is not evidence that the scheme's legit, it's just a Scheme Reference Number for one of a huge number of generic schemes in the marketplace, so that HMRC and taxpayer both have a common understanding of the scheme details. Don't take my word for it, IANAL.

            Are the Law Society likely to be definitive on this subject? Here's what they say (my bold):

            "5 Scheme reference numbers

            The scheme reference number (SRN) system is a means of identifying the users of disclosed schemes, allowing HMRC to prioritise and co-ordinate enquiries into users' returns.

            The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage."

   (11 May 2011)

            That's not me, that's the Law Society. You want to disagree with them, best of luck.

            As legalese goes, that's pretty clear: existence of SRN does not imply scheme is legit.

            The only bit missing from that Law Society line is a black and white instruction to make contingency plans in case HMRC later decide the scheme isn't legit, or take a particularly long time deciding it is legit. Which is just common sense, assuming you're aware that SRN does not mean scheme is legit,

            Those of you here that are telling the rest of us that SRN implies legitimacy appear to have been misinformed. You might want to have a quiet word with your financial or legal adviser and if required maybe make a complaint to the appropriate regulatory body. Good luck with that. And in turn your adviser may want to send the boys round to have a quiet word with the people who were promoting the scheme in question, who were presumably expecting their cut somewhere along the way.

            Meantime, you've had a learning experience. Best of luck sorting it out.

            Fwiw it took me all of twenty minutes or so to find this info just now, so if I've misunderstood, correction is welcome.

            If however *you've* misunderstood, and stand to be seriously out of pocket as a result, then what else can I say.

    2. Kraggy

      Re: Pay your tax like everyone else

      Completely agree.

      As someone (one of many) who worked alongside 'contractors' in the 80s exploiting umpteen tax loopholes to avoid paying their fair share of tax on the vastly higher salaries than those employees they worked alongside, I have no sympathy whatsoever if belatedly HMRC are catching up with such schemes; even if, sadly, those I saw abusing the system aren't likely those now getting hit.

      1. neil-t

        Re: Pay your tax like everyone else

        Schemes used were disclosed under the DOTAS rules (

        Why didn't you become a contractor? It's your choice whether or not to go down that route. I don't see why winging about people earning more than you helps when it's a free choice for anyone as to how they work and get paid for it.

    3. The Axe

      Re: Pay your tax like everyone else

      @Simon Watson, it's hard to have sympathy with people who don't have a guaranteed job and who ask high amounts to cover the times when they are looking for the next contact isn't it. Employees know that their job is relatively safe and even if they loose their job they have certain rights like redundancy and notice periods. Contractors have none of that and that's why businesses pay high rates - because they know they can get rid of them at the drop of a hat.

      As for paying tax, the rule is pay as little as possible. All paying tax does is allow the state to get big and fat and it'll keep on asking for more and more. Keep the state small and lean.

      What's a fair share anyway? 10% or 90%?

      PS. You do know that if you're not happy with the level of tax you're paying that you can send extra amounts direct to the Tresasury. I'm sure that you'd be happy to do so otherwise I could accuse you of not paying your fair share of tax.

      1. Ian 7

        Re: Pay your tax like everyone else

        @TheAxe - How many logical fallacies can you get in one rant? Fair play to you! To pop just one of your points, no-one here (at the time I'm writing this, anyway) was having a go at how much contractors earn. They're having a go at how some of them have used clearly dubious schemes to avoid tax. No-one can seriously look at the scheme as described in this article and think "hmm yes, that sounds all above board, I'll have me some of that". At best they were thinking "Wahay, looks like I may be able to get away with this after all, and screw the rest of you".

        By the way, I'm a former contractor - I get the reasons why contractors are paid more and I'm all for fairly and legally arranging your finances so as to minimize your tax burden. This scheme however was clearly a scam waiting to be found out.

        1. Anonymous Coward
          Anonymous Coward

          Re: Pay your tax like everyone else

          @Ian7 - They're having a go at how some of them have used clearly dubious schemes to avoid tax.

          Exactly. The lesson is, if you are ever sitting in a meeting with your accountant and he mentions Gibraltar, the Isle of Man or any of those other haven-y places - it's time to get a new accountant.

          1. Velv Silver badge

            Re: Pay your tax like everyone else

            Further to Evil Graham, if anything has the word "scheme" in the title, probably time to walk away!

            Not just tax, anything.



      2. Anonymous Coward
        Anonymous Coward

        Re: Pay your tax like everyone else

        the tax system is too complicated, higher tax brackets don't work, high corporation tax, does not work.

        Right now high earners try to avoid tax and live in less expensive tax regimes to save money.

        Make it a flat rate, and there suddenly is less of an urgency to avoid tax...

        Gov saves money by less avoidance to catch, you gain tax receipts by less people avoiding paying tax.

        Around 20% direct income tax is about right, with 20% VAT, meaning roughly 30% tax overall. (34% if there was no personal allowance and no zero VAT rated goods)

        oh and abolish NI.

        1. Anonymous Coward
          Anonymous Coward

          Re: Pay your tax like everyone else

          VAT is double taxation. Get rid of that and be upfront about what is being asked for from direct taxation, whether that figure is 30% or 99%

      3. Velv Silver badge

        Re: Pay your tax like everyone else


        Contractors do have a guaranteed job, they are employed by their own company. And it's very clear from the operation of these EBTs that the contractor was an employee of the foreign based company.

        What Contractors might be lacking is fee earning opportunities, that's why they charge the rates they do, to cover the slack and provide the pension as well as salary. So if the Contractor can't structure their business to cover the lean times and insist on stripping every penny and cent from the company while evading tax then that's just bad business and bad financial management. Stripping money from the company, even one you own, potentially leaving it unable to meet its financial obligations is fraud. Try getting your next contract with that conviction behind you.

      4. Stevie Silver badge

        Re: who don't have a guaranteed job

        "... who don't have a guaranteed job " by choice.

        I was a consultant programmer for years, and very happy I was, not because of the money - which wasn't outrageously great in them days - but for the sheer pride at holding a job because I could do it and would be shown the door the instant I couldn't.

        But the fact that the money was much better than the salaried types were getting, benefits and all, didn't hurt. Nosir, it didn't hurt at all.

        And the motto with taxes is "pay as little as you can but don't whine when the bills come due". This Gibraltar scheme is a re-tread of the old Seychelles scheme which is a retread of the ... well, you get the picture. The fiction is an obvious falsehood erected to avoid paying your fair share.

        Every tax pound *you* "avoided" was added to someone else's bill, usually in the form of additional taxation.

        So Mr F. Ewe, pay your taxes.

      5. Simon Watson

        Re: Pay your tax like everyone else

        @The Axe

        I can only assuming you're trolling, nobody's that obtuse.

      6. streaky Silver badge

        Re: Pay your tax like everyone else

        "Contractors have none of that and that's why businesses pay high rates - because they know they can get rid of them at the drop of a hat"

        And they have to pay tax on those earnings. Many contractors do at the standard rates. I don't know enough about the specific scheme to be able to comment directly on it but given the HMRC think they're getting money it's fair to assume they think it was obviously bullshit.

        Also the HMRC doing idiotic - nay, arguably criminally corrupt - deals with the likes of Voda and many others doesn't negate your requirement to pay tax on your earnings (and yes it sucks). If everybody paid their fair share (i.e. what most other people pay) then no doubt the tax rates could come down generally; rather than the bullshit situation we've dug ourselves into.

    4. Bob Vistakin

      Re: Pay your tax like everyone else

      Of course you should pay your taxes - you think moats clean themselves? You think duck houses grow on trees? You think the home secretary gets their porn for nothing? You think smug pompous midgets work for free?

