EIM45000 - Employment income provided through third parties: overview, general approach: contents

Part 7A ITEPA 2003, Schedule 2 FA 2011

Overview
General approach
Contents

This page:

• gives an overview of the tax legislation on employment income provided through third parties,
• sketches the general approach you should take to cases, and
• sets out the structure of this guidance.

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Overview

The tax legislation on employment income provided through third parties tackles arrangements which:

• involve third parties (including trusts or other vehicles used to reward employees), and
• seek to avoid or defer the payment of income tax.

The legislation also deals with pension schemes which are not registered pension schemes.

Broadly speaking, if third party arrangements are used to provide for what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former, or future employment, then an income tax charge arises.

The rules contain detailed exclusions. These prevent the legislation from catching certain arrangements. Generally, the exclusions are targeted at arrangements which are not tax avoidance arrangements.

If the legislation applies, it deems an amount to count as employment income.

The amount that counts as employment income is specifically brought within the scope of PAYE.

Special rules deal with (for example) the interaction with the remittance basis.

The legislation applies to 2011-12 and later tax years. There are transitional rules. These include anti-forestalling rules which cover certain transactions carried out in the period from 9December2010 to 5 April 2011 inclusive.

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General approach

Third party?

First, although specialists often refer to it as the ‘disguised remuneration’ regime, Part 7A ITEPA 2003 is headed ‘Employment income provided through third parties’. Therefore, if you are looking at a case in which the employer is providing something directly to the employee, and there is no third party involved, then Part 7A will not apply.

There are two exceptions to this general rule.

Part 7A can apply where the employer is acting as a trustee. But this situation will be unusual.

Part 7A can also apply as a result of steps taken by an employer when there is an undertaking that contributions will be paid to a relevant third person comprising an unregistered pension arrangement.

Arrangement through Section 554A gateway?

An arrangement will not give rise to Part 7A income unless it ‘comes through the Section 554A gateway’ and thus meets the conditions for Part 7A to apply.

There are three fundamental questions you need to ask at this point.

1. First, is there an arrangement which might come through the Section 554A gateway?

If the answer to that is No, then the situation you are considering cannot give rise to Part 7A income.

2. Second, if there is such an arrangement, has a ‘relevant third person’ taken a ‘relevant step’?

If the answer to that is No, then the arrangement has not come through the Section554A gateway and has not given rise to Part 7A income.

3. Third, is it reasonable to suppose that the ‘relevant step’ is connected with the arrangement in question?

If the answer to that is No, then the arrangement has not come through the Section554A gateway and has not given rise to Part 7A income.

Exclusions?

If an arrangement has come through the Section 554A gateway, that does not necessarily mean that it has given rise to Part 7A income.

Part 7A does not include a general overriding purpose test. Instead, it has a number of specific exclusions. These exclusions cut down the scope of Part 7A considerably. Check carefully to see if at least one of the exclusions applies.

For example, there is an exclusion whereby no step taken under a registered pension scheme can give rise to Part 7A income.

Part 7A income

If the arrangement you are looking at has come through the Section 554A gateway, and is not covered by any of the exclusions, then it will give rise to Part 7A income.

The Part 7A income:

• counts as employment income of the employee, and
• is deemed to be PAYE income paid by the employer.

The general rule is that the amount of the Part 7A income will be the value of the relevant step. But there are rules which in certain circumstances will adjust this value, possibly down to nil.

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Contents

EIM45001 explains the structure of this guidance. In particular, it tells you about the pages after EIM45165.

EIM11813 explains the PAYE implications of the Part 7A rules.