EIM45000 - Employment income provided through third parties: overview, general approach: contents

Part 7A ITEPA 2003, Schedule 2 FA 2011

Overview
General approach
Contents

This page:

• gives an overview of the tax legislation on employment income provided through third parties,
• sketches the general approach you should take to cases, and
• sets out the structure of this guidance.

Overview

The tax legislation on employment income provided through third parties tackles arrangements which:

• involve third parties (including trusts or other vehicles used to reward employees), and
• seek to avoid or defer the payment of income tax.

The legislation also deals with pension schemes which are not registered pension schemes.

Broadly speaking, if third party arrangements are used to provide for what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former, or future employment, then an income tax charge arises.

The rules contain detailed exclusions. These prevent the legislation from catching certain arrangements. Generally, the exclusions are targeted at arrangements which are not tax avoidance arrangements.

If the legislation applies, it deems an amount to count as employment income.

The amount that counts as employment income is specifically brought within the scope of PAYE.

Special rules deal with (for example) the interaction with the remittance basis.

The legislation applies to 2011-12 and later tax years. There are transitional rules. These include anti-forestalling rules which cover certain transactions carried out in the period from 9 December 2010 to 5 April 2011 inclusive.

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General approach

Third party?

First, although specialists often refer to it as the ‘disguised remuneration’ regime, Part 7A ITEPA 2003 is headed ‘Employment income provided through third parties’. Therefore, if you are looking at a case in which the employer is providing something directly to the employee, and there is no third party involved, then Part 7A will not apply.

There are two exceptions to this general rule.

Part 7A can apply where the employer is acting as a trustee. But this situation will be unusual.

Part 7A can also apply as a result of steps taken by an employer when there is an undertaking that contributions will be paid to a relevant third person comprising an unregistered pension arrangement.

Arrangement through Section 554A gateway?

An arrangement will not give rise to Part 7A income unless it ‘comes through the Section 554A gateway’ and thus meets the conditions for Part 7A to apply.

There are three fundamental questions you need to ask at this point.

1. First, is there an arrangement which might come through the Section 554A gateway?

If the answer to that is No, then the situation you are considering cannot give rise to Part 7A income.

1. Second, if there is such an arrangement, has a ‘relevant third person’ taken a ‘relevant step’?

If the answer to that is No, then the arrangement has not come through the Section 554A gateway and has not given rise to Part 7A income.

1. Third, is it reasonable to suppose that the ‘relevant step’ is connected with the arrangement in question?

If the answer to that is No, then the arrangement has not come through the Section 554A gateway and has not given rise to Part 7A income.

Exclusions?

If an arrangement has come through the Section 554A gateway, that does not necessarily mean that it has given rise to Part 7A income.

Part 7A does not include a general overriding purpose test. Instead, it has a number of specific exclusions. These exclusions cut down the scope of Part 7A considerably. Check carefully to see if at least one of the exclusions applies.

For example, there is an exclusion whereby no step taken under a registered pension scheme can give rise to Part 7A income.

Part 7A income

If the arrangement you are looking at has come through the Section 554A gateway, and is not covered by any of the exclusions, then it will give rise to Part 7A income.

The Part 7A income:

• counts as employment income of the employee, and
• is deemed to be PAYE income paid by the employer.

The general rule is that the amount of the Part 7A income will be the value of the relevant step. But there are rules which in certain circumstances will adjust this value, possibly down to nil.

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Contents

1. EIM45001

   Summary of structure of guidance
2. EIM45005

   Requests for clearance
3. EIM45010

   Glossary
4. EIM45025

   The Section 554A gateway
5. EIM45030

   All the relevant circumstances
6. EIM45035

   Meaning of ‘relevant third person’
7. EIM45045

   Group exception: examples
8. EIM45050

   LLP exception: examples
9. EIM45055

   How Sections 554B to 554D are related
10. EIM45060

    Overview
11. EIM45065

    Payment of sum of money
12. EIM45070

    Employment income provided through third parties: relevant steps: Section 554C: sum of money or asset made available
13. EIM45075

    Grant of lease
14. EIM45080

    Making asset available for relevant person to benefit from
15. EIM45085

    Events before 6 April and after 5 April 2011: examples
16. EIM45090

    ‘Relevant person’ in sections 554C and 554D
17. EIM45095

    Section 554B: earmarking etc of sum of money or asset
18. EIM45100

    Relevant third person not aware of all the facts
19. EIM45105

    Shares from various sources
20. EIM45106

    Using options to hedge share awards
21. EIM45110

    Section 554B: meaning of ‘earmarked’ in Section 554B(1)(a)
22. EIM45115

    Relevant step within Section 554B, later relevant step within Section 554C or 554D, exclusions within Section 554E onwards
23. EIM45120

    Examples: loans
24. EIM45125

    Examples: EBTs
25. EIM45130

    Examples: various
26. EIM45131

    Examples: various (2)
27. EIM45135

    Examples: dividends
28. EIM45140

    Overview
29. EIM45145

    Conditions
30. EIM45150

    Earmarking etc by employers etc
31. EIM45155

    Provision of security by employers etc
32. EIM45160

    Transition
33. EIM45165

    Examples
34. EIM45200

    Employment income provided through third parties: exclusions: general
35. EIM45300

    Employment income provided through third parties: exclusions: share schemes etc
36. EIM45600

    Employment income provided through third parties: exclusions: retirement benefits etc
37. EIM45700

    Employment income provided through third parties: Part 7A income
38. EIM45800

    Employment income provided through third parties: remittance basis
39. EIM45900

    Employment income provided through third parties: transitional rules
40. EIM46000

    Introduction
41. EIM46001

    Double taxation provisions: Finance Act 2017: contents
42. EIM47000

    Loans etc outstanding on 5 April 2019: loan charge: contents