    5. Daniel Voyce

      Re: Pay your tax like everyone else

      I agree in theory - what I don't agree with is HMRC retroactively applying rules to things that were legally legitimate (albeit questionable morally) at the time.

  2. Trollslayer Silver badge

    Using offshore companies to avoid tax

    It sounds like tax evasion that was allowed before.

    Too many of these loopholes were created.

    HMRC have been put under the gun and are getting heavy handed but I wouldn't have used a scheme like this, too risky.

  3. Tony Humphreys

    Woudn't it just be easier for all to abolish IR35 and let contractors just be contractors. IR35 has caused all this mess in the first place. PAYE is not appropriate for many in IT as their contracts are not a full year. It was only brought in because of a spiteful government taking aim at workers whose contracts are not from the dinosaur ages like their union paymasters.

    Just remove IR35, and all will be well (or better anyway).

    1. Anonymous Coward
      Anonymous Coward

      Some years ago for every genuine contractor there must have been dozens who in reality were indistinguishable from employees, an abuse which is why IR35 came about. In recent years we've had "contractors" forced to divide their time between different employers in an attempt to show that they were independent, simply to get around IR35. EBTs are a particularly glaring example of other schemes that are at the "evasion" end of the scale, but all these tax avoidance shennigans were a disaster waiting to happen. And if you don't have the clout of an M&S or Amazon, choosing to fight HMRC is brave indeed.

      1. Doctor Syntax Silver badge

        " in reality were indistinguishable from employees"

        at first glance indistinguishable from employees of the engaging company but in reality had no employee rights from that engager and had to make their own equivalent arrangements


        It's really amazing how many permies thought that but somehow never took the freelance path themselves.

        1. Anonymous Coward
          Anonymous Coward

          The point is that these weren't genuine freelance contractors - they worked for the same company for years on end in many cases, and could have become permanent employees if they'd wanted to. The only reason for the arrangement was to minimise their tax, which they clearly thought was worth more than any employment benefits they had to forgo.

          1. Anonymous Coward
            Anonymous Coward

            No holiday pay, no sick pay, no pension, no redundancy pay, 1 week notice period or zero notice period if they don't renew when you're led to believe they will. Just how is that permanent employment?

            Should we tell clients not to renew us when we do a good job? Clients value flexibility and pay more for it, that's the reason for the arrangement.

            1. Anonymous Coward
              Anonymous Coward


              "No holiday pay, no sick pay, no pension, no redundancy pay, 1 week notice period or zero notice period if they don't renew when you're led to believe they will."

              So a lot like an employee on a short-hours contract then? The currently popular one is zero hours but you can work quite a few hours a week before employment rights start to apply.

          2. MrXavia

            There is a damn sight more difference between a real contractor and an employee...

            Not only the pay, but the control...

            as a contractor I can say NO to my client at any time (within reason of course or I'd never get work)

            I use my own equipment, I can do the task how I think it should be done, I can work in my own office most of the time (a definite requirement for any contracts longer than 3 months!)

            I can take time off when I want, no need to get approval, although its polite to ensure it doesn't affect the client, and I try to manage my holidays to slip between contracts.

      2. Anonymous Coward
        Anonymous Coward

        Re: if you don't have the clout of an M&S or Amazon

        I think the company that people need to look at for a class-leading example is Vodafone, though they were somewhat helped by revolving doors between Vodafone boardroom and HMRC HQ.

    2. Anonymous Coward
      Anonymous Coward


      IR35 has caused all this mess in the first place


      IR35 was HMRC's first attempt at dealing with unscrupulous IT contractors who thought in the 90s that it was a cool idea to pay themselves such a small salary as to only pay a token amount of National Insurance, no PAYE at all, and then pretend that the rest of their income was 'expenses' being reimbursed.

      Although a lot of contractors at the time were genuine small businesses operating above board, the number of pretenders who were taking the piss got ridiculous and eventually the HMRC had to do something.

      1. Anonymous Coward
        Anonymous Coward

        Re: IR35

        IR35 isn't specific to IT contractors, although for some reason it doesn't apply to lawyers or journalists.

      2. dotasscandal

        Re: IR35


        You'd be astonished at the number of contractors that moved from Ltd companies to various contractor structure (the one described in the article being but one example) to find some certainty away from the uncertainty that IR35 introduced.

        And often, this move was done ON THE RECOMMENDATION OF THEIR OWN ACCOUNTANT!

        Despite what people think, these "structures" generally didn't offer much of a "tax advantage" compared to a well managed Ltd with pension contributions. What they did offer was less admin, and SAFETY FROM IR35.

      3. william 10

        Re: IR35

        It wasn't just "unscrupulous IT contractors", when the previous coalition government came in they found that many people (managers) working at Quangos / BBC / NHS had moved themselves onto contracts to avoid paying NI even though they where really full time employees.

  4. Valeyard

    no sympathy

    sorry but i had a bit of a grin during that, I don't get a choice about paying my taxes and it's a good 25% of my pay, so don't expect me to shed a tear because you were made to do your share too

    I notice this is credited to "Team Register", because I'd looked to see just who I'd lost a lot of respect for

    1. David Dawson

      Re: no sympathy

      Taxes for contractors aren't actually as generous as many believe.

      Corp tax is 20% ish, depending on the year. Out of this are taken expenses. For a services contractor, expenses are fairly low, and there is a special VAT scheme that recognises this.

      This applies in all cases, unless there's some evasion scheme or other.

      To actually get the money from the company to your pocket there's a few methods. You could pay a salary, and pay paye. You then pay paye taxes, between 10 to 40%. Alongside that, there's national insurance, both employee and employer.

      Both PAYE and NI are blocked as expenses against the Corp tax liability and act to reduce it.

      You'll end up with an effective rate of around 35-45% on all money received by the contractors company if you do this. This is high.

      The alternate method, you pay dividend to the owner of the company. This is taxed at 10%. You then declare this income, along with a small salary and pay personal taxes on it.

      These are similar in rate to PAYE.

      The big tax missing from this system is employer side NI. So you gain around 12%.

      You'll end up with an effective tax rate, over everything, of between 25-35%.

      This is one of the reasons employers like contractors, the removal of employer NI. They can just pay it directly to the contractor, through a really simple invoicing system.

      If you sign up to IR35, expenses are removed and employer side NI are added, and you end up paying more than the average employee, due to the employee never seeing employer side NI or realising it's there (it's added on top of your salary).

      Contracting can be a good life, I recommend it. The vast majority of contractors arrange things the way I describe.

      Tax is necessary to sustain our civilisation, however I don't like the jump to declare it a 'moral' thing to do.

      1. neil-t

        Re: no sympathy

        Plus the government will probably up dividend tax rates again in the next budget. In a few years' time I doubt there will be a much tax advantage in being a contractor with a Ltd Company.

        Plus for those of you married, the spouse being able to draw dividends is a huge tax advantage that I hope will be closed.

  5. SniperPenguin

    Using the worlds smallest violin....

    1. Author uses bloody obvious Tax evasion scheme, which basically takes a cut of the money it saves him paying the government in tax.

    2. Author gets chased down by HMRC

    3. Author pays Tax that he was supposed to pay in the first place, plus interest.

    4. Author writes article about nasty, mean old HMRC....

    Replace the word "Contractor" with "Banker", ""MP", "CEO" or any high-earning celebrity and there would be a parade to support the actions of the HMRC....

    1. Anonymous Coward
      Anonymous Coward

      Re: Using the worlds smallest violin....

      You seem to have overlooked a couple of points:

      1. The schemes in many cases were OK'd by HMRC at the time.

      2. HMRC are going 5 years and more back to go after these people. Personally I don't think this should be allowed, for contractors or individuals, it's ridiculous.

      3. Whatever we may think of these schemes it seems they were legal at the time but HMRC have the table slanted in their favour to make it hard for the small man to get justice in the legal sense.

