Guidance

Tackling disguised remuneration: draft guidance for changes to Part 7A

Published 20 March 2017

Finance Bill 2017 Amendments – Introduction

Pt 7A ITEPA 2003 – Employment Income Manual Draft Guidance

The legislation at Pt 7A Income Taxes (Earnings and Pensions) Act (ITEPA) 2003 covering employment income provided through third parties charges income tax on payments to employees where income is routed through someone other than the employer. Finance Bill (FB) 2017 makes a number of amendments and additions to Pt 7A to cover the following major areas:-

New Relevant Steps

Section 554C is amended to create new relevant steps where a loan is transferred, released or written off.

Double Taxation Provisions

It was never the intention that a charge under Pt 7A would charge tax on income which was already subject to a charge to tax under provisions elsewhere in the Taxes Acts. The amendments and additions in FB 2017 give a flexible approach to avoiding double taxation within certain parameters. It also contains provisions which cover the interaction between charges under Pt 7A and any payments made to HM Revenue and Customs (HMRC) as a result of an Accelerated Payment Notice.

FB 2017 also contains provisions relating to relevant steps taken in order to pay tax arising from charges under Pt 7A as well as transfers of employment related loans to new employers.

The draft guidance which follows will be inserted into the Employment Income Manual (EIM). It covers the above areas as well as covering two amendments to Pt 7A ITEPA which were introduced in Finance Act (FA) 2016. Further guidance will be issued later in 2017 to cover other FB 2017 amendments to Pt 7A.

Double Taxation Provisions

Introduction
Section 554Z5 – earlier tax liability either paid or not yet due
Section 554Z5 – payment condition
Section 554Z5 – liability condition
Section 554Z5 – other provisions
Section 554Z11B and C – introduction
Section 554Z11B – identification of sums or assets P and Q
Section 554Z11C – overlapping charges introduction
Section 554Z11C – the earlier charge
Section 554Z11C – the chapter 2 overlap charge
Section 554Z11C – paid amounts
Section 554Z11C – overlapping sums or assets – example 1
Section 554Z11C – overlapping sums or assets – example 2
Section 554Z11C – overlapping sums or assets – example 3
Section 554Z11C – overlapping sums or assets – example 4
Section 554Z11C – Chapter 2 liability equal to or greater than earlier charges
Section 554Z11C – Chapter 2 aggregate paid amounts and earlier charges
Section 554Z11C – examples
Section 554Z11D – provisional payments of tax
Section 554Z11E – application to have payment treated as paid amount
Section 554Z11F – payments treated as paid amount

Double Taxation Provisions - Introduction

ITEPA 2003 – Section 554Z5 and Sections 554Z11B, C, D, E and F

The FB 2017 amendments to Pt 7A contain provisions designed to prevent double taxation of income arising from what will be essentially the same amounts of money or assets.

The amendments provide for relief dependent on the circumstances under which the double charge has occurred. Broadly relief is given under a revised version of Section 554Z5 where:

• a relevant step is taken
• an earlier tax liability based on the same sum of money or asset has been paid in full
• where the liability is not yet due and payable

Where a relevant step is taken and the earlier liability is due and payable but has not been paid, relief will be given under Section 554Z11C at the point a payment is made.

Relief is given in both Sections by considering the overlap between the sum of money or asset which is the subject of the relevant step and a sum of money or asset which gave rise to an earlier liability to income tax for the employee or director. The manner in which relief is given differs between Section 554Z5 and Section 554Z11C.

Relief is given in Section 554Z5 by reducing the value of the relevant step if either of two conditions are met. Section 554Z11C gives relief where two or more charges exist at the point a payment is made by the taxpayer. It does this by treating the payment of one liability by the taxpayer as a payment on account of the other liability as well. It doesn’t reduce the value of the relevant step.

Section 554Z5 – Earlier tax liability either paid or not yet due

ITEPA 2003 – Section 554Z5

It’s entirely possible for the same sum of money or asset to be subject to more than one liability to tax. It is however not the intention of Pt 7A to tax the same amount of income twice.

Section 554Z5 deals with overlaps between money or assets which are the subject of a charge to tax as a relevant step and which have already been the subject of an earlier charge to tax. The earlier tax liability has either become due and payable and been paid in full or the person liable for the tax has agreed terms with HMRC for the payment of the liability. It also deals with cases where the earlier liability is not yet due and payable.

The charge to tax on the relevant step is described as being on sum of money or asset “P”. The earlier tax liability is on sum or asset “Q”. It needs to be reasonable to conclude that P and Q are the same sum of money or asset or that P directly or indirectly represents Q. Both charges to tax are effectively on the same income.

In order to obtain relief under this Section either one of two conditions must be met. These are called the payment condition and the liability condition.

Where either of these conditions are met, the value of the relevant step is reduced by the amount of money or the value of the asset which overlaps with income included in the earlier charge. The reduction can’t however take the value of the relevant step below nil.

Section 554Z5 – Payment Condition

ITEPA 2003 – Section 554Z5(4)

The payment condition in Section 554Z5(4) is satisfied if, at the time the relevant step is taken, the earlier tax liability has become due and payable and has either been paid in full or the person liable has agreed terms with HMRC for payment of the liability.

This can cover a variety of scenarios.

Example: Reg 80 paid in full

An employer placed £100 into an Employee Benefit Trust (EBT) in September 2010 for the benefit of one of its directors. This was subject to an earnings charge under Section 62 ITEPA 2003. This is sum Q. A Reg 80 determination was raised on the employer in January 2012 and was paid in full.

The funds were left in the EBT until October 2017 when the trustees of the EBT made a loan of £100 to the employee which was chargeable as a relevant step under Pt 7A. This is sum P.

The Pt 7A step is taken on the same amount of money as was originally settled in the EBT. The loan (sum P) therefore fully overlaps with the amount of money which was the subject of the earlier tax liability (sum Q). The value of the relevant step is therefore reduced by the amount of the overlap. This reduces the value of the step from £100 to £0.

The earlier tax liability does not have to be an earnings charge under Section 62. The overlap can be between two relevant steps, provided that the tax due on the earlier relevant step has become due and payable and has been paid or has been the subject of an agreement for the discharge of the liability.

Example: Contract settlement for earmarked funds

An employer placed £1m into an EBT in October 2012 which was allocated instantly by the trustees into a sub-trust for the benefit of one of the employer’s directors. The allocation gave rise to a charge under Pt 7A as an earmarking step. No tax was paid on the value of the relevant step. The amount of £1m is sum Q.

The employer was subject to an Employer Compliance review which found that PAYE should have been operated at the time the relevant step was made. The PAYE due was the subject of a contract settlement in March 2017 which provided for payment of the tax arising over a 12 month period.

For the purposes of Section 554Z5, the tax arising on the contract settlement is the earlier tax liability. The amount has become due and payable and terms have been agreed for settlement of the tax due between HMRC and the employer. The payment condition in Section 554Z5(4) is therefore met. Any subsequent relevant step may be reduced by the amount by which it overlaps with the sum subject to the earlier charge.

The EBT trustees subsequently made a loan to the director of £400,000 in August 2017, consisting of £350,000 from the £1m originally contributed and £50,000 representing growth on the capital. For the purposes of Section 554Z5(1), the £400,000 loan is sum P.

