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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: the Section 554A gateway: examples: various (2)

Sections 554A to 554D ITEPA 2003

Here are some more examples.

Example: termination payment

An employer which has set up an EBT makes one of its employees (A) redundant. The trustees of the EBT make a termination payment within Part 6 Chapter 3 ITEPA 2003 (see EIM12800 onwards) to A.

If the payment is wholly within that Chapter, then it will not satisfy either condition 2 or condition 3 in EIM45025 (Section 554A(1)(b) and (c)) and so the arrangement will not come through the Section 554A gateway.

In other words, ‘pure’ termination payments and the Section 554A gateway are mutually exclusive.

On termination payments and benefits, see EIM12800 onwards.

All relevant circumstances are to be taken into account in order to get to the essence of the matter. See EIM12805 (finding the facts).

Example: shares in family company

Xavier was the founder of a successful trading company, PQR Ltd, in which he owned 90% of the shares. He settled his shares on discretionary trusts for the benefit of his children, their spouses and their descendants. Xavier died some years ago.

Xavier’s children, Yves and Zita, are now in their late 30s. Yves is the managing director of PQR Ltd. Zita is also employed by PQR Ltd, but, as she has established her own independent business, she only works one day a week for PQR Ltd.

The discretionary trustees appoint their shares in PQR Ltd to Yves and Zita, in the ratio 9 to 1.

Does this arrangement come through the Section 554A gateway?

Does it make any difference that Yves receives more shares than Zita?

Principles

The answers to those questions will depend on the facts of the particular case. There are two key principles here.

  • It is quite normal for wealthy parents to pass their assets down the generations. And discretionary trusts are often used for this purpose. Entering into such transactions for reasons of estate planning will not, of itself, take an arrangement through the Section 554A gateway.
  • But, if the estate planning is combined with remuneration planning, then the arrangement will come through the Section 554A gateway.

Section 554A(12) provides that all relevant circumstances are to be taken into account in order to get to the essence of the matter. So, you need to establish the full facts.

Questions

Questions like these are likely to be worth asking.

  • Why did Xavier put his shares into the trust?
  • Why did the trustees decide to give shares to Yves?
  • Why did the trustees decide to give shares to Zita?

With each of these questions, you need to find out what the alternatives were and why this course of action was preferred.

  • Why did the trustees decide to give Yves more shares than Zita?
  • How did the trustees decide how much to give each beneficiary?
  • What has the remuneration policy of PQR Ltd been in relation to (a) Yves and (b) Zita?
  • Is there any connection between the company’s remuneration policy and the trustees’ decision to appoint shares to Yves?
  • Is there any connection between the company’s remuneration policy and the trustees’ decision to appoint shares to Zita?