      4. I'd have a lot more time for HMRC doing this kind of thing if the rules were applied to large firms like Voda and if they went after Amazon, Starbucks and Google etc. Getting money from contractors is a drop in the ocean compared to what they should be getting from these large corporations.

      I should point out that I'm an employee and while I have contracted in the past I've never used a scheme like this, or in fact any scheme.

  6. Ashley Ward

    "The offshore company would provide the rest of the outstanding money (contract value) to the contractor as an interest-free loan."

    How was that ever considered legal by anyone? Surely an interest free loan is a benefit in kind, and therefore should be taxable (i.e. you should pay income tax on whatever the interest should have been at market rates).

    Seriously, the whole things sounds pretty dodgy so you must have had the thought in the back of your mind that it might come back and bite you at some point in the future.

    1. Anonymous Coward
      Anonymous Coward


      I heard about this scheme back when I was running my own company. I was really surprised that it was allowed in the first place!

      One of the downsides I saw about it at the time was that you have to keep the shell company in business, because if it was liquidated, the recipient of the loan would be considered a debtor. Even if the company was wound down gracefully, you would have to find some way of writing off the loan in an acceptable manner.

      Fighting this is risky. HMRC have the ability to bankrupt a UK company that doesn't pay money deemed to be owed. Under these circumstances, they could then chase the recipient of the loan for the money 'owed', something that gets them around the limited liability of a limited company. Presumably, this is why the scheme uses offshore companies, to make that more difficult.

      I am a contractor. A long time ago (relatively speaking), after a run in with HMRC over advanced corporation tax declarations - out of which I came out much worse off financially, I decided to pay myself in accordance with IR35. Over the years, it's 'cost' me thousands, but I feel that I can hold my head up when confronting 'permies' who tar all contractors with the same brush.

      I now work through an Umbrella company, because I got fed up running a company badly. That's de-risked me almost completely, although I am paying quite a heavy whack of tax and NI.

    2. gnasher729 Silver badge

      You forgot the biggest bummer. An interest free loan is certainly a benefit in kind, but only for the interest that isn't paid, and interest rates are quite low at the moment. So that would only attract a tiny amount of tax.

      But interest free loans have to be repaid! After five years, with no repayment of interest free loan in sight, HMRC is surely wondering why there is no repayment. And this makes the whole business a sham. The contract between contractor and employer is quite obviously not for real. If it was for real, the contractor would have to be the biggest idiot on earth to sign the deal - instead of billing say £60,000 plus cost a year and ending up with £10,000 tax, £36,000 or so paid out, and £14,000 profits left in the company for retirement, and all totally legitimate, this contractor chose to get £10,000 income a year, plus a £45,000 interest free loan. After eleven years, half a million pound in debt.

      Why aren't these contractors afraid of the company asking for the loan back? Because the contract is a sham.

  7. Anonymous Coward
    Anonymous Coward

    "The offshore company would provide the rest of the outstanding money (contract value) to the contractor as an interest-free loan."

    Have you repayed this loan?

    1. Anonymous Coward
      Anonymous Coward

      Re: Have you repayed this loan?

      How about

      "Have you any evidence to show there was ever a genuine intention to repay this loan?"

      Schemes like these are meant for corporate rich folk or folk with inherited wealth, whose financial teams and wealth management advisers can and do set up impenetrable networks of transnational transactions with medium term arrangements that might allegedly have plausible deniability if challenged.

      These schemes are not meant for oiks like contractors, self employed tradesmen, etc, not least because their purpose becomes blatantly obvious with no conceivable element of deniability. In reality it's obvious with the corporates and heritage rich too, but they have expensive lawyers and they have their personal representatives in or near Westminster.

      How did anybody ever seriously think the plebs would be allowed to get away with the same kind of thing?

  8. Stephen Horne

    Does closing the "loophole" mean the law was changed?

    Isn't there a human rights law that states that new laws cannot be applied to events that predate those laws? Possibly that's only criminal law - not sure.

    As much as I hate tax avoidance, the reason it's called avoidance and not evasion is because it's legal. And contractors have to be competitive in the market - paying more tax than everyone else means you need to earn more, putting yourself at a disadvantage.

    The loophole is closed. Irrespective of human rights, applying laws to events that predate those laws is IMO absurd and immoral.

    1. Doctor Syntax Silver badge

      "Isn't there a human rights law that states that new laws cannot be applied to events that predate those laws? Possibly that's only criminal law - not sure."

      ISTR that at some point the Labour government introduced legislation which allowed HMRC to move the goalposts on taxation retrospectively.

    2. Paul Shirley

      Avoidance usually involves interpreting the law in ways favourable to yourself (and HMRC does the same). Interpretations open to challenge and revision until a court picks one. This is retrospectively determining that law at the time was being broken, not retroactively changing law.

      What's unfair here is the heavy hand of HMRC applying it's revised interpretation quick&hard to grab the money before a court can disagree.

      That said this case looks like evasion rather than avoidance.

    3. Velv Silver badge

      The law has not been changed. Like all laws the words rarely cover every eventuality (Rumsfelds "unknown unknowns"), so what happens is the words are reviewed by the courts and an interpretation given. These "schemes" are playing on technicalities in the wording and relying on the interpretation being avoidance and not evasion. They lost. As it says in the article, the employee was "technically" employed by the foreign company

  9. fruitoftheloon


    Oh dear, that didn't work out so well did it?

    If anyone seriously believed what their 'independent adviser' told them at the time, then they were an idiot, as clear as day the only purpose of this scam was to fiddle your tax. There is no rational argument whatsoever for the clearly false structure of the transactions...

    BTW I have been a contractor for ages (I had hair when I started), and have NO sympathy whatsover.

    My ha'pennies...

    1. Anonymous Coward
      Anonymous Coward

      Re: DIDDUMS....

      "If anyone seriously believed what their 'independent adviser' told them at the time"


      Anyone following the tax-dodging news in recent years will have noticed that a string of minor UK celebs and the like have had their fingers burnt as a consequence of following blatantly dodgy tax advice involving blatantly dodgy "investment" schemes.

      What may be less well known is that many of those who were ordered to repay tax owing haven't necessarily repaid much yet, whereas some have repaid in full.

      Sorry about the Daily Mail reference, but if even the Daily Mail and the Taxpayers Alliance think this kind of thing is out of order, even during times of austerity, a few contractors now regretting earlier dubious decisions stand no chance at all: (April 2015, so relatively recent; earlier references also available)

      1. Tass1968

        Re: DIDDUMS....

        I was introduced to a QC whose documented opinion was that this was a perfectly legitimate scheme. I took soundings from other professionals who confirmed the same. HMRC have never objected in any of my clear tax returns.

        As to tax-dodging, in hindsight, I'm the first to admit that perhaps these schemes were a mistake. And yet if I add up the cost of scheme (in tax paid and scheme fees), then it equals no more/no less than the cost of tax to me as a contractor with a company 50:50 split with my wife. And that is the frustrating thing about this whole farrago - HMRC are acting like a schoolground bully without actually stopping to ascertain the individual facts about the users of the schemes. Personally I feel like a sardine in a feeding frenzy -

        1. dotasscandal

          Re: DIDDUMS....

          You are far from alone in this situation. Google DOTAS SCANDAL.

        2. neil-t

          Re: DIDDUMS....

          You weren't tax dodging. You were tax mitigating. HMRC should have made it very clear to anyone using a DOTAS registered scheme that it would be challenged and the tax payer might end up owing tens of thousands. It's only with the Tory government's need to tackle the deficit aggressively that it's become less acceptable to engage in aggressive tax mitigation.

          1. Anonymous Coward
            Anonymous Coward

            Re: DIDDUMS....

