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Disguised Remuneration

Author: Jo Summers ( - 22/12/2010

The draft Finance Bill for 2011 was published on 9 December 2010. It is subject to consultation and the rules summarised below may change before the Bill is enacted (expected July 2011).

New disguised remuneration tax charge

The Bill included provisions aimed at tackling arrangements which seek to avoid, defer or reduce income tax and national insurance contributions (NICs) on employment rewards through the use of trusts and other intermediate vehicles.

The new provisions are designed to catch Employer Funded Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBTs) but are so widely drafted that they may in fact apply to any employment reward arrangement which involves a third party, if that arrangement does not fall within the limited list of exclusions.

The new charge will apply, from 6 April 2011, where a third party (not the employer) makes provision for a reward, recognition or loan in connection with the employment of an employee (or former or prospective employee). The tax is still payable if the employee is non-resident, but will be reduced to the extent the reward etc relates to non-UK duties.

When does the tax charge apply?

The tax charge will apply to:

- sums or assets that are earmarked for employees by trusts or other intermediaries;
- loans provided to employees by trusts and other intermediaries; and
- assets provided to employees by trusts and other intermediaries.

Each of these ‘relevant steps’ will trigger the tax charge.

Anti-forestalling provisions are also included, to impose a tax charge if a ‘relevant step’ is taken on or after 9 December 2010 and before 6 April 2011. This tax charge will arise on 6 April 2012 to the extent that sums have not been repaid or assets returned before that date.

There is no definition of “earmarking” but the new rules stress this can be done informally and that it doesn’t matter if the employee has any legal right to the money or assets that have been ‘earmarked’. This will catch the allocation of funds from an EBT onto sub-funds, or sub-trusts, for the benefit of particular employees and their dependants. It also seems to cover the contribution of funds into an EFRBS or offshore pension because the trustees usually allocate the funds between members upon receipt. The rules catch making an asset available for use without a physical transfer, where the benefits are “substantially similar”, e.g. the use of a holiday home.

The tax charge is on the value of the ‘relevant step’ e.g. the amount of cash involved. In non-cash cases, the value is the higher of the market value of the asset in question or the cost of the relevant step. The value of the ‘relevant step’ is treated as employment income and is subject to income tax (under PAYE) in the same way as the salary or bonus. Regulations will be introduced to apply NICs to the amounts charged to tax under this new rule.

Provisions are included to avoid a double tax charge where there is more than one relevant step but loans are particularly problematic. When a loan is made, the whole amount of the loan will be taxed as employment income. There are no provisions explaining what happens if the loan is later repaid.

What exemptions apply?

The following arrangements are not caught by the new legislation:

- transfers to registered pension schemes;
- approved SIPs;
- approved SAYE option schemes;
- approved CSOP schemes;
- arrangements the sole purpose of which is to:
     - issue qualifying options;
     - provide excluded benefits, i.e. in respect of ill health, disability or death; or
     - make payments authorised for the purposes of section 160(1) of the Finance Act (FA) 2004.

A power is included for HMRC to provide by regulation (which may be retrospective) that the new tax charge does not apply to relevant non-UK schemes (within the meaning of paragraph 1(5) of Schedule 34 to FA 2004). This would include Qualifying Recognised Overseas Pension Schemes (QROPS). Until such regulations are made, however, any such scheme would seem to be covered by the legislation.

Certain loans are excluded but only those which:

- are made on ordinary commercial terms by a person whose normal business includes the lending of money or the supply of goods or services on credit; and
- are not connected (directly or indirectly) with an arrangement which has a tax avoidance purpose.

So, unless it is the normal business of the lender to make loans or supply credit, a third party loan will be subject to a tax charge, even where a commercial rate of interest is charged.

Transactions under employee benefit packages are excluded if they are offered in the ordinary course of business and:

- substantially all of the employees can take advantage of what is offered;
- such employees are not wholly or mainly directors, senior employees or highly paid employees; and
- they are not connected (directly or indirectly) with an arrangement which has a tax avoidance purpose.

The exclusion also extends to the acquisition of employment-related securities, in certain circumstances.

Existing arrangements

The new rules should not apply to pre-existing arrangements (e.g. where money has already been paid to an EBT or where loans have already made to employees). If, however, a relevant step is taken now, e.g. a new loan is made or where additional amounts are allocated to employees or their families, then the new rules will apply.

HMRC have also said that they will continue to challenge certain arrangements under existing law, particularly sub-trusts and whether loans are ‘commercial’.

PWT Advice LLP
20 December 2010

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Please Note:
These articles were based on the legislation in force at the date of publication. The laws may well have changed since. These articles should not be taken as being or replacing proper legal advice.


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