How Do Profit Extraction Schemes work?

Over the last ten years, a number of tax practices have specialised in helping companies to reward their employees in a tax efficient manner, much to the annoyance of the UK Government!

Most of the profit extraction schemes used similar "architecture" albeit there were differences in some of the technical aspects. The most popular schemes used a trust set up for employees, either via an Employee Benefit Trust or an Employer Financed Retirement Benefit Scheme.

Part of the popularity of these schemes can be attributed to a tax efficient technique for accessing the funds within the trust that had already been agreed by the Courts.

The Governments attempts to stop these schemes over the previous 10 years had previously focused on the Corporate Tax Deduction of payments made to trusts, with the legislation having to be redrafted a number of times as the tax practices found new and innovative ways through it.

However, their latest attempt may have been more successful. The Government issued draft legislation on 9th December 2010 attacking what it called "Disguised Remuneration" schemes.

Prior to the new legislation, employees could choose when and how to take their funds out of their trust, via an “Expression of Wishes” made to the Trustees. Many employees would ask for a loan from their trust as this was particularly tax efficient.

The new legislation attempts to close this route to accessing funds.

The legislation is due to be introduced on 6 April 2011, but there are anti-forestalling provisions meaning that the changes are effective from 9 December 2010.

So what is the future for these types of schemes?

The tax practices are looking at the new legislation to see if there are other ways that the funds within Employee Benefit Trusts and Employer Financed Retirement Benefit Schemes can be accessed in a tax efficient way. If and when solutions are forthcoming, we will review their suggestions and decide if we think this is viable or not.

If this issue is relevant to you and you would like us to keep you updated, please get in touch.

In addition, going forward, we anticipate some new Profit Extraction strategies will be available shortly. Again, if you would like us to keep you updated in this respect, please get in touch.

If you would like us to call you to discuss this further, please complete the Product Questionnaire.