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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income provided through third parties: overview, general approach: contents

Part 7A ITEPA 2003, Schedule 2 FA 2011

Overview
General approach
Contents

This page:

  • gives an overview of the tax legislation on employment income provided through third parties,
  • sketches the general approach you should take to cases, and
  • sets out the structure of this guidance.

Overview

The tax legislation on employment income provided through third parties tackles arrangements which:

  • involve third parties (including trusts or other vehicles used to reward employees), and
  • seek to avoid or defer the payment of income tax.

The legislation also deals with pension schemes which are not registered pension schemes.

Broadly speaking, if third party arrangements are used to provide for what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former, or future employment, then an income tax charge arises.

The rules contain detailed exclusions. These prevent the legislation from catching certain arrangements. Generally, the exclusions are targeted at arrangements which are not tax avoidance arrangements.

If the legislation applies, it deems an amount to count as employment income.

The amount that counts as employment income is specifically brought within the scope of PAYE.

Special rules deal with (for example) the interaction with the remittance basis.

The legislation applies to 2011-12 and later tax years. There are transitional rules. These include anti-forestalling rules which cover certain transactions carried out in the period from 9December2010 to 5 April 2011 inclusive.

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General approach

Third party?

First, although specialists often refer to it as the ‘disguised remuneration’ regime, Part 7A ITEPA 2003 is headed ‘Employment income provided through third parties’. Therefore, if you are looking at a case in which the employer is providing something directly to the employee, and there is no third party involved, then Part 7A will not apply.

There are two exceptions to this general rule.

Part 7A can apply where the employer is acting as a trustee. But this situation will be unusual.

Part 7A can also apply as a result of steps taken by an employer when there is an undertaking that contributions will be paid to a relevant third person comprising an unregistered pension arrangement.

Arrangement through Section 554A gateway?

An arrangement will not give rise to Part 7A income unless it ‘comes through the Section 554A gateway’ and thus meets the conditions for Part 7A to apply.

There are three fundamental questions you need to ask at this point.

  1. First, is there an arrangement which might come through the Section 554A gateway?

If the answer to that is No, then the situation you are considering cannot give rise to Part 7A income.

  1. Second, if there is such an arrangement, has a ‘relevant third person’ taken a ‘relevant step’?

If the answer to that is No, then the arrangement has not come through the Section554A gateway and has not given rise to Part 7A income.

  1. Third, is it reasonable to suppose that the ‘relevant step’ is connected with the arrangement in question?

If the answer to that is No, then the arrangement has not come through the Section554A gateway and has not given rise to Part 7A income.

Exclusions?

If an arrangement has come through the Section 554A gateway, that does not necessarily mean that it has given rise to Part 7A income.

Part 7A does not include a general overriding purpose test. Instead, it has a number of specific exclusions. These exclusions cut down the scope of Part 7A considerably. Check carefully to see if at least one of the exclusions applies.

For example, there is an exclusion whereby no step taken under a registered pension scheme can give rise to Part 7A income.

Part 7A income

If the arrangement you are looking at has come through the Section 554A gateway, and is not covered by any of the exclusions, then it will give rise to Part 7A income.

The Part 7A income:

  • counts as employment income of the employee, and
  • is deemed to be PAYE income paid by the employer.

The general rule is that the amount of the Part 7A income will be the value of the relevant step. But there are rules which in certain circumstances will adjust this value, possibly down to nil.

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Contents

  1. EIM45001
    Summary of structure of guidance
  2. EIM45005
    Requests for clearance
  3. EIM45010
    Glossary
  4. EIM45025
    The Section 554A gateway
  5. EIM45030
    All the relevant circumstances
  6. EIM45035
    Meaning of ‘relevant third person’
  7. EIM45045
    Group exception: examples
  8. EIM45050
    LLP exception: examples
  9. EIM45055
    How Sections 554B to 554D are related
  10. EIM45060
    Overview
  11. EIM45065
    Payment of sum of money
  12. EIM45070
    Employment income provided through third parties: relevant steps: Section 554C: sum of money or asset made available
  13. EIM45075
    Grant of lease
  14. EIM45080
    Making asset available for relevant person to benefit from
  15. EIM45085
    Events before 6 April and after 5 April 2011: examples
  16. EIM45090
    ‘Relevant person’ in Sections 554C and 554D
  17. EIM45095
    Section 554B: earmarking etc of sum of money or asset
  18. EIM45100
    Relevant third person not aware of all the facts
  19. EIM45105
    Shares from various sources
  20. EIM45106
    Using options to hedge share awards
  21. EIM45110
    Section 554B: meaning of ‘earmarked’ in Section 554B(1)(a)
  22. EIM45115
    Relevant step within Section 554B, later relevant step within Section 554C or 554D, exclusions within Section 554E onwards
  23. EIM45120
    Examples: loans
  24. EIM45125
    Examples: EBTs
  25. EIM45130
    Examples: various
  26. EIM45131
    Examples: various (2)
  27. EIM45135
    Examples: dividends
  28. EIM45140
    Overview
  29. EIM45145
    Conditions
  30. EIM45150
    Earmarking etc by employers etc
  31. EIM45155
    Provision of security by employers etc
  32. EIM45160
    Transition
  33. EIM45165
    Examples
  34. EIM45200
    Employment income provided through third parties: exclusions: general
  35. EIM45300
    Employment income provided through third parties: exclusions: share schemes etc
  36. EIM45600
    Employment income provided through third parties: exclusions: retirement benefits etc
  37. EIM45700
    Employment income provided through third parties: Part 7A income
  38. EIM45800
    Employment income provided through third parties: remittance basis
  39. EIM45900
    Employment income provided through third parties: transitional rules