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HMRC internal manual

Employment Income Manual

PAYE avoidance: background

Following the removal in 1985 of the upper earnings limit for Class 1 National Insurance Contributions (NICs) payable by employers (secondary NICs), a number of arrangements were used by employers to reward employees in a manner that the employers claimed avoided secondary NICs liability. The basic premise of the arrangements was that remuneration was paid in a non-monetary form to take advantage of the exemption provided by the NICs legislation for payments in kind. The aim was to put cash into the employee’s hands. Typically the employer would provide an asset that could easily, and invariably would quickly, be turned to cash by the employee with minimum risk of the asset falling in value between its acquisition by the employer and subsequent encashment by the employee.

Most of the employers using NIC avoidance arrangements also claimed that the concept of payment in kind within the NICs legislation was analogous to the concept of benefit in kind within the tax legislation. Those employers then argued that the PAYE regulations apply to actual payments and not to the provision of benefits in kind, so payment in that form also avoided the requirement to operate PAYE.

The NICs legislation was amended to prevent NIC avoidance arrangements from working. As schemes were identified assets were specified that would not fall within the meaning of payment in kind. Consequently employers used a variety of assets ranging from unit trusts and gold bars through fine wines to platinum sponge, oriental carpets and financial products.

Tackling PAYE avoidance

Efforts designed to tackle or prevent PAYE avoidance fall into three broad categories:

  • before 25 May 1994 (see EIM12001)
  • between 25 May 1994 (when Finance Act 1994 introduced the tradeable asset rules in Sections 203F to L ICTA 1988) and 5 April 1998
  • from 6 April 1998 (when Finance Act 1998 amended Sections 203F to L, replacing the tradeable asset concept with readily convertible assets).

With regard to NIC avoidance, see the National Insurance Manual NIM04000.

Part 11 Chapter 4 ITEPA 2003

Sections 696 and 702 ITEPA 2003 have replaced Section 203F ICTA 1988 and deal with payment in readily convertible assets (see EIM11855).