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HMRC internal manual

Employment Income Manual

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

Sections 554A to 554D ITEPA 2003

Example: salary paid through a payroll services company
Example: expenses payments paid through a payroll services company
Example: medical insurance
Example: third party incentive award scheme
Example: relevant person in relation to more than one current, former or prospective employee
Example: pension sharing on divorce

Here are some miscellaneous examples.

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Example: salary paid through a payroll services company

An employer contracts with a third party payroll services company to make monthly salary payments to its employees.

There is more than one reason why the Part 7A rules do not apply. The main one is that the employees’ salary is already taxed as earnings from the employment (seeEIM00511) and, as explained in EIM45735, this takes priority over Part 7A ITEPA 2003.

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Example: expenses payments paid through a payroll services company

An employer contracts with a third party payroll services company to make expenses payments to its employees.

To the extent that the expenses payments are normal business expenses, the Part 7A rules will generally not apply. Again, there is more than one possible reason. Expenses payments that have no reward or recognition element and that do no more than reimburse actual business expenditure do not come through the Section 554A gateway (see EIM45025). In other cases, business expenses paid under a commercial arrangement with a payroll services company are likely to meet the conditions for the exclusion for transactions under employee benefit packages (see EIM45215).

If the expenses payment relates to private expenses, then it should be taxable as earnings from the employment in any case (seeEIM00511) and, as explained in EIM45735, this takes priority over Part 7A ITEPA 2003.

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Example: medical insurance

An employer makes medical insurance arrangements to cover its employees.

This arrangement will meet condition 1 and either condition 2 or condition 3 in EIM45025 (Section 554A(1)(a) to (c)).

Premiums paid by the employer to the insurer will not take the arrangement through the Section 554A gateway, because the employer is not a relevant third person.

A third party insurance company will be a relevant third person, and the payment of a claim will be a relevant step within Section 554C(1)(a).

But insurance is against risk, not certainty. Therefore, if the insurer meets claims under the medical insurance policy, then, even though the fact of the claim has become certain by that time, it is unlikely that condition 5 in EIM45025 (Section 554A(1)(e)) will be met. So, the arrangement is unlikely to come through the Section 554A gateway.

Even if it does, it may come within the exclusion for transactions under employee benefit packages (Section 554G: see EIM45215 onwards). This will depend on the facts of the case.

For present purposes, it makes no difference whether the employer contracts with a third party insurance company or sets up a medical benefit trust to provide a form of protection akin to insurance cover as discussed in EIM21772.

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Example: third party incentive award scheme

Sometimes a third party makes payments to employees of other employers to reward them for product placement/effective sales performance etc. Broadly, incentive award schemes will entail the provision of cash awards or non-cash awards.

Cash awards of this sort will in any case be taxable as earnings within Section 62 ITEPA 2003 (seeEIM00511) and this will take priority over any Part 7A charge (see EIM45735).

However, there may also be non-cash awards for which the employer may agree administrative arrangements with HMRC (see EIM11200 onwards).

The non-cash awards will not necessarily rank as earnings within Section 62.

If the award itself is one that is not taxable as earnings within Section 62, you need to consider whether it comes within one of the relevant steps in Section 554B, 554C or 554D. If it does, you then need to consider whether the exclusion for employee benefits packages in Section 554G will apply (see EIM45215).

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Example: relevant person in relation to more than one current, former or prospective employee

B Ltd is an owner-managed business. The employees of B Ltd are all siblings. BLtd puts £250,000 into an EBT.

The employees’ aged mother, Z, is in a nursing home. She has never herself been an employee of B Ltd.

The trustee of the EBT (a relevant third person) makes payments of £3,000 a month to Z.

Z is a relevant person in relation to each of the employees.

The monthly payments are relevant steps within Section 554C(1)(a). And so condition 4 in EIM45025 (Section 554A(1)(d)) is met.

But it does not follow that each payment gives rise to Part 7A income for each and every one of the employees and the same amount is thus taxed several times over.

Conditions 2 and 3 in EIM45025 (Section 554A(1)(b) and (c)) concerning the relevant arrangement have to be met in relation to a particular current, former or prospective employee.

Therefore, you have to consider condition5 in EIM45025 (Section 554A(1)(e)) in relation to the particular current, former or prospective employee under review. And you must take into account all relevant circumstances in order to get to the essence of the matter.

Condition 5 is that it is reasonable to suppose that, in essence:

  • the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or
  • there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.

In a case like this, you can rule out the possibility that there is no current, former or prospective employee in relation to whom condition 5 is met. There will be at least one current, former or prospective employee in relation to whom condition 5 is met.

You may also be able to establish, on the facts, that there are some current, former or prospective employees in relation to whom condition 5 is not met.

If condition 5 is met in relation to more than one current, former or prospective employee, then you need to consider each of them separately. In the case of each of them, the essence of the matter will be that:

  • the whole of the relevant step is not taken in relation to that individual, but
  • part of the relevant step is.

The value of the relevant step will then need to be apportioned among them on a just and reasonable basis.

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Example: pension sharing on divorce

The trustees of an EFRBS have already earmarked a sum of money or asset in favour of an employee, Henry.

This was a relevant step within Section 554B. Whether the arrangement came through the Section 554A gateway will depend, in particular, on when the relevant step was taken.

The court makes a pension sharing order in connection with proceedings for Henry’s divorce from Katharine, who is not employed by employer B. The funds are accordingly transferred to a sub-trust in Katharine’s favour.

Katharine is still ‘linked’ to Henry by virtue of having been connected to Henry. See EIM45860.

In these circumstances, this change in the ultimate intended beneficiary is not, itself, a new act of earmarking. The status of the funds remains unchanged.

See also ‘Example: earmarking followed by clarification’ in EIM45125.