The relevant step is for £400,000. The amount of the step which overlaps with the sum which was subject to an earlier tax liability is £350,000. The value of the relevant step can be reduced by this amount to leave a sum which is taxable under Pt 7A of £50,000.

Section 554Z5 – Liability Condition

ITEPA 2003 – Section 554Z5(5)

The liability condition is met if, at the time the relevant step is taken, the earlier tax liability is not yet due and payable.

In order to obtain relief under this Section, it is necessary to identify that there is an earlier tax liability which existed at the time when a relevant step is taken. The earlier tax liability was not paid at that time because it had not become due and payable.

Example: RTI not yet due for notional payment

An employer makes a payment of £1m for the benefit of one of their employees into an EBT on 6 August 2017. This is immediately settled into a sub trust for the employee which creates an earmarking step under Section 554B. This gives rise to a PAYE liability which becomes due and payable with the RTI remittance to HMRC due on 22 September 2017. For the purposes of Section 554Z5(1), the amount of £1m is sum Q.

The trustees of the EBT make a loan of £700,000 to the employee on 21 August 2017. For the purposes of Section 554Z5(1), this is sum P.

Sum P overlaps with sum Q since it has been sourced from the same sum of money. The tax due on the earlier tax liability has not become due and payable at the time the relevant step is taken. The liability condition in respect of the earlier liability has therefore been met. The value of the relevant step can be reduced by the amount by which it overlaps with the value of the sum which was the subject of the earlier tax liability. The full amount overlaps here so the value of the £700,000 relevant step can be reduced to nil.

If the employer fails to operate PAYE and pay the appropriate amount to HMRC on 22 September, the £700 000 relevant step is still valued at nil for the purposes of Section 554Z5. The overall effect is to prevent double taxation by locking the liability to the earlier tax liability and reducing the value of any relevant steps where that value arises from the same sum or asset.

Section 554Z5 – Other Provisions

ITEPA 2003 - Section 554Z5

Besides the conditions listed in the previous paragraphs, the Section contains other provisions which need to be considered.

Where the earlier tax liability arose as a result of a relevant step within Pt 7A on sum or asset Q, the sum or asset which is the subject of the later relevant step (P), is treated as overlapping with any other sum or asset, provided that these have been treated as overlapping with the original sum or asset Q.

Where there are multiple relevant steps in a chain of transactions, this has the effect of reducing the value of the relevant steps provided they arise from the same sum of money or asset. This is provided for by Section 554Z5(7) and (8).

Some relevant steps will consist of withdrawal of both capital elements and growth elements. Where this is the case Section 554Z5(6) provides that it needs to be just and reasonable to conclude that the sums or assets P and Q are the same sum of money or asset or that sum or asset P directly or indirectly represents sum or asset Q.

For example an amount of £1m was put into an EBT in 2005 to 2006. It was immediately allocated into a sub-trust and tax was correctly accounted for following the allocation. By 2018 to 2019 the fund had risen in value to £1.7m. A relevant step is taken in 2018 to 2019 where £600,000 is loaned to the employee, leaving £1.1m still in the EBT.

The EBT had grown by £700,000 in cash terms and by 2018 to 2019 is worth 170% of its original value. It is necessary to calculate the amount by which the £600,000 overlaps with the original contribution.

The £600,000 will consist of an amount of 100/170 which relates to the original contribution and 70/170 which will represent growth. In cash terms:

£600,000 X 100/170 = £352,941
£600,000 X 70/170 = £247,059

It is just and reasonable to conclude that the overlapping amount of sum P and sum Q is therefore £352,941.

Relief under this Section is not allowed where the earlier tax liability arose from an earmarking relevant step which was taken prior to 6 April 2011 and which is, or would be if large enough, reduced under paragraph 59 Schedule 2, FA 2011 – please read Section 554Z5(2).

The earlier tax liability can be a liability of the employee personally or of any person linked with them – Section 554Z5(9)(a).

Any reference to a liability to income tax does not include any liabilities by reason of Section 175, which charges the benefit of having a taxable cheap loan as earnings. Any amounts paid on the benefit of a loan declared on a P11D will not be available for relief. The benefit under Section 175 is a charge on having a loan at a low rate of interest rather than an acceptance that what was described as a loan was in reality an amount of income – Section 554Z5(9)(b).

Section 554Z5 is part of a series of Sections which reduce the value of relevant steps. These Sections have to be considered in a particular order. Section 554Z(10) requires that adjustments to the value of the relevant steps are made after any adjustments under Section 554Z4 (residence issues) or 554Z7 (exercise price of share options) but before any adjustments under Sections 554Z6 (overlap with certain earnings) or 554Z8 (consideration given for relevant step).

In deciding whether an amount has been paid for the purposes of relief under the payment condition, no tax is considered to have been paid if it is:

• a payment on account of income tax
• an amount treated as a payment on account of an accelerated payment notice
• a payment pending determination of an appeal in accordance with Section 55 TMA 1970 – Section 554Z5(11).

Section 554Z11B and C – Introduction

ITEPA 2003 – Sections 554Z11B and C

It is entirely possible for the same sum of money or asset to be subject to more than one liability to tax. It is however not the intention of Pt 7A to tax the same amount of income twice.

Section 554Z11B and 554Z11C deal with overlaps between money or assets which are the subject of a charge to tax as a relevant step and which have already been the subject of an earlier charge to tax. Section 554Z11B details the circumstances which need to apply in order for relief to be given. Section 554Z11C gives details of how relief is given in a wide range of circumstances.

These provisions operate differently to Section 554Z5. In that Section relief is given by reducing the value of a relevant step. In order to get relief under Section 554Z11C a payment of tax must be made in respect of one of the liabilities. Section 554Z11C gives relief by treating the payment of that liability as a payment on account of the other. The single payment will frank both charges to tax to the extent that they arise from the same amount of income.

The start point for any such calculation has to be to identify which charge is being paid by the taxpayer. If the earlier tax liability is being paid, it is necessary to consider how much of that liability relates to the income included in the later charge on the relevant step. If the relevant step charge is being paid, it is necessary to consider how much of the income included in that charge relates to the earlier tax liability.

The identification of the overlapping value of the sum of money or asset is essential since separate charges may be in different tax years and the overlapping income may be charged at different rates. It is therefore necessary to identify what proportion of each charge relates to the overlapping value or income.

This is particularly true when dealing with an overlap between the income included in one Pt 7A relevant step and income included in more than one previous charge to tax.

Section 554Z11C provides different ways of giving relief where a taxpayer chooses to pay a Pt 7A charge and there is an overlap between that charge and two or more previous charges.

Where the Pt 7A liability is less than the previous charges, the provisions of Section 554Z11C(1) to (6) give relief for the overlapping amount across all earlier charges.

Where the Pt 7A liability is equal to or more than the previous charges, the provisions of Section 554Z11C(7) to (10) allow any payments towards the Pt 7A liability to also be treated as payments on account of the earlier liabilities. It does this by apportionment of the amount paid across the earlier liabilities.

The earlier tax liability can be a liability of the employee personally or of any person linked with them – Section 554Z11B(5)(a).