            "You weren't tax dodging. You were tax mitigating."


            For those of us that have never had the opportunity or never wished to play this game, can you expand on the difference?

            I thought the relevant words in the UK (and maybe elsewhere) were

            "tax avoidance": tax reduction by means which appear to be within the law


            "tax evasion": criminal non-payment of legally payable taxes.

            "Tax mitigation" is a new one on me. But I don't get out much.

            "Tax dodging", however, I would have thought was widely understood, even if not exactly clear in a legal sense.

        3. fruitoftheloon

          @Tass1968 Re: DIDDUMS....


          I (genuinely) feel for your situation, having done your homework, methinks you being a tad grumpy about it all is not unreasonable at all.

          I forgot to mention in my original post that at the point when my IFA asked if I would be interested in such a scheme, my reply was 'yup, as long as you and your firm will indemnify me if the Inland Revenue change their mind at some point in the future about the legality of the scheme'.

          Funnily enough he wasn't THAT CONFIDENT...

          Either way, have one on me!



  10. Anonymous Coward
    Anonymous Coward

    Again, you'll not like this...

    It is not the "contractor" who makes the laws. That's done by the folks we elect. And it's done with the interests of big business at heart. Otherwise the tax "laws" would be simple. "If you have money, then we'll tax you and we can look at all bank accounts, always.". It's not worded like that, to help the big boys. When the wee folks get involved then it's frowned upon as that's their club you're entering into. There is no moral angle here. None. This is business. That's how the world works. If you don't like that, scrap capitalism and think of something better.

    1. Anonymous Coward
      Anonymous Coward

      Re: That's how the world works.

      How the world works is we have laws to curb the excesses that would otherwise make the rich all powerful. You don't like it, tough.

  11. Hawkeye Pierce

    "Extra" Beneficiary Trust??

    I think you mean Employee Beneficiary Trust don't you?

    1. gazthejourno (Written by Reg staff)

      Re: "Extra" Beneficiary Trust??

      Curses. Fixed.

      Please note the "send corrections" link is provided for this sort of thing.

  12. pop_corn

    I worked with a contractor who was using an EBT exactly as this article describes. He claimed he was getting 93% of his gross rate in his pocket, after tax and fees for the scheme. So was paying out about £7k in tax and (mostly) fees on his £100k income.

    As his nominal salary was national minimum wage, I pointed out to him that his salary of approx £12k a year, meant that he could apply for tax credits and other means tested benefits (who all ignore loans as income), e.g. council tax benefit.

    "Oh, I wouldn't want to take the p1ss!" he exclaimed, "Besides, if I then got a visit from the council, they might ask how come I have a £400k house with no mortgage but am earning £12k a year?"

    I wonder if he's had one of these letters?

    1. Tridac

      Meanwhile, the multinationals get away with billions through tax (evasion) planning. Wouldn't it be a far better use of hmrc resources to pursue them, rather than go after entrepreneurial individuals for limited return ?.

      Oh, I know, the big boys fight back and must be *so* much work for those poor souls at hmrc...

      1. J P

        SME Tax Gap is estimated (Guestimated?) at £6bn per year. That's almost entirely made up of small numbers, which HMRC can't ignore just because each one is small - they really do all add up. .

        And not every big business is on the fiddle. One of my most used anecdotes from when I was in practice as a tax adviser was the UK inbound group who had a s343 transfer of capital allowances claim denied. We felt it was a good claim, and advised responding accordingly. Client consulted with head office, in the light of HMRC's second letter, which basically said that if they didn't give up the s343 point then HMRC would open an enquiry into the group's UK capital loss position. The s343 claim was "real cash" which the group would see quite quickly - 50% within 4 years, and 95% over 20. The capital losses were unlikely ever to crystallise into real cash, but did count on the head office financial accounts (deferred tax asset). Head office were terrified of losing >£1.5bn of deferred tax asset from the numbers, and instructed UK to abandon the capital allowances. HMRC got £145m extra tax out of 2 short letters; I have no idea how long it takes to get that much out of dodgy plumbers & scaffolders...

  13. Anonymous Coward
    Anonymous Coward


    Hello forum.

    I have not taken part in any EBT scheme but am a contractor, with a few clients. Just to let you understand why I think HMRC are in the wrong here, keeping in mind that I am against those who use major tax loopholes:

    The people in question had their self-assessment tax return signed off with a green tick from HMRC every year in which they were in the scheme. HMRC sent letters out confirming the setup of the individual via their Limited Company, EBT (etc) were entirely valid.

    There are now cases where HMRC are looking at an individual from a decade ago and saying "sorry, for 19 months a decade ago we said you were ok, but actually, you weren't". Many of these people are now retired, unemployed or in permanent jobs.

    What these people were doing was not criticised nor 'wrong' in HMRC's eyes at the time, but it is now. That's unfair, because it opens up the window for other claims upon people.

    In closing: contractors have risk; also their own insurances, pension considerations and everything else. So yes, they likely deserve to 'earn' a total of double a permanent employee; but overall it's the freedom to work at multiple clients that drives most, not primarily the money. If you view the entire overall package you'd likely find a contractor is no better off financially than a permanent member of staff. Stating you have no sympathy for these people due to *perceived* immediate earnings, rather than considering their overall earnings compared to your permanent salary over years, is a polarised and incorrect point of view.

    1. Anonymous Coward
      Anonymous Coward

      Re: Clarfication

      If your dodge involved a 'loan': has the loan been repaid?

      How would you expect HMRC to account for the fact that many people had no genuine intention of ever repaying the loan?

      Other questions may be available for other dodges.

    2. Velv Silver badge

      Re: Clarfication

      If you have letters from HMRC confirming you were "legal" then you have nothing to worry about. Go to court and you will win. The laws cannot change retrospecitvely, and the courts cannot expect you to cover HMRCs mistake if they've made one, If.

    3. SJG

      Re: Clarfication

      I've been a contractor myself during which I passed an IR35 investigation from HMRC, but I made a very conscious decision to avoid this type of scheme as they are all challengable. Where any corporate structure is put in place where the primary purpose of that structure is to reduce the tax burden, then it's challengable under current tax law.

      A limited company's primary purpose is almost always to maximise profits to pay dividends (excluding not-for-profits etc). For the board of a company to make a decision to 'loan' an employee a tax free sum with the understanding that the sum will never be repaid is clearly against the companies interest. When this is compounded that the board member making the decision is the same person as the employee receiving then there's a conflict of interest - there's no 'arms-length' decision making here. So in corporate governance terms this is very dodgy from the start.

      It's also the case that employee loans are perfectly fine - many banks offer them to staff at reduced rates so no issues there per se - the loan will get repaid eventually. The issue arises if the loan does not get repaid.

      ... and here's the key point about why the revenue are perfectly within their right to take this approach...

      At the time the loan is given, everything is hunky-dory. The revenue signs the scheme off - as a loan with the expectaion that it will be repaid. The issue can then justifiably be 'discovered' by the revenue when they find out that the loan has not been repaid, and that fact can only become evident after some time has passed. Unless the scheme includes specific notification to the revenue that the employee had no intent to EVER pay the loan back (something I doubt), then the revenue are well within their rights to investigate when it becomes apparent that no payments are being made.

      Of course, there's an easy way to get out of this. Pay back the loan, then the Revenue have no cause to complain. Borrow the money or remortgage your house, but pay back the loan. Then pay yourself the way that you ought to have done in the first place - i.e. through salary or dividends. You'll still need to pay tax on that income, but it will probably be less than the revenue is asking for.

      BTW, the clue's in the name - it's a loan - loans get repaid unless the recipient goes bankrupt. So that's the choice.

