BN66 Contractor Loses Court Case
A UK contractor who took advantage of a payroll scheme offered by Montpelier in the Isle of Man has lost his court case in which he was trying to have the retrospective element of BN66 classed as unlawful. The argument that this type of retrospective action was against human rights fell on deaf ears.
Robert Huitson an IT contractor had been using the scheme offered by Montpelier for several years but received a tax bill after HMRC changed legislation in 2008. The landmark case was the very first time that a judge had backed the retrospective element of BN66 and has left a great many contractors disappointed, many now face large retrospective tax bills. It’s almost certain that there will be more challenges to BN66 and the UK governments ability to penalise people under new tax legislation retrospectively. It should be noted the fuss and objection that was made by members of parliament when it was announced that expenses rules would be applied retrospectively. It appears as though independent high earners are not afforded the luxury of simply refusing like MPs. The scheme provider in this instance, Montpelier, have vowed to appeal the decision – although it will certainly be some time before this case will be heard by a higher level.
With this ruling it is now more important than ever to make sure that your payroll provider is acting in your best interests. For our recommended payroll solution please follow the link. This solution doesn’t rely on a double taxation agreement so BN66 has no impact.
IT Contractor Payroll
Of all the contractor groups currently operating in the UK it seems as though the IT contractor has been keenest on sourcing the right payroll solution. Many IT contractor payroll solutions have sprung up over the years in order to service this need, few have lasted the sands of time. One thing is certain though and that is most IT contractors seem to prefer the option of having somebody manage their payroll for them as opposed to forming their own limited company. These are just some of the payroll options that have been available:-
1. The Offshore Partnership. Based around double taxation legislation that permitted offshore companies to handle your payroll in a very efficient way. These schemes have all now been closed due to updated HMRC legislation.
2. Employee Benefit Trusts. Perhaps the most controversial payroll scheme to date for IT contractors. HMRC insist these are no longer compliant yet many scheme providers insist they are. Several providers have been investigated by HMRC. (Please see here for a tax efficient alternative to the EBT.)
3. Umbrella Company. A payroll solution that gives you the full statutory benefits of being a PAYE employee. Of course on the downside it is the most expensive payroll solution for IT contractors. The main benefit of an umbrella company is that it removes the burdens of running your own company.
4. Invoice Only (Gross Pay). Designed for contractors who are registered as self employed. An invoice only scheme gives you the ability to remain completely in control of your finances ensuring that all payments due to you are received gross. It’s then up to you to manage your own tax affairs. The main benefit for self employed contractors is that it removes the burdens of invoicing and chasing payment plus other administrative tasks.
There are several other solutions but the providers tend to be very shy on revealing the practicalities involved! If you’re currently an IT contractor operating in the UK and are stuck for a solution please feel free to use the contact form at the top of the page and we’ll do our best to put you in contact with a suitable payroll provider.
Employee Benefit Trust
Don’t Want To Use An Employee Benefit Trust? There is a Much Better Payroll Solution Available!
The Employee Benefit Trust has been a popular alternative to the Umbrella Company for many years. Hundreds if not thousands of self employed contractors and other high net worth professionals (such as those in the creative arts) have taken advantage of the higher rates of pay that can be achieved via the use of an Employee Benefit Trust payroll solution. Where as a typical Umbrella Company gives a gross to net contract ratio of around 65% many EBT solutions offer a return of up to 85%. The opportunity to keep an extra 20% of YOUR pay has been seen as a massive bonus to high earners.
Employee Benefit Trusts also became popular because of the added security they offered. By using an Employee Benefit Trust and becoming an employee scheme members were granted full statutory employment rights and benefits. The lack of a need to keep complicated expense details also endeared this solution to those who preferred to spend more of their time earning money instead of doing paperwork. This was a massive advantage over those that either used an Umbrella Company or who chose to setup their own Limited Company. At this point you’re probably thinking that an Employee Benefit Trusts sounds too good to be true, how come everybody isn’t using them?
The answer to the second question is simple. In order to gain any advantage from an EBT you really need to be earning above a certain level. Some scheme providers set this level at 40,000 a year, others at 50,000 a year. The too good to be true bit is a little harder to explain. In essence it comes down to risk. Employee Benefit Trusts were so tax efficient because of the nature of the loan payment that was given to the employee (i.e. the contractor). The contractor was paid a basic salary and the rest of the money was “loaned”. Because this was paid as a loan (and not as salary) there was no guarantee that the loan wouldn’t be called in. Of course all providers marketed that this wouldn’t happen and that they had various methods of making sure the loan wouldn’t be asked to be repaid. Fine unless the payroll provider encounters money problems which could result in the loan being sold as an asset. Could you imagine the company that now owns that debt not asking for the money back? As far as the legalities go there has been a split with regard to EBTs. The general consensus appears to be that those that are based onshore whilst those offshore were effective.
So even with all the advantages that an Employee Benefit Trust offers their popularity has declined massively.For many contractors the risks associated with an EBT are seen to out way the advanatges. A scenario that has not been helped by several scheme providers being investigated by HMRC. The question is what alternatives are there? The governments stance on contractors seems to go against encouraging innovation and excellence within business. How can you expect people to take the risks associated with working for yourself if the bottom line is no better than being employed to do the same job(minus paid holidays, pension)? It’s all too easy for Civil Servants in comfy 35 hours a week, 30 days a year holiday, final salary pensioned posts to interfere in areas of business where they have no understanding. It is every contractors duty to be paid in a compliant tax efficient manner and Employee Benefit Trusts have played there part in this process.
