PAYE140025 - The PAYE discretion at s684(7A)(b) ITEPA 2003 and contractor loans avoidance schemes: contents: Category 3

Category 3: Considerations for offshore and onshore trading income scheme used after 2014 (when applying the PAYE discretion to the Loan Charge)

Where an officer of HMRC may consider exercise of the PAYE discretion
Where an officer of HMRC may not exercise the PAYE discretion
How use of the PAYE discretion may work in practice  

Where an officer of HMRC may consider exercise of the PAYE discretion

Where applicable, an officer can consider exercise of the PAYE discretion in relation to the Loan Charge (Category 3) at the same time as they consider the exercise of the PAYE discretion in relation to the original loans (Category 2). 

Where an individual is not employed and provides services to an entity based in the UK (the End Client) via a third party under the terms of a contract, the current, post-2014 agency rules may mean that the entity which contracts directly with the End Client (usually the UK Agency) could be required to operate PAYE on the Loan Charge in respect of amounts paid to the individual. 

Where there is a UK Agency contracting with the End Client, that UK Agency should have taken steps to determine whether the remuneration of the individual was being taxed as employment income elsewhere in the supply chain under the requirements of Chapter 7 of Part 2 ITEPA 2003. The UK Agency would need to consider whether it had an obligation to operate PAYE, including on the Loan Charge. 

However, the requirement to operate PAYE on the Loan Charge occurs at the point a ‘relevant step’ is taken, which is deemed to be taken on 5 April 2019. The UK Agency may not have had an awareness of its obligation to operate PAYE on the Loan Charge in respect of the loans made by another entity. 

For various reasons the UK Agency may have difficulty becoming aware of its Loan Charge PAYE obligations

  • the UK Agency was not made aware of the presence of the scheme and the involvement of loans particularly where there are a number of intermediaries between the UK Agency and whichever entity made loans to the individual
  • the individual did not satisfy the requirements to inform the UK Agency of the outstanding balance of the loan
  • the UK Agency may not have been sufficiently informed of the identity of the parties in the contractual chain to be able to properly make enquiries in relation to any exposure it had

In considering whether to exercise the PAYE discretion HMRC officers must consider all relevant facts and this guidance. 

The HMRC officer may be satisfied that it is reasonable to conclude that due to the structure of the scheme the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge.

Where a Category 3 scheme has been used, the following criteria need to be met if an officer of HMRC is to consider exercising the PAYE discretion on the Loan Charge

  • the individual has used a trading income scheme (onshore or offshore) where the agency rules apply, and
  • the Loan Charge applies, and any outstanding loan amounts received by the individual may be taxable as employment income and, as a consequence, the PAYE Regulations may apply, and
  • an HMRC officer considers it is reasonable to conclude that due to the structure of the scheme the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge

HMRC does not need to know the identity of the UK Agency to be able to use the PAYE discretion, provided HMRC has sufficient information about the way the scheme operates so that it is reasonable to conclude that it was not aware of its obligation to operate PAYE on the Loan Charge.

It is not necessary to test the actual motivation and knowledge of entities or persons

  • that HMRC does not know about, or
  • that have ceased to exist, or 
  • where the evidence HMRC holds is such that it reasonably demonstrates that the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge. 

Where an officer of HMRC may not exercise the PAYE discretion

An officer of HMRC may not generally consider exercise of the discretion where

1. HMRC possesses evidence that the UK Agency was aware of its obligation to operate PAYE on the Loan Charge. A view of this may be established using evidence which shows

  • the UK agency was aware of the presence of the scheme and the involvement of loans 
  • the individual satisfied their requirements to inform the UK Agency of the outstanding balance of the loan 
  • the UK Agency was informed of the identity of all parties in the contractual chain  

2. HMRC is aware the individual is, or immediately before joining the scheme was, a company director of the UK Agency.

How use of the PAYE discretion may work in practice

The officer should check the individual’s customer record to see what information HMRC has on file, or has obtained through investigating their use of the scheme to help them determine whether

  • HMRC has sufficient information about how the scheme operated in order to determine that the scheme is a trading income scheme where the agency rules apply and that the entity that contracts directly with the End Client (usually the UK Agency) might be liable to comply with the PAYE Regulations in relation to the Loan Change. This will typically be as a result of an individual claiming the agency rules apply and HMRC agreeing
  • it is reasonable to conclude that the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge.
  • the individual is, or immediately before joining the scheme was, a company director of the entity that contracts directly with the End Client (usually the UK Agency)

As a guide, the following factors might be relevant in determining whether or not it is reasonable to conclude that the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge

  • the presence of one or more intermediaries between the UK Agency and the individual, particularly where there is evidence that at least one of the intermediaries is complicit in the scheme
  • any correspondence or promotional material that suggests that the UK Agency has been led to believe that PAYE was operated elsewhere in the supply chain
  • whether an individual satisfied the requirements to inform the UK Agency of the outstanding balance of any loans
  • whether the UK Agency was aware a trading income contractor loans scheme had been used and which entity made the loans
  • any other factors which might indicate that the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge.

It is possible that that there may be a connection (such as common directorship or shareholding) between the UK Agency and promoter, or other scheme entity which could indicate awareness of or complicity in the scheme. If so, then the officer may conclude that the agency may have been aware of its obligation to operate PAYE on the Loan Charge and therefore it may be inappropriate to exercise discretion.

The officer should consider all the facts and available evidence when making a decision; the above lists are not exhaustive.