SE11811 - PAYE avoidance: readily convertible assets

Section 203F(3A) ICTA 1988

A wider definition of trading arrangements

From 6 April 1998, the definition of trading arrangements includes:

• not only arrangements enabling the person to whom the asset is provided to obtain an amount for the asset, but also arrangements to enable members of his family or household to do so
• arrangements which enable the person to whom the asset is provided to obtain a second, or subsequent, readily convertible asset rather than cash.

Before 6 April 1998 some employers argued that trading arrangements did not apply to some awards of non-cash remuneration because of a narrow interpretation of the definition. See the reference to NMB Holdings Ltd v Secretary of State at SE12012.

From 6 April 1998 the emphasis of the definition of trading arrangements has been changed to address these arguments:

• the definition in the 1994 rules (see SE12012) was based on the “purpose” of the arrangements - this term allowed for different interpretations and in the 1998 changes “purpose” has been replaced by the “effect” of the arrangements, which should be easier to recognise
• the 1994 definition required a person to obtain an amount similar to the expense of providing the asset – employers sometimes argued that there was no guarantee of the amount to be obtained under arrangements and no certainty the amount would be “similar to” the expense incurred providing the asset. The 1998 definition includes arrangements which enable an amount to be obtained which is “ likely to be similar to” the expense incurred providing the asset.

Consequences of the wider definition of trading arrangements

From 6 April 1998, the effect of the broader definition is that employers can no longer argue that trading arrangements do not exist because:

• the amount the employee obtains was not guaranteed,
• the amount obtained was not necessarily “similar to” the expense incurred providing the asset
• the amount was obtained by a member of the employee’s family or household, rather than by the employee himself
• the employee did not receive cash but another asset (which could be turned to cash)
• the purpose of the arrangement was not to provide the employee with cash.