      1. Carl W

        Re: Clarfication

        My understanding of how these work is that the loan is never repaid and then when you eventually die it becomes written off by the trustees. I was also offered this scheme and it looked far too dodgy and had the potential to land my family with a huge bill at the end.

        But I also know someone who was involved in a scheme like this whilst working as a contractor at HMRC, and they were OK with it.

      2. Number6

        Re: Clarfication

        I thought the legal obligation on the company was to maximise shareholder value. If you're the sole director, shareholder and employee then there is no conflict of interest if the scheme provides you, as the shareholder, with the most money.

        1. Anonymous Coward
          Anonymous Coward

          Re: Clarfication

          "I thought the legal obligation on the company was to maximise shareholder value. "

          Then you thought wrong. The Companies Act 2006 explicitly says that is NOT the way companies should work; it explicitly extended the obligations. Not that anybody pays much attention. But please stop repeating the misinformation.

          In summary: Section 172 says that Companies (specifically, Company Directors) must consider the interests of employees, suppliers, community, environment etc, as well as shareholders, and not just in a short term context either.

          See my Companies Act post in this topic a couple of days ago, hopefully at:

  14. RogerT

    I had a tax charge appear out of the blue from the revenue. It didn't even say what the matter referred to but did contain the same dire threats.

    I paid "under protest" but demanded a full explanation. To give one revenue employee their due he did ring me to say this was a "computer glitch" and wrote confirming this. Over two months later, however, I've still not got my money back.

    To add insult to injury the revenue are not following their complaints procedure and have not given me a named officer dealing with my complaint.

    It does seem to me that normal people should have some rights when dealing with the revenue. I'm beginning to think that I will have to go to the County Court to recover my money.

    1. Paul Shirley

      Last time they did it to me it reached the point of 'you're going to prison' before I handed them money I didn't owe. A year later they finally realised they'd cocked up mightily, handed the money back with interest, the fines back with interest but not the slightest sign they cared.

      At least it was several % more interest than I could get anywhere else.

      1. Tom 7 Silver badge

        @Paul Shirley

        You wont forget to declare that will you!

  15. Doctor Syntax Silver badge

    I'd have regarded such an arrangement as being in the "not even with a bargepole" category.

    Of course it's quite possible to get some off-shore arrangements past HMRC but it helps if you do business with them, e.g. buy their property & then lease it back to them.

  16. codejunky Silver badge

    Sorry for you

    Some of the comments here are supportive but some are really not. Personally I hope whatever you choose to do (and others) works out for you and that this heavy handed mafia shakedown doesnt cause too much misery. I dont understand why some people think it is right that the law can be so complex and purposefully written as such so government shakedowns can occur. When the law is ambiguous the people affected will see it one way and the enforcers see it another. For the enforcers to then use it as an attack on people making a living is sickening.

    All the best.

    1. disgustedoftunbridgewells Silver badge

      Re: Sorry for you

      My understanding is that he paid his salary to an offshore company, which the then "borrowed" money from, with no intention of repaying the debt, in order to avoid tax.

      That's not being victim of a complex law. That's going out of your way to intentionally avoid tax in a way that any reasonable person would say looks dodgy.

      As somebody on PAYE, I have no sympathy whatsoever ( on the assumption that I understand the scheme correctly ).

      1. Anonymous Coward
        Anonymous Coward

        Re: Sorry for you

        I don't think he paid his salary to the off shore company.

        The off-shore company billed the client and then paid the employee.

        This is the same as working through an employment agency (such as Hays/Manpower/Kelly/Reed etc). The major difference is that instead of being given your daily rate (which is obviously lower than the agency has charged the client) you are given minimal amount and the rest is given as a loan.

        this loan is then passed to a trustee company who then "writes" off the loan as a bad debt a year later so it will never be chased. the argument behind this is that the trustees of the "loan" have to do what is right for the person given the loan - if they ever asked for the loan back they would face jail.

        or at least that is what some snake oil company tried selling to me when a friend tried to get me to sign up to one.

        1. disgustedoftunbridgewells Silver badge

          Re: Sorry for you

          Yeah, that's what I meant, in a badly worded way. Although thanks for confirming I understood the rest, as I wasn't sure I had, because it seems so dodgy, how could anybody justify it as reasonable?

  17. Anonymous Coward
    Anonymous Coward


    If businesses and their political puppets spent as much time and money on *energy* efficiency as they do on *tax* efficiency, the world would be a rather better place for most of us. Better still would be spending it on energy efficiency *instead* of tax efficiency. Then the tax experts would have to find something less wasteful to occupy their time. Golf, or powerboat racing, maybe.

  18. TonyJ Silver badge

    Reading some of the comments

    I can see both sides of the argument to a very great extent.

    There's an often overlooked concept that permies tend to get wrong and that is that as a contractor, I don't work for the company whose site I am currently sat at, I work for a limited company that just happens to be mine. My personal employment contract, however, is with this limited company.

    So in the same way if you had staff from, say, Microsoft or HP on site, you wouldn't expect those staff to be asking your manager to approve their holidays. As a courtesy, on long engagements, they would be expected to inform someone, of course.

    Also, in the same way that the business-to-business contract of engagement can be terminated by either party, exactly the same is true of the business-to-business agreement between my limited company, the agency whom I work through and the end customer. You wouldn't lose any sleep at their loss but you can usually understand that they (the company they work for) are being paid because there's usually a combination of skills they cannot easily fulfill themselves and extra risk that they will be canned - as with contractors.

    And yet, it's inevitable that in many cases, the people on site expect to have the right to approve or otherwise things like working hours, holiday entitlement etc etc.

    Ok, so having said that, there's no way I'd ever get my company and by association myself involved in such a scheme. My own stance has always been to avoid anything that looks in any way like it's exploiting some kind of short term loophole. Ultimately, it inevitably means I pay more taxes than if I were to use them, but so be it.

    And I get at least one email a day inviting me to maximise my earning so I can take home more (usually between 85 and 95% of turnover)...they go straight into my junk... indeed, I get this from "Hannah" at several times a week:

    "....As a Contractor, did you know that operating as a Limited Company could give you returns of up to 90%?

    * Perhaps you have a Limited Company already and are not getting the returns you thought you would?

    * Are you thinking of swapping from Umbrella to Ltd to maximize tax efficiency but think it is a hassle?

    * Do you need help setting up a Limited Company?

    Find out instantly how much pay you could retain by trying our quick no obligation calculator now <http:/L..blah>

    With superb support from our accountancy team coupled with easy to use, time saving online software, there really is a way to be very tax efficient AND not have too much paperwork. It is not much more than the paperwork you have with an umbrella solution! Find out more by calling us now on 0333 222 4054."

    However...I don't believe the fault lies with the contractors entirely as emails like that can be tempting to some, or even the accountancy firms that cook such schemes up but mostly with the government.

    Our tax laws are far too complex to be workable. Did you know, for example, that VAT is payable on adult shoes? It isn't payable on childrens shoes nor work boots. So...there is an entire section of the VAT guidelines that defines exactly what a boot is. (I will caveat that it's been a few years since I was looking at this so it _might_ have changed in the meantime).

    There's also a blunderbuss approach here - rather than fight the big boys who are in cahoots with the very big accountancy firms who are, in turn, in bed with the government and get tied up in court for years, they shoot a broadside at smaller entities who cannot afford a long fight and are more likely to roll over.

    I vaguely recall reading somewhere that one year, a prominent lord, paid less than £15k in taxes despite earning hundreds of millions from his various interests.

    Companies do have a legal duty to minimise their costs and maximise their profit for their shareholders and that includes taxes but there needs to be a shift from both sides to make the whole thing fairer.

    1. Anonymous Coward
      Anonymous Coward

      Re: Reading some of the comments

      You've spent a lot of your comment (like others..) defending contractors for "earning more" when no one else in the comments has said anything like "bloody contractors earning more, bastards".

