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Disguised pay crackdown could backfire

16th Dec 2010
Editor at large AccountingWEB
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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.”


Replies (7)

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By thacca
19th Dec 2010 21:03


Complex - the proposed rules are three small paragraphs.

Unintelligible - They seem understandable to me.

No Ni rule - It clearly says NI rules will be made the same as for PAYE.



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By Andy Reeves
20th Dec 2010 13:13

Good riddance to EBTs

I have no sympathy with the purveyors of these schemes. The overwhelming majority have been set up purely as  tax dodges and this legislation should be welcomed.

My firm had been approached with a view to selling these products, but I will be a long time in my grave before we go down that route.

[Rest of comment moderated - Ed]

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By frauke
20th Dec 2010 15:15


More complications..........

All the people I know that get involved with these things have only done so as they find themselves with less and less money of their own to spend.  As they earn more they pay more in taxes and have less.....

So they end up looking for ways to paying less than before, and in many cases none at all! ..

I know it would mean I would have less fees because my services would no longer be required to complete our complicated tax forms . (If you knew the number clients I have just because they can't do the forms themselves! )

But if everyone just paid a flat 15% of their income in taxes (over say £10k) then no matter how much someone earn't most people would not object to giving 15% of their income to the Government.....   Esepcially if it mean't things were easier and simpler.  Not paying tax is becoming a national pastime because of increases in tax and national insurance rates.  No other reason.  I know a lot of people who go on holiday rather than earn more - so they don't have to become VAT registered.  Many will not earn over the Basic Rate.  Of course there are those that will never earn, because they are better off not working and not paying tax etc.....   The Government needs more money, but unless they find a way to encourage people to earn more which is not complicated and easy without a burden to anyone people will keep looking for ways to avoid paying "Extra Tax" - because that is what they believe it is - "Extra Tax".....




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By thacca
21st Dec 2010 19:36


EBT seems immoral to me in that no/next to no tax is paid.


On the other hand at the levels of income where people use these schemes tax is 50% NI is 1% and er's NI 12.8%. For every £1 cost to the employer employees get to keep 43p. Again that seems "immoral".



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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
22nd Dec 2010 10:39

Some propriety and attention to facts, please

Sorry we've had to intervene in this thread to remove potentially defamatory comments about the people who contributed to this item. I don't think either of the people quoted are desperately keen to wrangle their way around already tortuous legislation.

What can be put to bed, however, is the suggestion from the first two commenters that the legislation isn't complicated. You've probably read the ministerial statement. Try the 40-odd pages of draft legislation and explanatory notes instead if you'd like to see what the PwC and PKF partners are talking about.

By way of illustration, paragraph 7 of the schedule 7A amendments notes:

"In subsection (1)(d) “relevant third person” means—
(a) A acting as a trustee of an arrangement,
(b) B acting as a trustee of an arrangement, or
(c) any person other than A and B."

If that isn't an example of "very widely drawn", I don't know what is.

When you've read the full document, perhaps you could let us know if you think they're a great example of how to close tax loopholes.

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By carnmores
22nd Dec 2010 14:03

well the questions of bankers pay and bonus

the more they pay out the better as long as it is being taxed at 50%+ so the Excequer is better off than those monies being taxed at a CTrate of 30%- ? gordon gekko eat your heart out

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By thacca
22nd Dec 2010 15:11

I stand corrected

I was looking at the summary rather than the actual draft legislation. I certainly won't be saying that the draft legislation is easy reading. I dont remember the second post being outright offensive so not sure why it needed moderation.




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