Any reference to a liability to income tax does not include any liabilities by reason of Section 175, which charges the benefit of having a taxable cheap loan as earnings. Any amounts paid on the benefit of a loan declared on a P11D will not be available for relief. The benefit under Section 175 is a charge on having a loan at a low rate of interest rather than an acceptance that what was described as a loan was in reality an amount of income – Section 554Z11B(5)(b).

Section 554Z11B – Earlier Tax Liability Due but Unpaid – Identification of Sums or Assets P and Q

ITEPA 2003 – Sections 554Z11B

As noted in the previous paragraph Section 554Z11B details the circumstances which need to apply for relief to be given.

Whereas Section 554Z5 deals with paid liabilities or those which have not become due and payable, Section 554Z11B requires that the earlier tax liability has become due and payable and is either wholly or partly unpaid at the time the relevant step is taken. Also the person liable for the tax will have not agreed terms with HMRC for the discharge of the liability.

The charge to tax on the relevant step is again described as being on sum of money or asset “P”. The earlier tax liability is on sum or asset “Q”. It needs to be reasonable to conclude that P and Q are the same sum of money or asset or that P directly or indirectly represents Q. Both charges to tax are effectively on the same income.

It may be that capital growth has been added to sum Q before the relevant step on sum P is taken. Due to Section 554Z11B(4), the provisions detailed in Section 554Z5 – other provisions in relation to the identification of the overlap between P and Q also apply where an amount of growth is included in a relevant step.

Example 1:

2008 to 2009 - Contribution to EBT £100,000 – Sum Q – charged under s62 – £40,000 2014 to 2015 – Loan made £50,000 – Sum P – charged under Pt 7A £20,000

The amount of the loan originates from the amount contributed to the EBT. It is therefore reasonable to conclude that the original contribution and the loan are the same sum of money.

Example 2:

2011 to 2012 – Loan made £100,000 – item charged under Pt 7A – £50,000
2012 to 2013 – Loan made £100,000 – item charged under Pt 7A – £50,000
2018 to 2019 – Loan charge £200,000 – item charged under loan charge provisions – £90,000

The 2011 to 2012 and 2012 to 2013 loans are still outstanding at 5 April 2019 so the FA 2017 loan charge provisions apply. It is reasonable to conclude that the 2018 to 2019 loan charge is on the same income as was charged under Pt 7A in the earlier years.

Section 554Z11C – Overlapping charges introduction

ITEPA 2003 – Sections 554Z11C(1)(a)

Section 554Z11C provides a flexible approach to giving relief where more than one charge exists on the same money or asset. It recognises that a payment can be made against one liability or the other. It gives relief by treating a payment of one liability as a payment on account of the other. The single payment will frank both charges to tax to the extent that they arise from the same income. As noted in Section 554Z11B and C – Introduction, the first consideration is which liability is being paid by the taxpayer.

In order to give relief, Section 554Z11C contains a number of basic concepts. The first is to define the charges which include amounts from what are effectively the same sum or asset. It is also necessary to consider how much of these charges relate to the value of that sum or asset. These are known as the earlier charge and the Chapter 2 overlap charge.

The term “earlier charge” refers to the amount of a charge which includes income common to sum or asset P and sum or asset Q and which arose prior to the taking of a relevant step.

The term “Chapter 2 overlap charge” refers to the amount of a charge which includes income common to sum or asset P and sum or asset Q and which arises on the taking of the relevant step referred to above.

Section 554Z11C – The earlier charge

ITEPA 2003 – Sections 554Z11C(1)(a)

Section 554Z11C(1)(a) - The earlier charge

There needs to be an earlier charge to tax on the sum of money or asset when compared to the charge on the later relevant step. The phrase “the earlier charge” however does not necessarily refer to the full amount of the earlier tax liability. It refers to the amount of the earlier tax liability which arises from the same income as the Chapter 2 overlap charge, for example, it refers to the tax arising from the overlap between sum or asset P or sum or asset Q. This introduces two related concepts.

It is necessary to define the overlap between sum or asset P and sum or asset Q – this is detailed in Section 554Z11B – identification of sums or assets P and Q. It is important to remember that the overlap is on an amount of income rather than any consequential tax liabilities.

It is then necessary to consider the overlap in terms of the charges arising. Although the overlapping amount will be the same in both charges, it’s necessary to consider how much of the total tax liability relates to the income that is common to both charges. The earlier charge is that part of the total earlier tax liability which relates to the overlapping amount of income included in both charges.

Example:

A loan of £50 000 is made in 2018 to 2019 from an amount of £200,000 earmarked in 2014 to 2015. The overlapping amount is £50,000 which is 25% of the total sum which was previously earmarked. The overall earlier liability is the total tax due on £200,000 at 45% which gives an earlier tax liability of £90,000. Since 25% of this liability relates to overlapping income, the total earlier charge is £90,000 @ 25% = £22,500.

It is useful to note that the earlier charge will be on sum or asset Q.

Section 554Z11C – The Chapter 2 overlap charge

ITEPA 2003 – Sections 554Z11C(1)(b)

The earlier charge (Section 554Z11C – the earlier charge) will already be due and payable at the point when a relevant step is taken using all or part of the sum or asset which was the subject of the earlier tax liability.

Since the same sum or asset is used in taking the subsequent relevant step, there will be an overlap with the income which is included in the later charge which arises on the taking of the relevant step. It is referred to in terms of a Chapter 2 charge because Section 554Z2 in Chapter 2 of Pt 7A ITEPA 2003 provides that the value of relevant steps taken in respect of an employee will count as employment income of that employee.

The provisions detailed in Section 554Z11C – overlapping charges introduction in relation to the earlier charge also apply when identifying the Chapter 2 overlap charge. This is similarly not necessarily the full amount of the charge on the later relevant step. It is necessary to identify the overlapping income and then consider how much of that income relates to the Chapter 2 liability.

Example:

A loan of £50,000 is made in 2018 to 2019 from an amount of £200,000 earmarked in 2014 to 2015. The overlapping amount is £50 000 which gives rise to 100% of the total Chapter 2 liability. The overall Chapter 2 liability here is £50 000 @45% = £22,500. Since the Chapter 2 overlap charge is that part of the total Chapter 2 tax liability which overlaps with the earlier charge, the Chapter 2 overlap charge is also £22,500.

This liability will be on sum or asset P.

Section 554Z11C – Paid amounts

ITEPA 2003 – Sections 554Z11C(3) and (5)

In order to complete the requirements for relief, it is then necessary to consider the payment made by the taxpayer.

Section 554Z11C(3) – The earlier charge paid amount

This applies the provisions of Section 554Z11C(4) where an amount is paid in respect of the earlier charge or any late payment interest on the charge. This amount then becomes the earlier charge paid amount. It does not have to be for the full amount of the earlier charge.

Where a taxpayer makes a payment of the earlier charge, an amount equal to the earlier charge paid amount is treated as a payment on account of the Chapter 2 overlap charge. This amount may or may not clear the earlier tax liability in full. It may or may not clear the Chapter 2 overlap charge in full. It can however be used as a payment on account of the Chapter 2 overlap charge.

Where the payment of the earlier charge paid amount also clears the Chapter 2 overlap charge in full, any balance can be treated as a payment on account of any late payment interest on that charge.

Section 554Z11C(5) – The Chapter 2 paid amount

This applies the provisions of Section 554Z11C(6) where an amount is paid in respect of the Chapter 2 overlap charge or any late payment interest on the charge. This amount then becomes the Chapter 2 paid amount. It does not have to be for the full amount of the Chapter 2 overlap charge.

