# Section 554Z11C: identifying overlapping sums or assets and applying relief: example 2 – two or more charges – Chapter 2 overlap charge paid

### ITEPA 2003 – sections 554Z11C(1) – (6)

The provisions of section 554Z11C(1)-(6) can be used where there is overlap between more than one earlier charge. Where this happens it is necessary to consider which charge is the Chapter 2 overlap charge and which charge is the earlier charge to give relief across all charges. It may be necessary to have 2 years which contain different Chapter 2 overlap charges in order to fully give relief.

The reason for this is that section 554Z11C allows an earlier charge paid amount to be set against a Chapter 2 overlap charge and a Chapter 2 paid amount to be set against an earlier charge. Where 2 or more earlier charges exist, there is no provision to set an earlier charge paid amount against a different earlier charge.

To ascertain how relief is given in these circumstances, it is necessary to firstly consider which charge is being paid. This is required to decide which year’s liability contains the Chapter 2 overlap charge and which year contains the earlier charge. This may affect which sums or assets are considered to be P and Q.

#### Example

An amount of £400,000 was originally contributed to an EBT in 2008-2009. From this sum an amount of £200,000 was earmarked in 2016-2017. An amount of £150,000 was then loaned to the employee from the earmarked amount in 2017-2018. This is sum or asset P which has given rise to the Chapter 2 overlap charge. Sum or asset Q needs to be considered in terms of each charge.

2008-2009 - earnings charge on £400,000 (sum Q2) contribution to EBT - resulting in 40% tax charge of £160,000

2016-2017 - relevant step on £200,000 (sum Q1) earmarking charge - resulting in 45% tax charge of £90,000

2017-2018 - relevant step on £150,000 loan (sum P) - resulting in Chapter 2 liability at 45% of £67,500

If a payment is made in relation to the 2017-2018 liability, this will be the year whose liability contains sum or asset P and the Chapter 2 overlap charge. The liabilities for 2016-2017 and 2008-2009 will both contain earlier charges.

The Chapter 2 tax liability is £67,500 in 2017-2018. The liability is based on income of £150,000 which was included in the previous 2 charges to tax. The overlapping amount is £150,000 and was brought fully into charge in 2017-2018. The Chapter 2 overlap charge is 100% of the Chapter 2 liability and is £67,500 in cash terms.

The first overlap in descending order exists between the liabilities for 2017-2018 and 2016-2017 and it is necessary to determine the earlier charge in relation to the 2016-2017 liability.

It is necessary to identify how much of the income which gave rise to the 2017-2018 charge is included in the 2016-2017 charge.

The overlapping income is £150,000 (sum P) out of total income charged of £200,000 (sum Q1). The overlap covers 75% of the income charged in 2016-2017. The charge for that year was £90,000. Since 75% of that relates to overlapping income, the amount of the earlier charge for 2016-2017 is £90,000 × 75% = £67,500.

The second separate earlier charge exists between the liabilities for 2017-2018 and 2008-2009. It is necessary to identify how much of the 2017-2018 charge is included in the 2008-2009 charge.

The overlap in terms of the original charge for 2008-2009 is (£150,000 (sum P) ÷ £400,000 (sum Q2)) × 100 = 37.5%.

The earlier tax liability for 2008-2009 was £160,000. Since 37.5% of this relates to the amount which overlaps with the liability on the loan, the earlier charge for 2008-2009 is £160,000 × 37.5% = £60,000.

In 2018-2019 a payment is made for the entire Chapter 2 tax liability of £67,500. This will clear the liability for this year in full but since it relates to income which overlaps with the earlier years liabilities, it can also be used as a payment on account of these charges.

The payment can be used against the 2016-2017 liability. This was £90,000 in total but the earlier charge in relation to this year was £67,500. The payment therefore reduces the liability to £22,500.

The payment of £67,500 can also be used against the liability for 2008-2009. The earlier charge for this year was £60,000 so the payment will cover this amount in full. There is however £7,500 remaining of the Chapter 2 overlap charge. This can be set against any late payment interest in respect of the earlier charge.