SE12013 - PAYE avoidance: employer’s arguments against trading arrangements before 6 April 1998

Section 203K ICTA1988

Employer’s arguments against trading arrangements

Before 6 April 1998, the definition of trading arrangements allowed some employers to argue there were no trading arrangements in place when an asset was provided to an employee and consequently no obligation to operate PAYE.

Various arguments were put forward to support this view but broadly these consisted of taking a narrow view of the definition such as;

• the employer was not involved in the arrangements
• the employee was not involved in the arrangements
• there was no guarantee of the amount the arrangements would realise for the employee.

These arguments have been put forward in a variety of schemes involving payments in platinum sponge, oriental carpets, gold coins, gold jewellery, trade debts, reversionary interests in offshore trusts (RIOTs), ECU bank accounts and many others.

Section 203K – a broad definition

But the definition of trading arrangements in Section 203K was broader than any of these arguments. It required only that the employee obtain an amount similar to the cost of the asset. It does not state who should be involved in the arrangements or how the arrangements should be created, as long as the purpose of the arrangement allowed the employee to obtain a similar amount to the cost of the asset.

Consequently Personal Tax believes that in all these schemes before 6 April 1998, there were trading arrangements and PAYE was due under Section 203F.

If agreement cannot be reached with employers the issue will be determined by litigation (see SE11809).

Trading arrangements from 6 April 1998

Because of the confusion over the original definition of trading arrangements, the Section 203K definition was abolished on 6 April 1998 and a new, extended definition was introduced in Section 203F(3) (see SE11811) as part of the changes when the readily convertible asset rules were introduced. These changes should make it difficult for employers to adopt the type of arguments referred to above.