Offshore EBT Fraud Scheme

Background: A company, XYZ Ltd., decides to use an offshore Employee Benefit Trust (EBT) to provide benefits to its high-earning employees while avoiding taxes. The EBT is set up in a jurisdiction with favorable tax laws, such as the Cayman Islands. This scheme is similar to those promoted by Douglas Barrowman’s AML Tax (UK) Limited.

How the Scheme is Structured:

1. Establishing the Trust:
   • XYZ Ltd. sets up an EBT in the Cayman Islands with a professional corporate trustee.
   • The trust is funded by XYZ Ltd. through substantial contributions, which are recorded as business expenses, reducing the company’s taxable income.
2. Loan Payments:
   • The EBT provides “loans” to the employees instead of direct remuneration. These loans are structured in a way that they are unlikely to be repaid.
   • The employees receive these loans tax-free, as they are not classified as income.
3. Offshore Accounts:
   • The funds are transferred to offshore bank accounts controlled by the EBT trustees.
   • Employees can access these funds through debit cards or other means, effectively using the money as if it were their own.
4. Disguised Remuneration:
   • The loans are disguised as remuneration, allowing employees to receive significant amounts of money without paying income tax or National Insurance contributions.
   • The company avoids employer National Insurance contributions on these payments.

Detection and Consequences:

1. HMRC Investigation:
   • HMRC investigates XYZ Ltd. and discovers the offshore EBT scheme.
   • They determine that the loans are, in fact, disguised remuneration and should be subject to tax.
2. Legal Action:
   • HMRC takes legal action against XYZ Ltd. and the employees involved.
   • The court rules in favor of HMRC, stating that the payments made through the EBT are taxable income.
3. Penalties and Repayment:
   • XYZ Ltd. and the employees are required to pay back taxes, interest, and penalties.
   • The company faces significant financial and reputational damage.

Real-World Example: Barrowman AML Tax Business

Background: Douglas Barrowman, through his company AML Tax (UK) Limited, promoted similar tax avoidance schemes. These schemes often involved offshore EBTs and complex structures to minimize tax liabilities.

Recent Developments:

• HMRC Actions: In March 2022, AML Tax (UK) Limited was fined for failing to comply with an information notice from HMRC. The company aggressively promoted tax avoidance schemes and used various tactics to frustrate HMRC’s efforts to determine the tax legally due.
• Liquidation: AML Tax (UK) Limited is now being dissolved following the fine and ongoing investigations.
• Additional Findings: Recent reports have uncovered that Barrowman’s group unlawfully hid ownership of more companies, further complicating the tax evasion investigations.

Implications for Barrowman’s Clients:

• Financial Liabilities: Many clients faced huge tax bills as HMRC sought to recover unpaid taxes. Some clients went bankrupt due to the financial strain.
• Legal Consequences: Clients involved in these schemes faced legal action and penalties. They were required to repay the taxes owed, along with interest and fines.
• Reputational Damage: Being associated with tax evasion schemes led to significant reputational damage for both the clients and their businesses.
• Stress and Uncertainty: The ongoing investigations and legal battles caused considerable stress and uncertainty for the clients, impacting their personal and professional lives.

Lessons Learned:

• Compliance: Ensure all employee remuneration is transparent and compliant with tax laws.
• Risk: Engaging in tax evasion schemes can lead to severe legal and financial consequences.
• Regulation: Tax authorities are vigilant and continuously updating regulations to prevent such schemes.