Where a taxpayer makes a payment of the Chapter 2 overlap charge, an amount equal to the Chapter 2 paid amount charge is treated as a payment on account of the earlier charge. This amount may or may not clear the Chapter 2 tax liability in full. It may or may not clear the earlier charge in full. It can however be used as a payment on account of the earlier charge.

Where the payment of the Chapter 2 paid amount also clears the earlier charge in full, any balance can be treated as a payment on account of any late payment interest on that charge.

Section 554Z11C – Identifying Overlapping Sums or Assets and Applying Relief – Example 1

ITEPA 2003 – Sections 554Z11C(1) – (6)

An employer makes a payment of £5m for the benefit of one of their directors into an EBT in June 2010 which gives rise to a charge under Section 62 ITEPA 2003. The employer does not operate Pay As You Earn (PAYE) and a Reg 80 determination for £2.5m is raised in May 2014 on the full income of £5m (£5m at 50%). For the purposes of Section 554Z11C, this is sum Q.

For the purposes of this example no investment growth arises. Please read Section 554Z5 – other provisions and Section 554Z11B – identification of sums or assets P and Q for details of how to calculate an overlap where a relevant step is taken which includes investment growth.

The amounts are left in trust with no withdrawals until August 2017 when the trustees make a loan of £3m to the director. This is a chargeable relevant step in 2017 to 2018 but since it has been taken from the £5m originally contributed to the EBT, there is clearly an overlap between the two sums of money. The relevant step gives rise to a tax bill of £1.35m (£3m at 45%). For the purposes of Section 554Z11C, the loan of £3m is sum P.

The taxpayer may choose to make a payment of tax for one or other of the liabilities. The overlap needs to be considered in terms of the liability which is being settled since payment of one liability will be treated as a payment on account of the other.

Taxpayer makes payment towards earlier tax liability

The earlier tax liability is on the full amount contributed which was £5m. The amount of that income which was used for the later loan is £3m. The overlapping amount of income is £3m.

It is necessary to identify how much of the earlier tax liability relates to the overlap in order to find the value of the earlier charge.

The initial amount charged was £5m. The amount loaned from that income to form the Chapter 2 tax liability was £3m, which is 60% of the income which gave rise to the earlier tax liability. The overlap between the two sums is therefore 60%.

This means that the amount of the earlier charge is 60% of the earlier tax liability of £2.5m which in cash terms is £1.5m. This means that £1.5m out of the original charge of £2.5 relates to the income which overlaps with the later charge.

It is also necessary to consider how much of the liability on the later relevant step has been caused by the overlapping £3m.

The entire Chapter 2 tax liability arises from income which overlaps with the income used for the earlier tax liability. The sum of £3m is entirely from the original 20 contribution of £5m. The overlap in relation to the Chapter 2 overlap charge is 100%. In cash terms this means the Chapter 2 overlap charge will be £1.35m.

The earlier charge in this example is therefore £1.5m and the Chapter 2 overlap charge is therefore £1.35m. The overlapping income is £3m but the differences in the tax bills arise from differing rates of tax applying in the years when the charges arose. In practical terms this means that any payment towards the earlier charge will be available to set off against the Chapter 2 overlap charge and any associated interest to a maximum of £1.5m plus any late payment interest which is associated with that earlier charge.

Having identified the earlier charge and the Chapter 2 overlap charge, it now becomes necessary to consider what the taxpayer pays in order to identify how to treat the earlier charge paid amount.

The taxpayer makes an initial payment of £1m against the earlier tax liability in January 2018. This is the first earlier charge paid amount. It reduces the outstanding balance of the earlier tax liability to £1.5m but it is also less than the full value of the earlier charge. It can be used in full as a payment on account of the Chapter 2 overlap charge. It will therefore reduce the balance of that charge to £350,000.

The taxpayer settles the remainder of the earlier tax liability in June 2018 with a payment of £1.5m. This is in excess of the remainder of the Chapter 2 overlap charge so can be used as a payment on account of that charge.

As noted above the balance of that charge is £350,000. The earlier charge paid amount for the second payment can be used to cover that remaining balance. It can also be used as a payment on account of any late payment interest on that later charge, to the extent that the total payments towards the Chapter 2 overlap charge and associated late payment interest do not exceed the £1.5m value of the early charge plus any payments towards any late payment interest which has accrued on that charge.

Taxpayer makes payment towards Chapter 2 overlap charge

Using the same scenario above it is necessary to consider how much of the Chapter 2 overlap charge overlaps with the earlier charge. The calculations will remain the same but the effect is different.

The entire amount of the Chapter 2 liability arises from the income included in the earlier tax liability. This means the overlap is again 100% on a tax charge of £1.35m. The Chapter 2 overlap charge is therefore £1.35m.

The earlier tax liability is still £2.5m and the earlier charge is still £1.5m since 60% of the earlier liability relates to the overlap.

Where the taxpayer chooses to pay the Chapter 2 liability, the amount of the payment which relates to the Chapter 2 overlap charge can be used as a payment on account of the earlier charge. This restricts the amount which can be set against the earlier charge and any associated interest to £1.35m plus any associated late 21 payment interest, which is the value of the Chapter 2 overlap charge along with any late payment interest arising from that charge.

The taxpayer makes an initial payment of £1m towards the Chapter 2 tax liability in January 2018. This is the first Chapter 2 paid amount. It reduces the value of the Chapter 2 liability to £350,000. It can be used as a payment on account of the earlier tax liability since it does not exceed the earlier charge, which is the amount by which the two charges overlap. The payment reduces the earlier tax liability to £1.5m.

The taxpayer then makes a payment of £350,000 in June 2018. This takes the total Chapter 2 paid amount up to the value of the Chapter 2 overlap charge. It can be used as a payment on account of the earlier charge so will reduce the earlier tax liability to £1.15m which remains to be settled.

Section 554Z11C – Identifying Overlapping Sums or Assets and Applying Relief – Example 2 – Two or more charges – Chapter 2 Overlap Charge Paid

ITEPA 2003 – Sections 554Z11C(1) – (6)

The provisions of Section 554Z11C(1)-(6) can be used where there is overlap between more than one earlier charge. Where this happens it is necessary to consider which charge is the Chapter 2 overlap charge and which charge is the earlier charge to give relief across all charges. It may be necessary to have two years which contain different Chapter 2 overlap charges in order to fully give relief.

The reason for this is that Section 554Z11C allows an earlier charge paid amount to be set against a Chapter 2 overlap charge and a Chapter 2 paid amount to be set against an earlier charge. Where two or more earlier charges exist, there is no provision to set an earlier charge paid amount against a different earlier charge.

In order to ascertain how relief is given in these circumstances, it is necessary to firstly consider which charge is being paid. This is required in order to decide which year’s liability contains the Chapter 2 overlap charge and which year contains the earlier charge. This may affect which sums or assets are considered to be P and Q.

Example

An amount of £400,000 was originally contributed to an EBT in 2008 to 2009. From this sum an amount of £200,000 was earmarked in 2016 to 2017. An amount of £150,000 was then loaned to the employee from the earmarked amount in 2017 to 2018. This is sum or asset P which has given rise to the Chapter 2 overlap charge. Sum or asset Q needs to be considered in terms of each charge.

