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HMRC internal manual

Business Income Manual

Specific deductions: employee benefit trusts: general-purpose EBTs: deductions for contributions: computing adjustments: example

General Purpose EBTs: Timing of Deductions for Contributions made or to be made on or after 1 April 2017 (CT) or 6 April 2017 (IT): Computing Adjustments: Example

S38 Income Tax (Trading and Other Income) Act 2005, S1290 Corporation Tax Act 2009

This example shows how to compute the amount of deductions for employee benefit contributions made, or to be made, on or after 1 April 2017 (CT) or 6 April 2017 (IT), which are:

  • Potentially allowable in computing the employer’s taxable profits for a period to the extent that qualifying benefits or qualifying expenses are paid during the period or within nine months of its end; or
  • Disallowed in computing the employer’s taxable profits for a period to the extent that qualifying benefits or qualifying expenses are not paid within nine months of the end of the period; and
  • Potentially allowable as a deduction in computing the employer’s taxable profits for a later period in which qualifying benefits are paid.

Example

A corporate employer’s accounting date is 31 December.

Employer contributes £200,000 to an EBT in August 2018.

In September 2018 the EBT pays a bonus of £5,000 to an employee of the employer and income tax and NICs on the bonus are paid in February 2019.

 In December 2018 the EBT loans £65,000 to an employee of the employer.  This constitutes employment income under Part 7A ITEPA 2003.  It is only after HMRC challenges the employer’s failure to pay over the income tax and NICs due on the income that the income tax and NIC is paid in July 2021.

In August 2021 the EBT makes a loan of £50,000 to an employee of the employer.  This is treated as employment income under Part 7A ITEPA 2003, and the income tax and NICs due on the income are paid in September 2021.

The balance of £80,000 remains unallocated and unearmarked in the EBT until March 2024 when the EBT makes a loan of £80,000 to an employee of the employer.  This is treated as employment income under Part 7A ITEPA 2003, and the income tax and NICs due on the income are paid in April 2024.

 

How the transactions should be treated for tax purposes:

APE 31/12/18:  of the £200,000 contribution only £5,000 is an allowable deduction.   This is because:

  • £5,000 of qualifying benefits were provided within nine months of the end of the accounting period (S1290(2)(a)), and the income tax and NIC due on the qualifying benefits was paid within twelve months of the end of the accounting period ended 31/12/18 (the period in which the deduction would be allowable) (S1290(3D)). 
  • Although £65,000 of qualifying benefits were provided within nine months of the end of the accounting period (S1290(2)(a)), no deduction is allowed for this amount because the income tax and NIC due was not paid within twelve months of the end of the period in which relief would otherwise be allowable (APE 31/12/18) (S1290(2B)).

 

APE 31/12/21:  a deduction of £50,000 is allowable for CT purposes because

  • qualifying benefits of £50,000 have been provided during the accounting period out of contributions that were previously disallowed (S1290(3)(a)) AND
  • the income tax and NICs due on the qualifying benefits have been paid within 12 months of the end of the accounting period ended 31/12/21 (s1290(3B)),  AND
  • the deduction is being claimed in APE 31/12/21 which does not start more than 5 years after the period in which the contribution was made (S1290(1A))

APE 31/12/24:  no deduction is allowable for CT purposes for the remaining £80,000, either in this period or any subsequent period.  This is because although qualifying benefits have been provided during the accounting period (S1290(3)(a)) and the income tax and NIC due has been paid within 12 months of the end of the accounting period,  APE 31/12/24 starts more than five years after the period in which the contribution was originally made (S1290(1A)).