      I contact for a number of clients. When my tax return is due I write down how much earned on all the jobs I did in the last year and pay my fair share of national and local tax (I don't live in the anymore UK, it's split into different types of income tax over here) and then pay for 3 other peoples health insurance as well as my own. I have no sympathy for people that think they can use a scheme to dodge taxes that everyone else pays to fund services they are using like putting their kids through school.

      If the money ends up in your pocket at the end of the day pay the income tax on it because you will have to at some point and you don't want that point to be when you've already spunked the money on something shiny.

      1. sjaddy

        Re: Reading some of the comments

        In the UK this quote is very apt

        “No man in this country is under the least obligation, moral or otherwise, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his store.”

        Lord Clyde, quote from a judgment given in 1929.

        If at the time the "scheme" wasn't illegal then I have no issue with people doing this. I personally wouldn't touch it with a bargepole because I feel uncomfortable about the shifting of money around etc.

        Most contractors - even those paying minimum wages via a Ltd company - will still be paying corporation tax (20%).

        Based on a company billing £100000 a year and the contractor taking the minimum amount of £8000 a year. Even if they took expenses of £20k a year they are still left paying 20% tax on £70000 before they take dividends.

        That means their company is still paying £14k in tax a year.

        also by billing £100k a year they will have to VAT registered so there is another 20% they charge that goes straight to the government. They have to declare £120,000 to the government even though they have only seen £100,000 of it.

        so the government is still getting at least £34000 a year in "taxes" from that contractor's limited company. If the contractor then takes dividends that take total remuneration to over circa £42000 he will be charged another 25% tax on the money over £42000.

        so - if the contractor only takes £40,000 a year "remuneration" (not forgetting his £20k to pay expenses - such as train fares/lunches/pc's etc) he is then paying £34000 in tax, the company then retains £26000 in profits which can be used to pay the contractors wages when they are out of work.

        A permanent person earning £60k a year only pays £17,870.12.

        so a contractor taking home minimum pay through a ltd company will still contribute twice as much in taxes as a permanent employee on £60k.

        Before any of you take issue with my maths and the VAT portion - it is still £20000 that the government has done nothing for to support the limited company so yes it is still a tax that the limited company has paid to the government.

    2. J P

      UK VAT law is as bad as ever

      If selling garments trimmed with goat skin, you need to be able to distinguish your Tibetan goat from your Nepalese one. Seriously. (When I shared this with a bunch of tax professionals on Twitter, several thought it was a spoof. It's not)

    3. Anonymous Coward
      Anonymous Coward

      Re: Reading some of the comments

      "Companies do have a legal duty to minimise their costs and maximise their profit for their shareholders "

      Often repeated, not particularly true in the UK these days. Don't take my word for it.

      Here is the presumably-relevant part of the Companies Act 2006. Have a read. Maybe look it up elsewhere to make sure I'm not misrepresenting.

      Once you've done that, please show readers any text relating to a legal duty to minimise costs and maximise profits for their shareholders, not subject to any other consideration.

      In fact the extract below specifically says organisations must consider the interests of employees, suppliers, community, environment etc, and not just in a short term context either.

      Obviously it's yet another law that's frequently ignored and rarely enforced. It's also frequently misquoted/misrepresented, maybe by well-intentioned people who have been misinformed.

      That said, this is The Law as it has been in the UK for a few years, so would contributors please not repeat the mistaken claim that the law says what you said it does. Better still, if you see the claim repeated elsewhere, point out the Section 172 obligations go wider (significantly wider) than just maximising short term shareholder profit.

      Thank you.

      From e.g.

      172Duty to promote the success of the company

      (1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

      (a)the likely consequences of any decision in the long term,

      (b)the interests of the company's employees,

      (c)the need to foster the company's business relationships with suppliers, customers and others,

      (d)the impact of the company's operations on the community and the environment,

      (e)the desirability of the company maintaining a reputation for high standards of business conduct, and

      (f)the need to act fairly as between members of the company.

      (2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

      (3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

    4. gnasher729 Silver badge

      Re: Reading some of the comments

      "Our tax laws are far too complex to be workable. "

      That's nonsense if you work as a contractor with nobody working for you.

      You start a limited company. You collect receipts for all your expenses, including an accountant (who knows all the stuff that follows and doesn't cost very much).

      You pay yourself a small salary; exactly the tax free amount (£10,600 a year if I'm right). On that you pay a tiny amount of national insurance and no employer's NI because £2,000 a year of employer's NI is free. Your accountant does that for you. All you have to do is take a cheque to the bank every month.

      Your accountant subtracts your expenses and your salary from your invoices. Every three months or so he tells you how much the company can afford to pay in dividends, and how much is tax free. Then you decide how much in dividends to pay yourself.

      At the end of the year, you pay taxes on the dividends if you took out too much. You can take home about £3,500 a month without paying any taxes on your dividends. The accountant calculates the profits of your company so far (invoices minus expenses minus small salary). If there is money left over you can pay money into your pension and deduct that as an expense from your profits. And then you pay 20% of your profits to HMRC.

      Money that is left stays in the company, so you can keep paying salary and dividends next year if you don't find work, or when you retire. And that's it. If you make over £82,000 you register for VAT and use the Flat Rate scheme, and HMRC gives you a tiny amount of free money.

      If all of this is unworkable for you, then maybe you should look for a simpler job.

      1. neil-t

        Re: Reading some of the comments

        IT's simple enough. However using a Ltd co. for his personal affairs cost Ken Livingston dear in the last mayoral election as the voting public were lead to believe it was avoidance. Nonsense of course. Who would pay more tax than they are assessed for? But it's an easy stick to bash independent professionals with.

        It's up to the chancellor and the government to decide the tax rates for dividend income. They've whacked it up once this year and I guess it will rise until it reaches par with tax on earned income. That's probably fair. I'd prefer this than people bashing LTD company directors for tax 'avoidance'.

        For those who are complaining about independent contractors using Ltd Companies, write to your MP. Simple.

  19. Ptol

    The tax issue...

    When I was contracting, I quickly realised the only "safe" way to do it was as an employee through an umbrella company. This in turn meant I was giving up most of the tax advantages of being a contractor, and taking on a lot of income risk for sickness, holidays, gaps in contract etc.. I'm now back being an employee.

    If you want to contract in a "tax efficient way" then you are taking on significant tax risks. With limited companies, you could be deemed on the wrong side of IR35, and there is no effective way to manage these risks - not even insurance. In the end, you need to decide how much risk you are prepared to take for that bit of extra cash today.

    For the current batch of contractors who are in the firing line, I recon their best option is to repay back that loan to that offshore company, but I'm glad I ignored the constant approaches by DarwinPay to get involved in such schemes.

  20. sh856531

    Dry your eyes

    I'm all in favour of contractors being able to charge 2 or 3 times what I get paid on a daily basis. I don't even begrudge them the Ltd company dodge that gives them a slight tax advantage given the lack of employee protections they get.

    But as soon as I saw the words "offshore" and "interest free loan" my sympathy for anyone in this situation evaporated and I hope the taxman hits you like a ton of bricks

    Contractors paid £500+ p/d are already heavily compensated for the lack of employee protections and job security. There is a reason my contractor friends are driving around in Porsche's and Mercs and I'm not.

    They don't need an even greater tax break than they already get by running everything through a ltd company

    1. neil-t

      Re: Dry your eyes

      Your colleagues must have been earning squillions. In London contractors earn a decent living but so probably less than many similarly skilled professionals in the finance sector sector for example I personally don't know anyone driving expensive cars or owning a town house in Chelsea.

      We are all earning enough to live in the capital and provide for families while taking care of our own pension arrangements, insurances, unpaid holidays and so forth.

