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HMRC internal manual

Employment Income Manual

Pt 7A ITEPA 2003: CCG: relationship between relevant transaction and relevant arrangement

ITEPA 2003: section 554AA(1)(d)

In order for the CCG provisions to apply, it has to be reasonable to suppose that the relevant transaction is entered into, wholly or partly, in pursuance of the relevant arrangement or that there is some other connection between them.

In the marketed avoidance close company cases, the objective of the arrangement is to provide an employee with a sum of money or an asset. In order to do this the schemes which were sold involved the employing company setting up an arrangement with a third party. This generally required the company to settle a sum of money or asset into a trust. Where the trust then makes a loan to the employee, a relevant step is taken by someone other than the employing company. In these circumstances it is reasonable to suppose that the relevant transaction was entered into to facilitate the relevant arrangement and the CCG provisions are satisfied.

There can be arrangements which are not set up by the employer and which do not trigger the CCG provisions. An employee may settle their shares in the employing company into a trust set up for their benefit independently of any requirements of the company. Since the employee is a beneficiary, this is an arrangement which is concerned with providing A-linked payments, benefits or loans but the employing company has had no involvement in the trust. There has been no relevant transaction at the point the employee settles their shares so if nothing else happens, this will be a relevant arrangement but the CCG will not apply to any payments or benefits from it.

If the employer decides to settle an amount of profit unrelated to the employee’s shareholding into the employee’s trust, it is necessary to consider whether it is reasonable to suppose that arrangement is at least partly concerned with the provision of A-linked payments. It is also necessary to consider if the transaction is entered into in pursuance of the relevant arrangement or whether there is some other connection between them.

The original trust may never have been intended to be used for such purposes. It is difficult to state that any such settlement as described above is entered into in pursuance of the original arrangement. However HMRC interprets “arrangement” widely and it is HMRC’s view that a decision by the employing company to use the trust to settle a sum of money establishes a new arrangement. The arrangement now involves the employer using the employee’s own trust to settle an amount of money.  It changes from being a relevant arrangement which does not satisfy the CCG conditions to becoming a relevant arrangement which is partly concerned with the provision of A-linked payments, benefits or loans and which will satisfy the conditions of the CCG.

Since the employer has decided to use the trust as an integral part of providing a sum of money to the employee, a relevant arrangement has come into existence which is connected to the relevant transaction.

Where a close company enters into a transaction with a third party, it is not inevitably a transaction which is connected to a relevant arrangement.  In the scenario above, the employing company may also pay dividends into the employee’s trust based on the employee’s shareholding.  These are excluded transactions which are discussed in EIM47230. Such payments are not relevant transactions so even if a relevant arrangement has led to the receipt of sums of money or assets which are relevant transactions, the payment of the dividends into the trust and any subsequent distribution to the employee will not be connected with the relevant arrangement.

Where an unconnected third party has settled sums or assets into the employee’s trust and these are subsequently passed on by the trustees to the employee, it is clear that such settlements into the trust and payments from the trust are not connected to any relevant transactions involving the employing company. The trust may have become a relevant arrangement but such arm’s length transactions not involving the employer are not relevant transactions.