In the past, it appears some Goldman bankers did not pay income tax on their bonuses

Goldman Sachs appears to have been exonerated from paying 10m in interest on a tax avoidance scheme involving an employee benefit trust in the Virgin Islands. The revelation is causing widespread outrage and prompting calls for the permanent secretary at HM Revenue to resign.

Outrageous as the 10m waiver is, however, what is surely more galling (both to average PAYE taxpayers and bankers now paying a marginal rate of 50%) is the reminder that, in the past, bonuses were often tax free.

The Guardian reports that in the 1990s "all of" Goldman's London bankers were seconded to and employed by "Goldman Sachs Services," a Virgin Islands-based entity.

Linked to this, appears to have been a Goldman Virgin Islands employee benefit trust (EBT) of the kind also favoured by JPMorgan, Deutsche and 19 other banks.

A former trader at a bulge bracket bank explains how these employee benefit trusts worked.

"When you got your bonus of, say 1m, you could either opt into the employee benefit trust or not," he says. "If you opted out, you'd pay 400k+ in income tax and national insurance immediately and would have 600k cash to spend. If you opted in, you'd put your 1m offshore and could borrow - say - 850k, tax free, at a low rate of interest indefinitely."

Mike Warburton, a tax partner at Grant Thornton, says the only thing taxable in this sort of arrangement was the interest paid on the loan. Therefore, a banker who received a 1m 'loan' from an employee benefit trust, and paid a notional rate of interest of 5%, would have paid income tax of just 20k (when income tax was 40%).

Today, an individual with a 1m bonus would be eligible to pay 478k in income tax.

Tax avoidance via employee benefit trusts has been impossible since April 2011. However, Danny Blum, a partner at law firm Eversheds says there are still "arrangements" which can be used to mitigate tax even now. "Many are very aggressive and should only be used where appropriate," he cautions. Instead of avoiding tax almost entirely, today's schemes mostly involve converting income into capital gains, which are taxed at top rate of 28%.