Here at Crunch, we’ve long been wary of Employee Benefit Trusts promising contractors take-home pay of 80 to 90 percent. Often dressed up as HMRC-friendly methods of reducing your tax burden, the schemes in reality just exploited loopholes in the tax system. From April 6 next year, the loophole will be closed.

EBT arrangements usually work as follows: A contractor enters into an arrangement with a service provider that promises a higher than usual take home pay. Although they often don’t advertise themselves as such, these accounting services operate via offshore accounts which allow them to operate around the law. The arrangement is that you get paid a loan, via the EBT, which never has to be paid back.

Many of these schemes are based on the Isle of Man or Guernsey: think of them as offshore umbrella companies.

However, new legislation to be released in the Finance Bill 2011 will make EBT’s count as a payment of employment income and the employer will be required to account for PAYE accordingly. This will make obsolete the umbrella companies who remunerate their clients via EBT’s.

Be warned. If you’re a contractor looking for an accounting solution, be suspicious of umbrella companies that promise a larger-than-usual percentage of take-home pay. Such claims can no longer be backed up.

The move to close EBT’s has been earmarked as part of the Government’s self-proclaimed ‘drive for a fairer tax system.’ They will ensure that:

* Income tax and NICs on income are not avoided or deferred.

 

* Contributions to unregistered pension schemes do not benefit from tax advantages on pension savings beyond the allowances available in registered pension schemes.

There are currently over 5,000 companies offering EBT schemes and more than 50,000 employees working via them. By closing the loophole, the Exchequer expects to raise £500m per year.

For those currently on such schemes, this is bad news. They will quickly need to find alternative accounting solutions that offer tax efficiency and full compliance with HMRC. This will leave them with two options: a limited company or standard umbrella company. Read this guide on the perceived advantages and disadvantages of each.

A limited company set-up undoubtedly offers the most tax-efficient method of contracting by enabling you to pay yourself in a combination of dividends and salary. The argument against them, usually forwarded by umbrella providers, is that they are a time-consuming method of running a business.

However, with the best automated online accounting technology, this needn’t be the case. Crunch accounting offers this, and much more besides. By providing every customer with online technology, their own account manager and unlimited access to a team of expert accountants; running a limited company is transformed into a blissfully simple process.

The day when running a limited company was a tiresome and time-consuming chore is long gone. At least in our hands.

If you need to make the switch from an offshore umbrella company, give one of our friendly Crunch advisers a call on
0333 311 8000. We ensure a smooth switching process and painless limited company set-up –  in fact, one of our customers got his limited company set up in
just three-and-a-half hours!