2008 to 2009 - earnings charge on £400,000 (sum Q2) contribution to EBT - resulting in 40% tax charge of £160 000 2016 to 2017 - relevant step on £200,000 (sum Q1) earmarking charge - resulting in 45% tax charge of £90,000
2017 to 2018 - relevant step on £150,000 loan (sum P) - resulting in Chapter 2 liability at 45% of £67,500

If a payment is made in relation to the 2017 to 2018 liability, this will be the year whose liability contains sum or asset P and the Chapter 2 overlap charge. The liabilities for 2016 to 2017 and 2008 to 2009 will both contain earlier charges.

The Chapter 2 tax liability is £67 500 in 2017 to 2018. The liability is based on income of £150,000 which was included in the previous two charges to tax. The overlapping amount is £150,000 and was brought fully into charge in 2017 to 2018. The Chapter 2 overlap charge is 100% of the Chapter 2 liability and is £67,500 in cash terms.

The first overlap in descending order exists between the liabilities for 2017 to 2018 and 2016 to 2017 and it is necessary to determine the earlier charge in relation to the 2016 to 2017 liability.

It is necessary to identify how much of the income which gave rise to the 2017 to 2018 charge is included in the 2016 to 2017 charge.

The overlapping income is £150 000 (sum P) out of total income charged of £200,000 (sum Q1). The overlap covers 75% of the income charged in 2016 to 2017. The charge for that year was £90 000. Since 75% of that relates to overlapping income, the amount of the earlier charge for 2016 to 2017 is £90,000 @ 75% = £67,500.

The second separate earlier charge exists between the liabilities for 2017 to 2018 and 2008 to 2009. It is necessary to identify how much of the 2017 to 2018 charge is included in the 2008 to 2009 charge.

The overlap in terms of the original charge for 2008 to 2009 is £150,000(sum P)/£400,000(sum Q2) x 100 = 37.5%.

The earlier tax liability for 2008 to 2009 was £160,000. Since 37.5% of this relates to the amount which overlaps with the liability on the loan, the earlier charge for 2008 to 2009 is £160,000 @ 37.5% = £60,000.

In 2018 to 2019 a payment is made for the entire Chapter 2 tax liability of £67 500. This will clear the liability for this year in full but since it relates to income which overlaps with the earlier years liabilities, it can also be used as a payment on account of these charges.

The payment can be used against the 2016 to 2017 liability. This was £90,000 in total but the earlier charge in relation to this year was £67,500. The payment therefore reduces the liability to £22,500.

The payment of £67,500 can also be used against the liability for 2008 to 2009. The earlier charge for this year was £60,000 so the payment will cover this amount in full. There is however £7,500 remaining of the Chapter 2 overlap charge. This can be set against any late payment interest in respect of the earlier charge.

Section 554Z11C – Identifying Overlapping Sums or Assets and Applying Relief – Example 3 – Two or More Charges – Earlier Charge Paid

ITEPA 2003 – Sections 554Z11C(1) – (6)

Since the legislation does not allow earlier charge paid amounts to be set against other earlier charges, a different approach must be taken in order to obtain relief where more than two charges exist and an amount is paid towards an earlier charge.

Using the example from Section 554Z11C – overlapping sums or assets – example 2 with a payment being made against an earlier charge will demonstrate how the difference in relief is obtained:

2008 to 2009 - earnings charge on £400,000 (sum Q2) contribution to EBT - resulting in 40% tax charge of £160,000
2016 to 2017 - relevant step on £200,000 (sum Q1/P2) earmarking charge - resulting in 45% tax charge of £90,000
2017 to 2018 - relevant step on £150,000 loan (sum P1) - resulting in Chapter 2 liability at 45% of £67,500

General principles

In order to obtain full relief, it is necessary to consider how the payment made by the taxpayer interacts with each of the other liabilities as separate calculations.

In the table of liabilities above, payment is being made against the 2016 to 2017 liability. It is necessary to consider the liability arising in 2017 to 2018 as including a Chapter 2 overlap charge against an earlier charge arising in 2016 to 2017. Any earlier charge paid amounts will be treated as payments on account of the Chapter 2 overlap charge. This will deal with any double taxation between the separate charges for these two years.

This leaves the 2008 to 2009 liability to be considered. Since a payment of an earlier charge can’t be used to relieve another earlier charge, to fully relieve the income across all the charges, it is then necessary to compare the 2016 to 2017 liability separately against the 2008/ to 2009 liability.

The 2016 to 2017 liability becomes a separate Chapter 2 liability which includes a separately calculated Chapter 2 overlap charge against an earlier charge arising in 2008 to 2009. The value of the relevant step for the 2016 to 2017 liability becomes a newly calculated sum P. It is necessary to consider the overlap between this and the earlier liability in 2008 to 2009. This becomes a newly calculated sum Q. Any payments against the Chapter 2 overlap charge for 2016 to 2017 can be used payments on account of the earlier charge for 2008 to 2009.

Detailed calculation – 2017 to 2018 against 2016 to 2017

The Chapter 2 liability is £67,500 in 2017 to 2018 and it wholly relates to income included in the 2016 to 2017 tax liability. The Chapter 2 overlap charge is therefore still £67,500.

It is again necessary to calculate how much of the income which gave rise to the 2017 to 2018 charge is included in the 2016 to 2017 charge.

The overlapping income is £150,000 (sum P1) out of total income charged of £200,000 (sum Q1). The overlap covers 75% of the income charged in 2016 to 2017. The charge for that year was £90,000. Since 75% of that charge relates to overlapping income, the amount of the earlier charge for 2016 to 2017 is £90,000 @ 75% = £67,500.

Detailed calculation – 2016 to 2017 against 2008 to 2009

It is then necessary to consider what the Chapter 2 overlap and earlier charges are when comparing 2016 to 2017 to 2008 to 2009.

Previously the liability for 2016 to 2017 was the earlier year’s tax liability and contained the earlier charge. In relation to the 2008 to 2009 year, the charge for 2016 to 2017 becomes the Chapter 2 tax liability and contains the Chapter 2 overlap charge.

Sum P is no longer the £150,000 from 2017 to 2018 – it is now £200,000 from 2016 to 2017 (referred to now as P2). The overlapping amount between 2016 to 2017 and 2008 to 2009 is £200,000. This gave rise to the whole of the Chapter 2 tax liability of £90,000 so the Chapter 2 overlap charge is £90,000.

The overlapping amount of £200,000 is 50% of the amount which gave rise to the earlier tax liability of £160,000. The earlier charge for 2008 to 2009 is £160,000 @ 50% = £80,000.

To summarise the position in relation to the overlapping charges:

2008 to 2009 – earlier charge 2 – £80,000 2016 to 2017 – Chapter 2 overlap charge in respect of 2008/09 – £90,000 2016 to 2017 – earlier charge 1 – £67,500 2018 to 2019 – Chapter 2 overlap charge in respect of 2016 to 2017 – £67,500

Paid amounts

In 2018 to 2019 a payment of £70,000 is made for the 2016 to 2017 liability. This needs to be considered as a paid amount against both the 2018 to 2019 charge and the 2008 to 2009 charge.

