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HMRC internal manual

Employment Income Manual

PAYE: special type of income: a payment that enhances the value of an existing asset

Section 697 ITEPA 2003

In some PAYE avoidance schemes, instead of transferring an asset to an employee, the employer enhanced the value of an existing asset already owned by the employee. For example, where an employee owned a life assurance policy, the employer paid an additional premium into that policy to increase its value.

The enhancement of the value of an existing asset may be subject to PAYE under Part 11 Chapter 2 ITEPA 2003 if the premium was paid to satisfy a legal entitlement to money (see EIM12002). Alternatively, and usually, the employer will be required to operate PAYE by virtue of section 697 ITEPA 2003.

Section 697 applies if:

  • any PAYE income of an employee is provided in the form of anything enhancing the value of an asset in which the employee or a member of his or her family or household already has an interest and
  • the asset, in its enhanced state, would be treated as a readily convertible asset if provided in that form at the time of enhancement (see example EIM11861).

Meaning of enhancement

Enhancing the value of an asset includes:

  • providing any services by which the asset or any right or interest in it is improved or otherwise made more valuable
  • providing any property that adds to the asset, so improving the asset or otherwise increasing its value
  • providing any other enhancement by applying money or property to improve the asset or to secure an increase in its value or the value of any right or interest in it.

But the following items that may enhance the value of an asset are excluded for the purposes of section 697:

  • any shares acquired by the employee under an approved SAYE option scheme, an approved CSOP scheme or an approved profit sharing scheme
  • any right over or interest in shares obtained or acquired under such a scheme
  • any shares acquired by the employee as a result of the exercise of a right (option) over shares, where the right was obtained before 27 November 1996 if the shares are own company shares - own company shares are shares in a company that is the employer (the employer company), has control over the employer company, or either is or has control of a company that is a member of a consortium owning the company that is either the employer company or has control over the employer company.

Amount subject to PAYE

The value of the enhancement is subject to PAYE.