SE11823 - Readily convertible assets: Example 3 - Assignment of trade debts

Section 203F(2)(c) ICTA1988

Example 3

• In May 1998, an employer awards a director a bonus of £100,000
• the employer awards the bonus by assigning trade debts to the value of £100,000
• the employer selects 15 debts which total £100,000, varying from £1500 to £15,000, and confirms that the debts have been assigned to the director
• the individual debtors are unaware of the debt assignment and return their payment to the employer
• the employer’s normal terms require payment within 30 days of invoice.
• 10 of the debts are paid within that time and letters are issued to remind the remaining debtors – all debts are paid within 45 days of the invoice dates
• as each payment is received, the equivalent money amount is placed in a separate account by the employer
• in July, once the debts are all paid, the employer pays £100,000 to the director.

Is the employer obliged to operate PAYE on the debt assignment ?

Yes. Under Section 203F(2)(c) any money debt, including a trade debt, is a readily convertible asset (see SE11806). Consequently the employer is obliged to operate PAYE on £100,000 at the time of the award in May 1998.

Was PAYE due on a similar award before 6 April 1998?

Yes. The arrangement to assign the trade debts represents a trading arrangement under the original Section 203F(2)(c) ICTA1988 introduced by Finance Act 1994.

Employers sometimes argue that because here was no guarantee of payment of the debts, and the debtors were not aware that the debts had been assigned to the director, there were no trading arrangements in place.

Neither condition was required by the definition of trading arrangements before 6 April 1998 (see SE12012) and so both points are irrelevant. In all of these schemes, the debts were selected so that only payments due from reliable payers were assigned, so it may be instructive to ask the employer for details of those debts which were not paid.

From 2 July 1997, for the avoidance of doubt, special rules stated that PAYE applies to trade debts assignments and from 6 April 1998 money debts, including trade debts, are readily convertible assets under Section 203F(2)(c), as amended by Finance Act 1998.