Employment Benefit Schemes using fettered payments (Spotlight 17)
Published 17 April 2013
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HM Revenue and Customs (HMRC) is aware of schemes which claim to allow companies to pay their employees directly, without deducting any tax and National Insurance contributions.
A number of these have been disclosed under the disclosure of tax avoidance schemes rules, including the schemes given the following scheme reference numbers:
- 56363346
- 20373764
- 40426176
- 72070132
- 75714684
- 88908075
- 71405364
A scheme reference number does not mean that HMRC has approved the scheme.
The schemes often involve the company making a payment to an employee, on the condition that the employee subscribes for shares in the company at face (nominal) value equal to the payment.
The employee pays a small amount of the share face value, they remain partly paid up. The obligation to use the payment in this way is claimed to prevent the employee paying tax and National Insurance contributions on the payment. The view of HMRC is that the schemes do not work.
For the employee, the payment is earnings from employment and chargeable to tax and National Insurance contributions.
For the employer, the scheme is an ‘Employee Benefit Scheme’ for the purposes of the Corporation Tax rules, which restrict deductions for employee benefit contributions.
These schemes could leave both companies and employees in a worse situation after tax and National Insurance contributions. Compared to if the companies had simply paid the employees through the payroll in the normal way.
HMRC will challenge users of this scheme through the courts, where appropriate. This is to make sure that the companies and employees pay the correct amount of tax and National Insurance contributions.
If you have used this scheme and now wish to exit to minimise any potential interest and penalties (if HMRC find you have not taken reasonable care), you should contact HMRC.