SE11826 - Readily convertible assets: Example 6 - an award of platinum sponge

Section 203F(2)(g) ICTA1988

Example 6

• On 10 August 1998 an employer pays a metal supplier £252,500 for 5 bottles of platinum sponge worth £250,000, plus 1% supplier's commission
• Unlike pure platinum metal, platinum sponge is not tradeable on any recognised investment exchange nor on the London Bullion Market
• the platinum sponge is retained by the supplier but not held in bond (see example SE11824)
• on 12 August the employer awards a director a £250,000 bonus in the form of platinum sponge and informs the director of the available options

• the metal supplier will retain the platinum sponge as an investment
• the supplier will arrange delivery of the platinum sponge
• the supplier will repurchase the platinum sponge for cash - the employer helpfully provides full details of the supplier, including a prepared form showing the sale details for the director to complete and return to the supplier

• on 13 August the director sells the platinum sponge to the supplier for £250,000.

Is the employer obliged to operate PAYE on the platinum sponge?

Yes. The platinum sponge is a readily convertible asset under Section 203F(2)(g) because on 12 August there was an understanding that trading arrangements were likely to come into existence in future for sale of the sponge because the employee knew that the supplier was willing to repurchase the sponge for money (see SE11810).

Would PAYE have been due on a similar award before 6 April 1998?

Yes. Before 6 April 1998, some employers argued that because the definition of a tradeable asset required trading arrangements to exist at the time of the award and there were no trading arrangements in place on that day, PAYE was not due.

Whilst the director knew on the day of award that he could sell the sponge, he apparently did not make the decision to sell until the day after the award and so there were no trading arrangements in place at the time of award.

We do not accept this interpretation of trading arrangements. One must consider the scheme as a whole - the sponge was purchased solely with the aim of awarding a bonus to the director in a form that would avoid PAYE and NICs and within 4 days the scheme was complete and, as intended by employer and employee, the director received £250,000 in cash.

This scheme is a trading arrangement because it provided the director with an amount similar to the cost to the employer in purchasing the asset. The High Court agreed this interpretation in NMB Holdings Ltd v Secretary of State, a NICs case involving payment in platinum sponge (see SE12012).