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HMRC internal manual

Employment Income Manual

PAYE avoidance: pre-existing entitlement to a monetary amount

Before the introduction of Section 203F to L ICTA 1988 on 25 May 1994 (now Part 11 Chapter 4 ITEPA 2003), PAYE was due on an award of assets only where an employee was legally entitled to remuneration of a monetary amount.

For directors, legal entitlement is usually established by reference to the company’s memorandum and articles of association (particularly Article 82 Table A of the 1985 Companies Regulations), together with the minutes recording the resolution adopted at the company meeting at which the remuneration was awarded.

In the case of employees who are not directors, entitlement must be established from a contract of employment (see EIM42300).

Monetary amount

Once it is established that an employee was legally entitled to the remuneration, PAYE is due if the entitlement is to a monetary amount but not if the entitlement is only to assets. This will depend on the wording used in the resolution awarding the bonus and reflected in the minutes of the meeting at which the remuneration was voted.

For example, a resolution stating that a director was entitled to “10 gold bars” establishes entitlement to assets, but not to any monetary equivalent, and PAYE is not due. Similarly, a resolution entitling an employee to “£100,000 in the form of 10 gold bars”, whilst specifying the value of the gold bars, only establishes entitlement to 10 gold bars. If the employer fails to make payment by the assignment of the gold bars, the director may take action against the employer. But any judgment would only either compel the employer to provide the gold bars or require payment of damages to compensate for the failure. Alternatively, if a resolution states that a director is entitled to a bonus of £100,000 but subsequently the employer agrees with the director to make payment by way of the assignment of 10 gold bars to the value of £100,000, then the entitlement is to the monetary amount. The satisfaction of that monetary entitlement by transfer of assets (the gold bars) does not alter the underlying entitlement to money, which represents a payment of assessable income under Section 203(1) ICTA 1988 (now Section 684 ITEPA 2003).

An appeal on this subject has been heard by the Special Commissioners (see Paul Dunstall Organisation Ltd v Hedges, EIM12003).

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)