Saving grace

Nearly all directors who own a profitable limited company want the same thing - to reduce their corporation tax and to be able to take money out of their business without triggering income tax or national insurance. With personal tax rates rising, this is as true today as it always has been.

The use of trusts, such as employer financed retirement benefit schemes and employment benefit trusts to hold company money, and friendly trustees happy to ‘invest’ in loans to directors, seemed to allow these clients to have their cake and eat it. An interest-free loan, with the client simply paying benefit-in-kind tax on the interest that would have otherwise been paid, was certainly going to have to come to an end at some point.

HMRC had repeatedly made announcements that it intended to legislate against these types of arrangements, and have created the term ‘disguised remuneration’ to describe a wide range of scenarios where a client was trying to seek reward from an employer without paying the full rate of PAYE tax and national insurance contributions.

With 26 pages of legislation and 112 pages of explanatory notes, this is going to be a complex consultation process. Although consultation is much appreciated, there are many industry professionals who have concerns over the true meaning behind a number of the proposals. Where there is a lack of clarity, or serious concerns over ‘intent’ against ‘interpretation’, HMRC has been asked to consider comments and respond before the intended implementation date of 6 April 2011.

The proposals talk about ‘relevant steps’ and ‘relevant individuals’ which are a lot wider in scope than the current rules, since they include any person connected with the employee or ex-employee and any other person if the third party takes the step on the employee’s behalf or at the employee’s direction or request. The result will be a wider set of circumstances where a full PAYE tax and national insurance charge will be applied.

One area of concern is that of ‘earmarking’ funds for the benefit of a named individual, no matter how informally. Where an EFRBS or EBT holds funds for the benefit of all employees there is no tax charge, but as soon as funds are earmarked for an individual, the proposals imply that a full PAYE tax and national insurance charge will need to be applied – even if the individual himself receives no actual money. Trustees being asked to make specific investments on behalf of a named individual might find that a tax charge would apply, even if the named individual had left employment and moved abroad many years before.

The obligation to apply PAYE will fall on the employer in the first instance, but if the trustees of the EFRBS/EBT account for the PAYE instead, then the employer will be released from their obligation.