      The labour government could have closed down EBT schemes when they came to power but didn't. I don't see why taking advantage of overly complex, poorly drafted, ambiguous finance law is i

      immoral or wrong.

      Offshore / loans and other memes are just mechanisms for tax mitigation. Until the government in power close town tax loopholes and legislate appropriately they will be exploited. I don't this kind of exploitation as any different from implementing a clever engineering solution.

  21. dotasscandal

    99% of you are missing the point

    What all of you guys seem to be missing is that the retrospective tax demand has nothing to do with the merits of the "contractor scheme" (really, just a different type of umbrella company). The scheme he used may have been perfectly valid. In fact, there is, at this time, no case law in favour of HMRC with regard to EBTs. It's purely a matter of "pay first, argue later" on the part of HMRC. Problem: their demands concern tax from 10 years ago.

    See to educate yourselves before you serve judgement.

    1. DougS Silver badge

      Re: 99% of you are missing the point

      No, they're not missing the point. You're missing the fact that this scam involved an interest-free "loan" that they NEVER had any intention of paying back. I'm utterly shocked anything like this was ever allowed in the first place, but I can say with certainty had it been allowed in the US and someone I knew was using this dodge the first question I'd ask would be "so what happens when you retire, and you owe your offshore scam company several million dollars?" Forgiven debt is taxable income, so I guess the goal was to die still owing the money and arranging things so that their heirs somehow weren't liable for the debt?

      1. dotasscandal

        Re: 99% of you are missing the point

        You did not read my post, did you? I'll say it again: Under the APN (Accelerated Payment Notices), it DOES NOT MATTER what the mechanics of the "scheme" are.

        Please read the legislation:

        All the matters is that he declared participation in the scheme on his tax return (which was the right thing to do).

        You are looking at the specifics here, and completely missing the big picture: HMRC DOES NOT LOOK AT THE SPECIFICS OF THE STRUCTURE. Look: there are about 40 000 people that used various employment structures from 2000 to 2012 (after that year, the law changed) to protect themselves from IR35. 99% of these schemes where REGISTERED WITH HMRC under a system called DOTAS. They had what is called a SRN ("Scheme Registration Number"). The condition for HMRC to deliver a SRN was merely their belief that the structure could produce a "tax advantage" of some sort (even if only as a side effect). This "loan" thing is only one of the hundreds of variants of contractor structures.

        Now the purpose of this "SRN" system has been turned on its head, and it is now used as part of a big cash grab by HMRC, who needs to find money wherever they can.

        The key point is that the validity of the author's scheme is UNDETERMINED. IF there is a court case and HMRC loses (which is probable, because they have lost ALL cases involving EBTs to date!), they'll have to repay this "Accelerated Payment" with interest.

        It is precisely because HMRC does not have a case that they led Parliament to introduce this highty controversial "pay first, argue later" retrospective legislation (more than 10 concurrent Judicial Review procedures ongoing or in the pipeline - which is unprecedented for ANY piece of legislation in the UK)

        1. neil-t

          Re: 99% of you are missing the point

          The real point here is that the schemes were notified to HMRC in taxpayers' annual returns. HMRC has sat on this information for years, refused to negotiate with scheme providers to resolve open enquiries made on tax returns (a formal way for HMRC to be able to dispute the return in future).

          HMRC has never sent out warning letters to scheme users saying they are liable to be pursued for income tax and NIC on the amounts disclosed (loans amounts from EBT schemes were disclosed annually in P11D forms).

      2. neil-t

        Re: 99% of you are missing the point

        You are simplifying complex tax planning to the level of a drunken pub dispute. That aside, the 2008 budget shut down this particular loophole. Why do you think there's a whole industry of tax accountants, lawyers, planners, advisor and so forth ? To exploit loopholes in poorly drafted, massively complex tax legislation. If the tax system was radically simplified as they've done in Estonia then wouldn't we just all pay what was due and have little wiggle room? Write to your MP or join a pressure group There's no point complaining on here about it.

        1. Anonymous Coward
          Anonymous Coward

          Re: 99% of you are missing the point


          "the tax system was radically simplified as they've done in Estonia"


          "a whole industry of tax accountants, lawyers, planners, advisor and so forth"

          might have to find real work that they're qualified to do (?), or seek unskilled work in a flooded market, or GAIN PERSONAL EXPERIENCE OF STATE BENEFITS (sorry, recruit-ad mode for a moment there).

          What's not to like?

  22. Dan Paul

    Don't you have a Statute of Limitations law there?

    Here in the states, we have a statute of limitations that defines how long any agency has before you are out of anyones jurisdiction. It varies from ruling to ruling but a good bet is seven years.

    If you steal money and, they can't tie you to the crime in that seven years and you wait to dig it up, they usually have a hard time getting any case against you.

    1. Anonymous Coward
      Anonymous Coward

      Re: Don't you have a Statute of Limitations law there?


      The thing here is that HMRC can simply say they "intend to look into your tax return" (they have one year from you filing it to do that). They do that fairly routinely, generally just before the cut-off date, in order to protect their position.

      From that point on, it's completely open ended. The taxman is not bound by any deadlines (you'll understand in a minute why this is a problem)

      What happened in a a lot of these EBT cases, the taxman sent an "inquity letter", then did NOTHING (no requests, no letters - litterally sat on their hands) for 10 years (and in doing so, conveyed that they took no issue with these "contractor schemes")

      The following website has some interesting first-hand stories of guys caught in this mess (one is mine)

      The retrospective legislation that the article talks about was, many suspect, largely brought about to cover up the taxman's inaction in closing up the tax loopholes that made these schemes prosper in the first place.

      In theory, what they demand here is merely a "payment on account" that they have to repay you if and when your scheme is proven to work by the courts. Yet this "payment" can be massive and mean bankruptcy for many.

      What HMRC are counting on is that most will never see their day in court, since a lot of the companies that provided these structures 5-10 years ago have now closed shop.

      1. gnasher729 Silver badge

        Re: Don't you have a Statute of Limitations law there?

        "What HMRC are counting on is that most will never see their day in court, since a lot of the companies that provided these structures 5-10 years ago have now closed shop."

        Clearly HMRC should allow people to avoid any tax payment by paying their loans back to HMRC then, and everyone is happy. I mean it was a loan after all, right? And a loan has to be paid back?

        1. neil-t

          Re: Don't you have a Statute of Limitations law there?

          I'd suggest taking a step back and doing some reading to understand the very basic of loan based EBT structures. Nobody has borrowed anything from HMRC therefore nothing is owed on that basis.

    2. DougS Silver badge

      Look up tax law in the US

      The IRS can go back an unlimited number of years for tax evasion. They can only go back seven years for mistakes/corrections or whatever, but if you aren't paying your taxes or are doing something illegal to reduce the amount of taxes you owe, they could go back 50 years if they wish.

      An interest free "loan" that you never had any intention of paying is so utterly clearly a scam I can't believe the author of this article was defending it.

  23. Phil Endecott Silver badge

    Rangers Football Club

    The only other time I've heard of Employee Benefit Trusts was in the context of Rangers football club, who were using them to "pay" their players. There was a major court case with HMRC about this which the club eventually WON (to my surprise). I wonder how/if this Gibralter scheme differs from what Rangers were doing?

    FT story:

    1. dotasscandal

      Re: Rangers Football Club

      Phil, you are missing the point that it doesn't matter what "the Gibraltar scheme is (or rather was) doing".

      HMRC doesn't even look at that. All they look at is that the guy has, in all honesty, declared membership in a structure they deem to be "tax avoidance" (regardless of whether this was a primary motive to join).

      The specifics of the scheme are not even taken into consideration when HMRC sends out an "Accelerated Payment Notice" retrospectively ("retrospective advance payment" oxymoron if there was ever one!).

