SE11824 - Readily convertible assets: Example 4 - Property held in a "bonded" warehouse

Section 203F(2)(d) ICTA1988

Example 4

On 28 June 1998 an employer awards a director a bonus of £100,000 and arranges through an intermediary to purchase 8 oriental carpets from a supplier. The cost of the carpets is £101,500 (£100,000 plus 1.5% commission to the supplier).

On 1 July the employer awards the carpets to the director. The carpets are held in storage and the director has 3 options:

• the carpets may be retained in storage (for a small fee)
• the supplier may arrange delivery to the director
• the supplier may be willing to repurchase the carpets from the director.
• On 2 July the director decides to sell the carpets back to the supplier and on 4 July the director receives £100,000.

Is the employer obliged to operate PAYE on the oriental carpets?

Yes. The carpets are readily convertible assets under Section 203F(2)(d) ICTA1988. The employer is obliged to operate PAYE on £100,000 on 2 July 1998 (see SE11807).

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

• Yes, but for different reasons. Before 6 April 1998, the definition of tradeable asset made no reference to property held in a bonded warehouse, but the carpets were tradeable assets because the understanding that they could be immediately sold back to the supplier satisfied the definition of trading arrangements in Section 203K(2)(a).
• The employer may argue that since the decision to sell the carpets was apparently made the day after the award, there were no trading arrangements in place at the time the carpets were awarded (Section 203F(2)(c)).
• It is extremely unlikely that the decision to sell the carpets had not been made when, if not before, they were awarded. Few employees would want to retain the carpets as an investment or to take delivery of them. The only realistic option was to sell them back to the supplier and this is the option always chosen.
• Before 6 April 1998, the definition of trading arrangements in Section 203K(2)(a)(see SE12012) required the employee to obtain an amount similar to the cost incurred in providing the asset – this is precisely what has been accomplished in this scheme and so the carpets were tradeable assets, subject to PAYE under Section 203F(2)(c).