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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: the Section554A gateway: examples: loans

Sections 554A to 554D ITEPA 2003

Here are some examples involving loans.

For other examples also involving EBTs, see EIM45125.

Example 1: loan from employee benefit trust

Victoria works for an employer in the United Kingdom. The employer contributes £100,000 to an EBT established in Jersey by the employer for the benefit of its employees. Having properly considered a request from the employer, the trustees of the EBT make a loan of £30,000 to Victoria’s husband, Albert, in recognition of Victoria’s work over the previous year.

The EBT arrangement meets conditions 1 and 3 in EIM45025.

The trustees are a relevant third person, and the loan is a relevant step within Section 554C.

The arrangement therefore comes through the Section 554A gateway.

The value of the relevant step that counts as employment income of Victoria is the full amount of the sum paid by way of loan, namely £30,000 (see EIM45710).

Example 2: existing loan left in place

An employee received a loan from an EBT in 2009-10. The loan is left in place after 9December 2010.

The original advance does not give rise to Part 7A income, because the Part 7A rules were not in force in 2009-10.

If the loan is left in place, the arrangement does not come through the Section 554A gateway. If all the loan terms and everything about the arrangement remain unchanged, then nobody takes a relevant step.

While the loan remains outstanding, it is a taxable benefit within Part 3 Chapter7 ITEPA 2003. See EIM26101 onwards.

Example 3: loan write-off

The facts are as in Example 2, except that, after 5 April 2011, the EBT writes the loan off.

The EBT arrangement meets condition 1 and either condition 2 or condition 3. And the trustees will be a relevant third person.

But the loan write-off does not come through the Section 554A gateway, because a loan writeoff is not a relevant step in the first place.

You will need to consider whether the loan write-off is taxable either as general earnings or under the benefits code. See EIM26116.

Example 4: extension of repayment period for existing loan

The facts are as in Example 2, except that, after 5 April 2011, the parties extend the repayment period for the loan.

Whether this is a relevant step will depend entirely on the facts of the case.

If the extension amounts to the making of a new loan, then it will be a relevant step within Section 554C(1)(a). If it does not, then it will not.

You need to take all relevant circumstances into account in order to get to the essence of the matter.