      Oh, and about Rangers... HMRC lost twice already, and the case has just been heard again in Court of Appeal a couple weeks back. They're expected to lose for the 3rd time.

      What you have to understand is that EBT were a very common remuneration structure 10 years ago, and there isn't anything particularly "dodgy" about them. Most commenters here are judging a reality of 2005 with eyes of 2015, which doesn't make sense.

    2. neil-t

      Re: Rangers Football Club

      They won at the upper tax tier but it's still ongoing in the higher courts. It's an important case for HMRC. They'll go all the way to the supreme court.

  24. batfastad

    Fair share?

    So in law, what is a fair share? It seems like most people here seem to think that fair share should actually be more than the amount that someone is legally liable to pay. I'd like to know how many people make additional voluntary donations to over and above their legal minimum requirement to fulfil their fair share.

    Loopholes exist. The people who are responsible for the loopholes should do their job and close them, not whinge about people using them.

    1. DougS Silver badge

      Re: Fair share?

      Allowing a company to loan people money and consider the amount loaned as an "expense" against taxes was the loophole. If it was truly a loan, at arms length and therefore intended to be paid back, then it was a loophole that may have had a purpose. Allowing a "loan" that was not arms length and not truly a loan since there was never any intention whatsoever to ever pay it back was not "using a loophole" it was a tax evasion scam, nothing more.

      You are trying to change the issue by complaining "what is a fair share"? A fair share is what you would have owed if you used this loophole as intended, and actually paid back the loan at some point. Given that you did not, your fair share is what you would have owed if this loophole did not exist at all.

  25. batfastad


    Well I've massively overpaid on stamp duty since that law changed recently. And the personal allowance has increased over the last 15 years of my working life so presume my old tax returns are being automatically re-assessed according to current legislation and my refund is in the post?

    Nope. There's only ever one winner.

  26. Anonymous Coward
    Anonymous Coward

    One of many reasons I now live in Australia

    The ATO isn't perfect but it is certainly a lot better than HMRC! Also being able to claim expenses on PAYG tax is great.

    Plus IR35 doesn't exist out here (we have something much less ambiguous called PSI), When I was in the UK as a contractor it was always an edge case and a worry that HMRC might decide that I fell within the bounds of it and then decide I owe them another 20% tax on everything I had paid over the previous 5 years, it's hard when you work 35 hours for one client and then have 3 or 4 other smaller ones that HMRC seem to think "don't matter" when it suits them but perfectly happy to collect the tax on earnings from them!

  27. Not a contractor

    Not "approved".........

    Many posters have suggested that as the contractor who signed up to this arrangement was told that the scheme was "approved" that this means HMRC had agreed to it.

    This is simply not the case, HMRC will not agree to arrangements of this nature without going through every inch of detail and even then it will not sign-off on such arrangements.

    A lot of providers say the scheme is approved on the basis that someone (probably a professional) has looked at how it works and said, based on legislation, it can work. Again though, was the professional told everything ie that its disguised remuneration in the form of a loan that never gets repaid.

    HMRC have been aware of these arrangements for a long while but found it difficult to challenge and as such in 2011 new legislation was introduced to specifically target these types of arrangements, hence the reason why HMRC is now actively chasing those individuals who participated.

    1. dotasscandal

      Re: Not "approved".........

      Not exactly. In fact, all these structures were duly registered with HMRC, and all of them had what's called a DOTAS SRN ("scheme reference number"). I remember VERY CLEARLY that when I was offered this as an IR35-insultated trading vehicle, I DID CALL HMRC, WHO CONFIRMED THAT: "as long as the scheme is registered, it's valid". I'm CERTAIN I'm not the only one.

      So, contrary to what you are writing, they KNEW ALL about it. They just were fine with all of it for years.

      Ironically, these SRNs are now used to send these retrospective "advance payment" demands to individuals.

    2. dotasscandal

      Re: Not "approved".........

      Yes, HMRC had agreed to it.

      You see, in these days, there was (still is) a system called DOTAS (look it up).

      Any provider that wanted to market a "contractor structure" (IR35-insulated trading vehicle) had to submit an application to HMRC, who would *examine the scheme*, and if they were happy with it, would assign it a SRN ("Scheme Registration Number").

      You then had to declare the SRN on your tax return.

      The aim of this system was, literally, to help HMRC keep tabs on what structures are out there, and help them close legal loopholes where need be.

      I remember *very distinctly* giving a call to HMRC back in 2005 to ask about one of these structures, and be told that "if it has a SRN, it's legit"/

      1. Anonymous Coward
        Anonymous Coward

        Re: Not "approved".........

        "I remember *very distinctly* giving a call to HMRC back in 2005 to ask about one of these structures, and be told that "if it has a SRN, it's legit"/"

        An apparently simple change to "if it already has an SRN, it's already registered with us, nothing for you to do" doesn't half change the meaning of that conversation, does it. Still, easy mistake to make.

      2. Anonymous Coward
        Anonymous Coward

        Re: Not "approved".........

        "Any provider that wanted to market a "contractor structure" (IR35-insulated trading vehicle) had to submit an application to HMRC, who would *examine the scheme*, and if they were happy with it, would assign it a SRN ("Scheme Registration Number")."

        Hmmm. Who should readers believe, dotasscandal's posts here or the Law Society's published position on their website since 2011?

        "if they were happy with it" isn't how the Law Society's published advice sees it.

        "if the scheme was already registered. Such registration is no guarantee of any tax implications" (marginally paraphrased) is how the Law Society's published advice sees it:

        Source: Law Society DOTAS FAQ in 2011: section 5, Scheme Reference Numbers.

        1. gnasher729 Silver badge

          Re: Not "approved".........

          That website that you linked to contains the telling sentence

          "The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage."

          Having a scheme reference number only means that the promotor sent a description of the scheme to HMRC, and got a reference number back.

          But even if this scheme was completely legit (and I assume it is), part of the scheme is that you received a loan, and HMRC couldn't just say "we don't believe you that it is a loan", because there was no evidence for that at a time. Instead they can wait ten years and say "you got this loan ten years ago, could you please show us when you repaid it? You didn't? So where are your plans to repay it? You haven't got any? Well, in that case we will assume that when you talked about a loan, you were in fact lying to us, and it was never a loan, but just normal salary".

  28. Anonymous Coward
    Anonymous Coward

    Interesting Variation on Loan "scheme"

    I am a contractor, and I have always thought this scheme to be very dubious. I would never have considered using the scheme as described, as it is a clear-cut tax-dodging scam (but apparently legal).

    I did hear of a far better variation on this scan, though - the money was loaned in Zimbabwean dollars! Obviously, the recipient of the loan would convert this back to a less hyper-inflationary currency immediately.

    The neat thing about this is that the recipient can then pay back the loan in a couple of years - in Zimbabwean dollars and, due to hyper-inflation, do this using the change from a tenner after buying two pints.

    Not saying this is any less dubious, but you have to admire the deviousness of the scheme.

    1. neil-t

      Re: Interesting Variation on Loan "scheme"

      How many listed companies for example have NEVER used tax planning? It's been part of our corporate culture for many years. It's good that the government are making it clear that these tactics are not acceptable but at the time they were. So many large companies have avoided paying billions by clever tax planning and secret deals with HMRC. Private Eye has pages of journalism every fortnight on this topic.

    2. gnasher729 Silver badge

      Re: Interesting Variation on Loan "scheme"

      I once read a story (long time ago) about a company paying a large part of the salary in sovereign coins, which are in fact legal tender. So they handed over ten pound sovereign coins, which you could buy for £174 and sell for £162 each with a quick web search, and paid taxes etc. for £10. And then that loop hole was closed.

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