Concerns are being raised within the profession about the effect Finance Bill clauses will have on employee benefits for ordinary employees rather than the super-rich tax avoiders targeted by a disguised remuneration anti-avoidance measure introduced last week.
Published in the wake of taxpayer protests last week, a written ministerial statement from Treasury exchequer secretary David Gauke indicated that the government plans to block arrangements involving trusts and other third party vehicles that “seek to avoid or defer the payment” of income tax and NICs.
A new Part 7A will be introduced into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Where a third party makes provision for a reward or loan for an employee, the new law will establish that an income tax charge will be raised on the money made available or the market value of the asset used to deliver the reward.
The amount concerned will count as a payment of employment income and the employer will be required to account for PAYE.
The legislation will take effect from 6 April 2011 and apply to employee rewards, recognitions or loans that are made available on and after that date. Anti-forestalling provisions will apply any sums or assets that would be covered by the new rules, if they are provided to employees between 9 December 2010 and 5 April 2011
According to Gauke, the new law is necessary to prevent higher earners who have used up their annual and lifetime pension allowances to set up “tax-advantaged” alternative schemes. Other scenarios that have caught are things like loans offered through Employment Benefit Trusts that the employee never pays back.
“In many cases, these third party arrangements allow an employee to enjoy the full benefit of a sum of money paid or assets provided while arguing that, because of the structure of the arrangements, there is no legal right to the money or assets. This argument is used to support a proposition that income tax and NICs is due (if at all) only on the use of the money or assets during the period of the employee’s employment and not on their full value,” the minister wrote.
The amendments to ITEPA 2003 will ensure that registered pension schemes, approved employee share schemes and ordinary commercial transactions will be able to continue and benefits packages available to all employees will be unaffected, he added.
But Philip Fisher, PKF employment benefits and remuneration partner warned that the widely drawn clauses may catch arrangements they were not intended to.
“This is the most complex legislation I have seen in my life. It’s absolutely unintelligible,” he said. “It may take years to truly understand.”
Fisher found it telling there was no parallel legislation to cover National Insurance Contributions. “Why not do them together? This suggests the government is trying to do something in too much of a hurry.”
PwC reward partner Carol Dempsey was also concerned about the possible implications for arrangements using employee benefit trusts and other vehicles, or schemes provided by employers above and beyond registered pension plans offered via employer-financed retirement benefit schemes (EFRBS): “The rules are far reaching and careful consideration will need to be given to establish if the law, if enacted as it is, will have a wider scope possibly impacting on some straightforward employee share plans. We will need urgent clarification from HMRC.”
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