Employment income provided through third parties: meaning of ‘relevant third person’
Sections 554A(7) to (10) and 554Z17(1) ITEPA 2003
One of the conditions for Section 554A to apply is that a relevant third person takes a relevant step.
The general rule
In general, a ‘relevant third person’ means any person other than A or B.
So, a ‘relevant third person’ does not have to be connected with either A or B.
There are three special rules which extend this definition, and there are two exceptions to it.
The special rules
- A acting as a trustee is a relevant third person.
- So is B acting as a trustee. For example, if an employing company is also a trustee of a trust.
Note that, in certain limited circumstances, an employer may be a trustee. For example, a trustee of a charitable trust may take on employees to deliver the business of the charity. As long as there were no circumstances that cast doubt over the genuine nature of the employment, a trustee that is also an employer would not be viewed as acting as a trustee when acting in their capacity as employer.
- B is also a relevant third person if B takes a step within Section 554Z18 or 554Z19.
The group exception
The group exception applies if:
- B is a company, and
- B is a member of a group of companies at the time the relevant step is taken.
To decide whether B is a member of a group, you apply the rules for corporation tax on chargeable gains (see CG45100 onwards) with one modification.
The chargeable gains test is a 75% test. For the purposes of the group exception, you change ‘75%’ to ‘51%’ throughout.
If the group exception applies, another member of B’s group at the time the relevant step is taken is not a relevant third person (unless it is acting as a trustee).
The LLP exception
If B is a limited liability partnership, then a company which is a wholly-owned subsidiary of B at the time the relevant step is taken is not a relevant third person (unless it is acting as a trustee).
‘Limited liability partnership’ has the meaning given by Section 1(2) Limited Liability Partnership Act 2000.
‘Wholly-owned subsidiary’ has the meaning given by Section 1159(2) Companies Act 2006.
Neither of the exceptions applies if there is a connection (direct or indirect) between the relevant step and a tax avoidance arrangement.
On ‘connection between’ a step and a ‘tax avoidance arrangement’, see EIM45855.
Group exception and LLP exception: common circumstances
Especially with larger employers, it is common for parts of remuneration packages to be delivered by a group company or by a wholly owned subsidiary of an LLP that is also an employer.
It will usually be clear that there is no avoidance involved and therefore the group exception or the LLP exception will apply.
The result will be that there will be no Part 7A income and the step in question will be subject to the other employment income provisions in ITEPA 2003 as applicable.
An individual can be a relevant third person. The most common example is likely to be where an individual is a trustee of a trust used in an arrangement.
In other cases, where a relevant step is taken by an individual, remember that in contrast to other categories of person, an individual may take a step in the normal course of domestic, family or personal relationships and not as a means of providing rewards, recognition or loans in connection with employment. Where this is the case, the step will not come through the Section 554A gateway (see EIM45025).