In relation to the 2018 to 2019 Chapter 2 overlap charge, this is an earlier charge paid amount. It can be used as a payment on account of the 2018 to 2019 Chapter 2 overlap charge of £67,500. Since the amount paid exceeds the Chapter 2 overlap charge by £2,500, that amount can be set against any late payment interest arising in respect of that Chapter 2 overlap charge. It will not clear the 2016 to 2017 liability in full but it does clear the earlier charge for this year.

In relation to the 2008 to 2009 earlier charge, this is a Chapter 2 paid amount. The payment can be used as a payment on account of the 2008 to 2009 earlier charge.

It will not clear the earlier liability in full. Since the earlier charge is £80,000, the payment of £70,000 will leave £10,000 of the earlier charge still able to be franked by any further payment towards any of the 2016 to 2017 liability.

Using the payments in this example, the 2018 to 2019 charge is fully covered. Any further payments would be made against the balances remaining on the other years. These would then be considered as Chapter 2 paid amounts or earlier charge paid amounts as appropriate and available to be used as payments on account of the earlier charges or Chapter 2 overlap charges as appropriate.

Section 554Z11C – Identifying Overlapping Sums or Assets and Applying Relief – Example 4 – Paid Amounts and Late Payment Interest

ITEPA 2003 – Sections 554Z11C(1) – (6)

The amount of a Chapter 2 paid amount or an earlier charge paid amount can include sums paid towards the various overlap and earlier charges as well as sums paid towards any late payment interest on those charges.

The amount of the late payment interest which can count towards the paid amounts can only be the amount which has arisen due to the late payment of the overlap or earlier charges. It is not necessarily the full amount of the interest due on the entire Chapter 2 or earlier tax liability.

An amount of £800,000 is put into an EBT in 2008 to 2009 for the benefit of an employee. It is chargeable under Section 62 and is invested by the trustees. This is sum Q. A tax charge of £320,000 arises in 2008 to 2009.

The employee wishes to withdraw the entire amount plus investment growth in 2018 to 2019. This will trigger a charge under Pt 7A. By 2018 to 2019 the value of the fund has grown to £900,000. This is sum P. A tax charge of £405,000 arises in 2018 to 2019.

The amount of overlapping income is £800 000. The early charge is £320,000 since it arises entirely from overlapping income. The Chapter 2 overlap charge is the portion of the £405 000 which arises from the £800 000 overlapping income. Since the charge is on £900 000, the overlapping amount of the charge will be £405,000/£900,000 x £800,000 = £360,000.

The taxpayer decides to settle in May 2019. By this time the 2008 to 2009 charge has accrued a late payment interest charge of £110,000, all of which relates to the charge on the overlapping income. The 2018/19 charge has accrued a late payment interest charge of £11,150. Not all of this relates to the Chapter 2 overlap charge however. The same apportionment calculation as detailed above applies to give the amount of the interest which relates to the overlapping portion of the charges £11,150/£900,000 x £800,000 = £9,900.

At the date of settlement the taxpayer has to choose which liability they wish to pay. The total liabilities are as follows.

	Tax	Overlap	Interest (A)	Interest Overlap (B)	Total Overlap (A + B)
2008 to 2009	£320,000	£320,000	£110,000	£110,000	£430,000
2018 to 2019	£405,000	£360,000	£11,150	£9,900	£369,000

The total liabilities are £430,000 for 2008 to 2009 and £416,150 for 2018 to 2019.

If the taxpayer chooses to settle 2008 to 2009 in full including interest, the total amount of £430,000 becomes the earlier charge paid amount and can be used as a payment on account against the Chapter 2 overlap charge and the overlapping interest. This will therefore frank £369,900 of the total 2018 to 2019 charge of £416,150. This will leave both the tax due on the growth element and the associated late payment interest totalling £46,250 still payable. The total amount payable is £320,000 + £110,000 + £46,250 = £476,250.

If the taxpayer chooses to settle 2018 to 2019 in full including interest, the Chapter 2 paid amount will be the total of the Chapter 2 overlap charge plus the associated accrued interest which totals £369,900. This can be used as a payment on account of both the earlier charge as well as the overlapping interest of £430,000. It does not however cover the amount of the earlier liability in full. There will be an amount of £60,100 still payable in respect of late payment interest. The total amount payable is £405,000 + £11,150 + £60,100 = £476,250.

Section 554Z11C – Chapter 2 liability equal to or greater than earlier charges – Overlap with 2 or more items and relevant Chapter 2 overlap charges

ITEPA 2003 – Section 554Z11C(7) - (10)

It is possible for a relevant step to be taken which arises from the same income which has been subject to more than one previous charge. The double taxation amendments to Pt 7A contained in FB 2017 provide for relief to be given on a just and reasonable basis where overlaps exist between income which has been subject to more than one charge to tax.

Where a liability under Pt 7A includes income which overlaps with all the liabilities previously charged, the provisions of Section 554Z11C(7) – (10) allow payment of the Pt 7A liability to be apportioned across all the previous charges. These provisions will need to be used where the later Pt 7A liability which is being settled is equal to or exceeds the total of the earlier tax liabilities.

This will apply in different circumstances to those covered by Section 554Z11C(1) – (6). It will be appropriate to use the earlier parts of the Section where, for example, a large amount was charged on contribution and lesser charges arise either on earmarking or where a payment of a sum of money was made.

Some of the concepts used in Section 554Z11C(1) - (6) still apply.

There still needs to be a sum of money or an asset which is the subject of a relevant step. This is still referred to as sum or asset P. The tax due on the relevant step is still referred to as the Chapter 2 tax liability.

There is a different approach to the earlier charges on sum or asset Q. Where more than one earlier charge to tax exists, it is necessary to be able to identify the extent to which the income overlaps across the charges.

Section 554Z11C(7)(a) states that there must be overlap between sum or asset P which is the subject of the relevant step and each of two or more items which gave rise to a charge to tax on the employee before the relevant step is taken.

It achieves this by importing the conditions of Section 554Z11B(2)(b) which states that an overlap has to exist with sum or asset Q. Since an overlap has to separately exist with each of the items previously charged to tax, each item will effectively have its own sum Q which will be a constituent part of the total amount charged to tax on sum P.

Each of the items previously charged to tax will overlap independently with the Chapter 2 tax liability on sum or asset P. The Chapter 2 tax liability now consists of different overlaps with each of the previous charges. The overlap within the Chapter 2 tax liability with each of these separate charges is called a relevant Chapter 2 overlap charge. The Chapter 2 liability has to therefore consist of two or more relevant Chapter 2 overlap charges.

Section 554Z11C – Chapter 2 liability equal to or greater than earlier charges – Chapter 2 aggregate paid amounts and earlier charges

ITEPA 2003 – Section 554Z11C(7) - (10)

Where a taxpayer makes a payment towards a Chapter 2 tax liability such as was mentioned in Section 554Z11C – Chapter 2 liability equal to or greater than earlier charges, they will also be making payment towards any relevant Chapter 2 overlap charges contained in that liability.

Where a payment is made in respect of two or more relevant Chapter 2 overlap charges or their associated late payment interest, any such payment is known as a Chapter 2 aggregate paid amount.

The relevant Chapter 2 overlap charges relate to a part of the overall Chapter 2 tax liability. In order to give relief against the tax charges arising on the earlier items, it is necessary to identify the earlier charges. These are the amounts of the liability in respect of each earlier individual item which overlap with sum or asset P.

