SE11810 - PAYE avoidance - readily convertible assets

Section 203(2)(f) and (g) ICTA 1988

Readily convertible asset – trading arrangements

If the definitions of readily convertible asset in Sections 203F(2)(a)-(e) are not met (see SE11803 - SE11808) the alternative definitions in subsections (f) and (g) may apply.

Trading arrangements in existence –Section 203F(2)(f)

The first of these definitions of a readily convertible asset in subsection (f) concerns assets provided subject to trading arrangements in place at the time of award. This rule has applied since the tradeable asset rules took effect in 1994 (see SE12011).

Before 6 April 1998 some employers argued that even though an asset was sold by the employee within a short time (typically a day or so) of being provided by the employer, there were no trading arrangements in place at the time when the asset was provided and hence the asset was not a tradeable asset and PAYE was not due.

Trading arrangements likely to exist in future – Section 203F(2)(g)

The Revenue does not accept this narrow interpretation of the 1994 rules, but from 6 April 1998 to put the matter beyond doubt, the definition of trading arrangements is extended to include arrangements likely to come into existence in future, due to an understanding or arrangement in place at the time the asset was awarded.

It should be difficult for employers to suggest that, at the time of award, there was not an understanding in place likely to lead to trading arrangements if, as usually happens, the employee sold the asset a day or so later - see example SE11826.

In these schemes the employee typically has several options after receiving the asset:

• option one - sell the asset back to the supplier in return for money
• option two - ask the supplier to retain the asset as an investment on the employee’s behalf
• option three – take delivery of the asset for personal use.

In most cases, very soon after the award, the employee chooses option one but, before 6 April 1998, employers could argue that the decision to sell was not taken until the day after the award and so there were no trading arrangements in place at the time of award. Consequently they could argue there was no obligation to operate PAYE.

The Revenue does not accept that view because the employee rarely wants to retain the asset. In almost every case the employee’s intention was to sell the asset in return for cash, and the extended definition of trading arrangements to include arrangements likely to come into existence in future, puts the matter beyond doubt from 6 April 1998.

Other aspects of the definition of trading arrangements also changed from 6 April 1998 – see SE11811. In situations where there are no trading arrangements see SE11812.