Employee Benefit Trusts

Employee Benefit Trusts are the latest popular tax solutions for self-employed contractors after years of using Managed Service Companies and Umbrella Companies. In the last couple of years hundreds of contractors have taken advantage of the Employee Benefit Trust (EBT) structure as a way of both managing their admin as well as achieving far higher gross to net ratios on their contracts.

Traditionally, contractors in the UK used a Managed Service Company (MSC) which was a composite service company structure for managing accounts, invoices and general administration. Contractors became shareholders in the company but did not have to deal with any of the management of the company or any of the jobs traditionally taken on by directors. This company 'management' was handled by a service-provider, allowing the contractors to simply receive their salary and to have a more efficient working environment, without having to waste contracting hours on time-consuming admin.

However, because of the problems associated with IR35 legislation the Treasury introduced the "Tackling Managed Service Legislation" in 2007. This sought to deal with the use of Managed Service Companies' to avoid income tax and National Insurance. Thereafter, Umbrella Companies, which were not covered by the MSC legislation, became more and more popular amongst contractors.

Umbrella Companies are companies that act as employers to contractors working for fixed term contracts. Basically, an umbrella company also operates as a service for dealing with all of the admin associated with invoicing, collecting payments from clients, paying national insurance contributions and calculating tax. The individual contractors will work on their contracts as usual, but at the end of the day will submit their expenses and timesheets to their chosen umbrella company.

In the last couple of years however, contractors have sought out more robust solutions such as Employee Benefit Trusts which offer more advantages still.

Employee Benefit Trusts are discretionary trusts provided by employers for the benefit of their employees. The Employee Benefit Trust is therefore a discretionary trust set up for contractors, who become 'skilled employees' and who benefit from the EBT's tax efficient payment structure. The company managing the EBT will pay the contractor a salary at minimum wage, from which PAYE and NIC are deducted and the rest of the contractor's wages are then paid into a (normally offshore) Employee Benefit Trust. Finally, the trustees of the EBT, then make an interest free loan to the contractor for the balance of the pay owed to them from the client company.

An Employee Benefit Trust offers all the same advantages as an umbrella company (no invoicing, admin or company duties and not subject to stringent MSC legislation) with none of the problems - unlike umbrella companies, EBT's do not require expenses forms or timesheets, and they also offer added security as contractors are given full employment status, statutory rights and benefits (whether contracting in the UK or overseas), as well as professional indemnity cover.

Finally, Employee Benefit Trusts also offer a far higher gross to net ratio than any Umbrella Company. Umbrella Companies typically offer up to 65% gross to net whereas EBT's offers a return on contract of up to 85%.

The Bedouin Group often an alternative to umbrella companies so contractors can maximise their income and reduce the amount of paperwork they have to do.