Where a Chapter 2 aggregate paid amount is paid, it can be apportioned between the earlier charges on a just and reasonable basis. Once the amount has been apportioned, the payments allocated to the earlier charges can be used as payments on account of the earlier charges to which they are allocated. If the earlier charge is paid in full, the amount allocated can be treated as a payment on account of any interest payable in respect of that charge.

Section 554Z11C – Chapter 2 liability equal to or greater than earlier charges – Examples

ITEPA 2003 – Section 554Z11C(7) - (10)

Example 1

A relevant step is taken in 2017 to 2018 on an amount loaned to an employee of £300 giving rise to a Chapter 2 liability for £135.

The loan arises from amounts earmarked in earlier years which gave rise to tax charges as follows

• 2012 to 2013 - £100 @45% £45
• 2013 to 2014 - £100 @45% £45
• 2014 to 2015 - £100 @45% £45

The £300 loan is sum P. It is made up entirely of the amounts previously earmarked so an overlap exists in terms of the income included in the liability for each separate earlier year. The income subject to tax in each of the earlier years is therefore an item within Section 554Z11B(2)(b).

The liabilities for these earlier years are still referred to as earlier charges to the extent that they relate to the overlap. This is provided for by Section 554Z11C(9)(a). Here the liabilities are made up entirely of amounts which overlap with the Chapter 2 tax liability so they are also the earlier charges for each individual year.

As noted above each of these overlap individually with the Chapter 2 tax liability for 2017 to 2018. Each one is a relevant Chapter 2 overlap charge. The total Chapter 2 tax liability therefore contains three separate individual relevant Chapter 2 overlap charges, one for £45 for each year.

In order to obtain relief a payment of the Chapter 2 liability must be made. Where this amount covers all or part of 2 or more of the relevant Chapter 2 overlap charges, the payment will also be treated as a payment on account of the earlier charges. The split of the payment is to be allocated justly and reasonably across the earlier charges.

A payment of £90 is made towards the 2017 to 2018 liability. This is the Chapter 2 aggregate paid amount. This is also paid in respect of two or more relevant Chapter 2 overlap charges.

It would be reasonable to allocate this to the earlier charges by setting £30 towards each charge. An amount of £30 can therefore be used as a payment on account of each of the earlier charges of £45, leaving an amount of £45 outstanding in respect of the 2017 to 2018 tax liability. This means an amount of £45 still needs to be settled in terms of the three relevant Chapter 2 overlap charges included in the Chapter 2 tax liability. There will also be £15 still outstanding in respect of each of the earlier charges.

Example 2

• a loan of £100 made in 2008 resulting in a tax liability of £40
• a loan of £100 made in 2009 resulting in a tax liability of £40
• a loan of £100 made in 2010 resulting in a tax liability of £50
• the loan charge applies in 2019 on the £300 loan balance resulting in a tax liability of £135

The £300 loan charge would be sum P which would overlap with each of the 2008 to 2010 liabilities, for example, three items within Section 554Z11B(2)(b). The relevant Chapter 2 overlap charges for each year would be:

• 2007 to 2008 - £40
• 2008 to 2009 - £40
• 2009 to 2010 - £50

£135 is then paid by the taxpayer as a Chapter 2 aggregate paid amount against the Chapter 2 tax liability. This would also be in respect of ‘two or more relevant Ch2 overlap charges’ within Section 554Z11C(7)(b)(i). This is because £135 is a Chapter 2 tax liability which relates to an overlap between it and each of the three other items.

In order to determine the amounts of the individual earlier charges under Section 554Z11C(9)(a), it is necessary to consider how much of the liability for each year relates to the overlap. On the facts here, the liability would be the earnings charge on the contribution/allocation of the £100 in 2008, 2009 and 2010 which was lent out, for example, the £40, £40 and £50. As these overlap 100% with the loan charge, the ‘earlier charge’ would be the same.

Under Section 554Z11C(9)(b) the £135 needs to be justly and reasonably apportioned between the earlier charges of £40, £40, and £50. This does not necessarily require the amount to be allocated on a straight line split of £45, £45 and £45, leaving an additional £5 due on the 2010 liability. The amount should be allocated £40, £40 and £55. This clears all the previous charges and allows the £5 overpaid on the 2010 liability to be set against any late payment interest arising on that charge.

Section 554Z11D – Provisional Payments of Tax

ITEPA 2003 – Section 554Z11D

In order to take advantage of the double taxation provisions in Sections 554Z11B and C, it is necessary to make a payment of tax. Section 554Z11D confirms that where a provisional payment of tax is made, this will not count as a payment of tax.

Provisional payments of tax are defined in Section 554Z11D(3) as:

• a payment on account of income tax
• a payment treated as a payment on account under provisions relating to accelerated payments
• a payment made pending determination of an appeal made in accordance with Section 55 TMA 1970

It provides that such a payment can be treated as a payment if an application has been made to HMRC under Section 554Z11E for such treatment – please read Section 554Z11E – application to have payment treated as paid amount.

The reference to payments on account does not include any earlier charge paid amounts, Chapter 2 paid amounts or Chapter 2 aggregate paid amounts which are also treated as payments on account of earlier charges or Chapter 2 overlap charges under Section 554Z11C.

Section 554Z11E – Provisional Payments of Tax – Application to have payment treated as paid amount

ITEPA 2003 – Section 554Z11E

It is possible for a person to apply to have a provisional payment of tax treated as an earlier charge paid amount, a Chapter 2 paid amount or a Chapter 2 aggregate paid amount. The application must be made to HMRC and the decision will be notified to the applicant.

Where an application is successful, the provisional payment of tax to which the application relates will be treated as a paid amount and will not be repaid.

Section 554Z11F – Provisional Payments of Tax – Treatment of payments following application to have payment treated as paid amount

ITEPA 2003 – Section 554Z11F

Where a provisional payment of tax is made, it can be considered as being made in respect of any overlapping charges under Section 554Z11C.

Where the payment is made in respect of an earlier charge, it is to be treated as also being in respect of the overlapping Chapter 2 overlap charge.

Where the payment is made in respect of a Chapter 2 overlap charge or two or more relevant Chapter 2 overlap charges, it is to be treated as also being in respect of the earlier charge or the earlier charge to which it is allocated so far as it relates to the overlap.

If the underlying charge, in respect of which any provisional payment of tax has been made, is determined not to be due and the amount is repaid, any interest which has accrued in relation to the earlier charge or the Chapter 2 overlap charge is treated as accruing as if the provisional payment of tax was never made. These provisions cover the period between the day the provisional payment of tax was made and the day on which the repayment was made.

New relevant steps – loan transfer, release or write off

ITEPA 2003 – Section 554C

The FB 2017 amendments have created new relevant steps which occur in relation to loans already made which are subsequently transferred, released or written off.

For the purposes of the new legislation, the normal terminology of Section 554C is applied. A person is P and will be the third party who takes the relevant step. A relevant person is defined in Section 554C(2).

A relevant step is taken under Section 554C(1)(aa) where a person (P) acquires a right to a payment of a sum of money or to the transfer of an asset. There has to be a connection (either direct or indirect) between the acquisition of the right and a payment or transfer of an asset to a relevant person. The payment can be by way of a loan or otherwise.

