In order to combat various schemes to provide highly paid employees with tax free or very low tax rewards, the new legislation introduces a number of new concepts into tax legislation, and is drafted in extraordinarily broad terms – for example, it applies whenever it is reasonable to suppose that, “in essence ” an arrangement is designed to provide rewards to employees. Such vague language (what does “in essence” mean here?) is likely to lead to some very peculiar results.
The legislation bites whenever an employer and an employee are involved in a “relevant arrangement” (that is, it is “reasonable to suppose...etc”), with a “relevant third party” (generally, anyone except the employer and the employee), and that third party takes a “relevant step”.
A “relevant step” can be one of three types:
• “Earmarking” (another word new to tax law) which means anything that “earmarks” cash or some other asset for the future use or reward of an employee
• “Payment or Transfer” which means more or less what it says, but also applies to such arrangements as guaranteeing a loan or leasing a property
• “Making an asset available” which means arrangements for an employee to enjoy the use of an asset even if he does not in fact become the owner of it.
When the “relevant third party” takes one of these “relevant steps”, the employer becomes liable to pay income tax (including national insurance) on the employee’s behalf in that month’s PAYE payment. If the employee does not make good that tax within 90 days, he is liable to tax on the further benefit of having had his tax paid for him.
Crucially, there is in general no scope for repayment of this tax if the “relevant step” is unwound – so for example, if the “relevant third party” makes a loan to the employee, tax is due on the whole amount of the loan, not just on the notional rate of interest on it.
A loan of say £100,000 could therefore give rise to a tax liability of £52,000 (plus employer’s NIC of £13,800) for an additional rate taxpayer, and repaying the loan will not lead to a repayment of tax.
For those already involved in the sort of schemes this legislation is designed to attack, there is a window of opportunity to unwind them (for example, to repay the loan) before the new rules impose a tax charge. This applies to “steps” (such as loans) taken between 10 December 2010 (when the intention to legislate was first announced) and 5 April 2011. If the loan is repaid before 6 April 2012, it will not be caught by the new rules – but if it is not, it will be deemed to have occurred on 6 April 2012 and the tax will be due with the 19 May 2012 PAYE payment.
For those involved in “relevant steps” since 5 April 2011, it is already too late. Steps taken after 5 April 2011 but before Royal Assent to the Finance Act on 19 July 2011 were deemed to occur 30 days later on 19 August, so the PAYE was due on 19 September 2011.
If you think the new rules will not affect you, consider the following:
An employer leases a “pool” car for business use. At the end of the lease period, the car can be bought for a quite low price from the leasing company. An employee asks if he could buy the car from the lessor when the time comes, and the employer agrees, asking the leasing company to offer the car to the employee.
In this scenario, the leasing company is a “relevant third party”, and it has “earmarked” the car for the employee concerned, so a charge to tax arises under the new rules on the market value of the car when new.
Are you worried yet?
James Bailey
