SE12012 - PAYE avoidance: definition of trading arrangements before 6 April 1998

Section 203K ICTA 1988

Definition of trading arrangements before 6 April 1998

Before 6 April 1998, if an employer provided an employee with an asset that was not capable of sale on a recognised investment exchange, the asset might nevertheless be a tradeable asset subject to PAYE, if “trading arrangements” existed at the time when the asset was provided to the employee.

Trading arrangements were defined in Section 203K ICTA1988 as arrangements for the purpose of enabling the person to whom the asset was provided to obtain an amount similar to the cost incurred providing the asset (usually by the employer).

The rules state clearly that the arrangements may arise under any means – what matters is not the means by which the arrangements operated but whether the purpose of the arrangements was to enable the employee to obtain money for the asset.

The term “arrangements” covers a wide range of means of turning an asset into cash, including raising money by a loan secured on the asset.

The Section 203K definition of trading arrangements was abolished with effect from 6 April 1998 and replaced by a new definition in Section 203F(3) – see SE11811.

NMB Holdings v Secretary of State (See NCR2/2000)

This NICs appeal was heard in the High Court in June 2000. The directors of NMB were paid in platinum sponge in three years between 1994/95 and 1997/98.

Langley J decided that NMB should have operated NICs on the platinum sponge because

• the conditions for the application of the Ramsay principle (WT Ramsay v CIR 54TC101) were satisfied and/or
• there were trading arrangements in existence and consequently the platinum sponge was a tradeable asset under Section 203F ICTA 1988.

NMB was a NICs decision but the same two arguments apply for PAYE in platinum sponge cases. The NMB case represents the first time that Section 203F has been considered in the courts and the first time Ramsay has been applied to NICs by the courts. It is potentially a very important decision but employers and their tax advisers have not agreed that the NMB decision should apply to all platinum sponge cases for NICs, and possibly PAYE as well, because there are other cases due to be litigated in 2001 where Section 203F and Ramsay will be reconsidered in the courts.