A relevant step will be taken under this new provision where a loan was made to an employee by a third party but new arrangements are put in place to transfer the loan to someone else. This may involve the receipt by the third party of an asset transferred from another party.

A relevant step will be taken under Section 554C(1)(ab) where P releases or writes off the whole or part of a loan made to a relevant person. This also includes the write off or release of an acquired right as detailed above. If a relevant step is taken under this sub-section after the death of the employee, the value of the relevant step will not count as income under Pt 7A.

A relevant step will be taken under Section 554C(1)(ab) where the rights to the repayment of a loan are transferred to the person responsible for repaying the loan. Such a transaction makes the borrower the same person as the lender so would have the effect of writing off the loan. These provisions also apply to transfers of rights to either payments of sums of money or transfers of assets where the person who acquires the rights is the person who was liable to make the payment or transfer the asset.

Such transfers of rights are treated as releases under Section 554C(1)(ab) under new provisions in Section 554C(3B) and (3C).

In these provisions loan means any form of credit or any payments which are purported to be made by way of loan.

Exclusions

Section 554OA – transfer of employment related loan
Section 554XA – relevant steps taken in respect of tax liability

Transfer of employment related loan

ITEPA 2003 – Section 554OA

During consultation for the FA 2017 amendments, concern was expressed that the transfer of loan provisions would result in a relevant step occurring when an employee changed jobs and also transferred an employment related loan from their old employer to their new employer.

Section 554OA prevents a charge under Pt 7A in these circumstances. It applies if the relevant step arises because the new employer acquires a right to a payment of an amount for the whole or part of a loan made to the employee – Section 554OA(1)(a).

It requires the loan to be employment-related at the time it was made – Section 554OA(1)(b).

The loan must also not exceed the threshold for loans given in Section 180(2) ITEPA 2003. Where an employer makes two or more loans, the aggregate of the outstanding balance of those loans is taken to decide whether or not the Section 180 threshold has been exceeded. If it has, the exclusion will not apply.

The employee must also be an employee or prospective employee at the time the new employer acquires the right to repayment of the loan – Section 554OA(1)(d).

The final condition is that there can be no connection between the relevant step and a tax avoidance arrangement.

Relevant steps taken to make payment in respect of a tax liability

ITEPA 2003 – Section 554XA

It is not intended that the making of a payment of a tax liability should give rise to a charge under Pt 7A where the liability arises due to an arrangement in pursuance of which the step is taken.

There are a number of ways in which such a payment could be made. The legislation introduces the concept of a relevant tax payment. A relevant tax payment can be made directly by a third party to HMRC or the third party could make a payment to a person to enable them to pay their own liability.

No charge will arise under Pt 7A provided:

• the relevant tax payment is made directly to HMRC by a third party
• the payment is made to the employee so that they can make a relevant tax payment
• the employee pays HMRC an amount equal to the payment from the third party
• the payment to HMRC is made before the end of the 60th day from the date of the original payment by the third party

The relevant tax payment must be a payment to HMRC in respect of a liability for:

• Income tax
• National Insurnace Contributions (NICs)
• Corporation tax
• Inheritance tax

The liability must arise in relation to the relevant arrangement in respect of which the relevant step is taken. If the payment is in respect of an unrelated liability, the exclusion will not apply.

Any amounts paid as provisional payments of tax in terms of Section 554Z11D (please read Section 554Z11D – provisional payments of tax) can’t be treated as relevant payments of tax.

Finance Act 2016

EIM45705 – Section 554Z2 – just and reasonable apportionment
EIM45760 – Section 554Z8 – consideration given for relevant step

EIM45705 - Employment income provided through third parties: Part 7A income: general

Section 554Z2 ITEPA 2003

If Part 7A Chapter 2 ITEPA 2003 applies by reason of a relevant step, employment income arises as a result.

What income

The value of the relevant step counts as employment income. If the value of the relevant step would count as employment income of more than one person, its value is to be apportioned between those persons on a just and reasonable basis. The amount apportioned in respect of each person is then taken to be the value of the relevant step in relation to that person’s employment income.

Whose income

The general rule is that it counts as employment income of A. Special rules apply if A has died. Please read EIM45865.

What kind of income

It counts as employment income of A in respect of A’s employment with B.

This rule takes priority over the benefits code. So, for example, if the relevant step is the making of an employment-related loan, the loan gives rise to Part 7A income and is not treated as a taxable cheap loan. On the benefits code and loans, please read EIM26101 onwards.

Similarly, this rule takes priority over Part 4 Chapter 3 ITTOIA 2005 (savings and investment income: dividends etc. from UK resident companies etc.)

When

In general, it counts as A’s employment income for the tax year in which the relevant step is taken.

But, if the relevant step is taken before A’s employment with B starts, it counts as A’s employment income for the tax year in which the employment starts. Please also read EIM45720 (residence issues).

How much

For the measure of the income, please read EIM45710.

EIM45760 - Employment income provided through third parties: amount of Part 7A income: consideration given for relevant step: A pays a sum of money

Section 554Z8 ITEPA 2003

Section 554Z8 adjusts the value of certain relevant steps if consideration is given for the value of the relevant step in specified circumstances.

In Section 554Z8, ‘A’ includes any person linked with A, please read EIM45860.

A pays a sum of money as consideration for a relevant step: conditions

If A pays a sum of money as consideration for a relevant step, four conditions must be met if Section 554Z8 is to adjust the value of the relevant step. These conditions are bulleted below.

• the relevant step is a step within one of the provisions listed below
• Section 554C(1)(b) (transfer of asset), please read EIM45060
• Section 554C(1)(c) (employment-related securities etc.), please read EIM45060
• Section 554C(1)(e) (lease), please read EIM45075
• Section 554D (asset made available), please read EIM45080 onwards
• the relevant step does not also involve a sum of money
• the relevant step is for consideration given by A in the form of the payment of a sum of money to the relevant third person P (in Section 554C) from A
• A pays the money before, or at or about, the time the relevant step is taken

Whether transactions take place ‘at or about’ the same time is a question of fact. In practice, ‘at or about’ normally means a few days either side of the date of the relevant step. The leeway allowed could be up to a week; depending on the particular circumstances, it could be longer.

No reduction in the value of the relevant step is made if there is a connection between the payment and a tax avoidance arrangement in relation to payments made on or after 16 March 2016.

A pays a sum of money as consideration for a relevant step: adjustment

If these conditions are met, you adjust Part 7A income in one of two ways.

If Section 554Z4 (residence issues) has not applied, you reduce the value of the relevant step by the amount of the consideration.

If the value of the relevant step was reduced under Section 554Z4 (please read EIM45720), you reduce the value of the relevant step by C x (Z3V — Z4V) / Z3V

where:

• ‘C’ is the amount of the consideration
• ‘Z3V’ is the value of the relevant step as determined under Section 554Z3, please read EIM45710
• ‘Z4V’ is the amount of the reduction under Section 554Z4, please read EIM45720

You make this reduction after any reductions under:

• Section 554Z4
• Section 554Z5 (overlap with earlier relevant step), please read EIM45725
• Section 554Z6 (overlap with certain earnings), please read EIM45735

It can’t reduce the value of the relevant step below nil.