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HMRC internal manual

Employment Income Manual

Pt 7A ITEPA 2003: CCG: relevant transaction

ITEPA 2003 – sections 554AA(1)(c) and 554AB

For any set of arrangements to pass through the CCG, it is necessary for the company to enter into a relevant transaction. This is defined in section 554AB.

The tax avoidance schemes marketed to owner managed close companies generally involved the company settling a sum or an asset into a trust. The beneficiaries of the trusts set up often included family members or suppliers to the company. The trusts excluded employees from being beneficiaries but did give them the power to make loans to employees. The trusts were set up simply as a vehicle for a payment to be made to the employee or director.

The CCG therefore includes a requirement that the employing company enters into a relevant transaction which facilitates the arrangement in some way, including the provision of funding. It applies to transactions entered into by close companies only. A relevant transaction is a separate concept from a relevant step.

The provision is carefully targeted  – there are a number of transactions which are specifically excluded and these are detailed at EIM47230.

A relevant transaction can take a number of forms, but will always involve or relate to a relevant third person.

In its simplest form, the company pays a sum of money to a relevant third person.  It can also transfer an asset to a relevant third person or it can take a step which enables a third person to acquire securities, including interests in and options on securities.  Where securities are involved, it is necessary to refer to the definitions of securities in section 420 ITEPA 2003 and to read section 421B(2)(a) to interpret what is meant by “acquire”.

The employing company will also enter into a relevant transaction if it acquires a right to payment of money or to a transfer of assets. This is provided for by section 554AB(2)(b) and is a slightly different concept to other relevant transactions since these involve the employer directly giving value to an arrangement. For section 554AB(2)(b) to apply it is B who receives the right to a payment or asset transfer. There has to be a connection between the acquisition of the right and either a payment, by loan or otherwise, or a transfer of assets, to a relevant third person.

The employing company also gives value to a third person and enters into a relevant transaction if they write off or release the whole or part of a loan made to that person. For these purposes loans include any form of credit and any payments which are purported to be made by way of a loan.  If the employer writes off the whole or part of an acquired right of a kind listed in section 554AB(2)(b) as described above, that is also a relevant transaction.

An employer also enters into a relevant transaction if they make a sum of money or asset available for use as security for either a loan to be made to a relevant third person or otherwise for the meeting of a liability or the performance of any undertaking which a relevant third person has or will have. This is provided for by section 554AB(2)(f).

For the purposes of the above paragraph, section 554AB(5) makes it clear that the sum of money or asset can be made available in any way, however informal. It makes no difference if the relevant third person has no legal right to the money or asset.  It also is irrelevant if the money or asset is not actually used as mentioned.

Section 554AB(2)(g) states that the employer enters into a relevant transaction if they grant a lease of any premises with an effective duration likely to exceed 21 years to a relevant third person. Section 554AB(7) requires that, if there are circumstances which make it likely that the original lease will be extended for any period, the effective duration of the original lease is to be determined on the assumption that it will be extended.

This principle is further extended in section 554AB(8).  If the relevant third person, the employee or director, or someone linked with them is entitled to a grant of a later lease, the duration of the original lease is treated as continuing until the end of the later lease. This is also true if the same people are likely to become entitled to a later lease or otherwise to be granted one.