New legislation to prevent 'disguised employment'

Date: 14 December 2010

Contractors should be wary of trusts and other vehicles due to ‘disguised remuneration’ laws.

Contractors using trusts and other vehicles to avoid paying income tax and National Insurance (NI) contributions could soon find themselves having to pay more tax on their earnings due to legislation coming in April 2011.

The Treasury has published draft legislation of an amendment to the Income Tax (Earnings and Pensions) Act 2003 called ‘Employment Income through Third Parties’, designed to tackle ‘disguised remuneration’. This is due to be introduced as part of the Finance Bill 2011.

It is not clear whether or not there might be a retrospective element to the new rules, and this is likely to be clarified over the coming weeks.

According to the Treasury, the legislation will “ensure that where a third party makes provision for what is in substance a reward or recognition or loan in connection with the employee’s employment, an income tax charge arises”.

The Treasury estimates that 5,000 employers and 50,000 workers, including many contractors, will be affected, as it expects many such schemes to be “discontinued”.

This will effectively end the use of vehicles like Employee Benefit Trusts (EBTs). By using EBTs contractors could take advantage of existing tax laws that permit a trust created for the benefit of employees to advance contractors ‘loans’ that do not attract income tax and NICs, but will in effect never be repaid by the contractor because the terms of the trust would not allow enforced repayment.

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