Inland Revenue 32
17 March 1998
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COUNTERING AVOIDANCE OF PAYE OBLIGATIONS
The anti-avoidance package announced by the Chancellor today
includes measures to clarify and strengthen the rules
requiring employers to operate PAYE when, instead of paying
in cash, they pay their staff in assets which can be easily
turned into cash. These proposals will prevent tax deferral
and produce a fairer tax system.
The measures supplement the changes announced in the
Chancellor's last Budget to put beyond doubt that, from 2
July 1997, PAYE applies to assignments of trade debts by
employers to their employees. The measures will be included
in the forthcoming Finance Bill. They demonstrate the
Chancellor's determination to take whatever steps are
necessary to put a stop to artificial schemes to avoid PAYE
deductions from what are often very substantial bonuses.
The Secretary of State for Social Security will also take
action where necessary to ensure that these payments attract
National Insurance contributions.
DETAILS
Background
1. The 1994 Finance Act introduced legislation which
requires employers to operate PAYE on remuneration in
non-cash forms such as gold bars and other assets which can
easily be turned into cash. Certain payments by
intermediaries and offshore employers were also brought
within the scope of PAYE at that time. Since 1994
increasingly complex and artificial schemes have been
developed in an attempt to take payments in non-cash form
outside PAYE.
2. The aim of these schemes is to put cash into the hands of
the employees but take the remuneration outside the scope of
PAYE so that the tax due is deferred and does not have to be
paid until after the end of the tax year. Such schemes are
generally founded on a narrow interpretation of the
anti-avoidance rules which is not accepted by the Inland
Revenue. The Chancellor's proposals clarify and extend the
1994 legislation to put beyond doubt that PAYE applies where
employees are paid in assets which can readily be converted
into cash.
Proposed changes
3. Legislation will be included in the Finance Bill to
explicitly bring remuneration in the form of trade debts
within the scope of PAYE from 2 July 1997. To the extent
that they have not already done so, employers will have to
account by 19 April 1998 for PAYE on assignments of trade
debts to their employees which took place on or after 2 July
1997. Draft legislation is attached as an annex to this Press
Release. Provisions in identical terms to this clause will be
given in a resolution under the Provisional Collection of
Taxes Act which Parliament is expected to agree on Monday 23
March 1998.
4. The 1994 legislation requires employers to account for
PAYE on the provision of tradeable assets to an employee.
Tradeable assets are defined as assets for which arrangements
exist to enable the recipient of the asset to obtain an
amount similar to the cost of its provision, or which can be
traded on a recognised investment exchange such as the London
Stock Exchange.
5. Under the new provisions the term "tradeable asset" will
be replaced by "readily convertible asset" the meaning of
which will be explicitly extended to include:
money debts;
property that is subject to a warehousing or fiscal
warehousing regime within the meaning of Sections 18 to
18F of the Value Added Tax Act 1994, or any
corresponding arrangements in another state within the
European Economic Area;
assets that give rise to cash without any action being
taken by the employee; and
assets for which trading arrangements come into existence
in accordance with other arrangements or an
understanding in place when the asset was provided to
the employee.
6. The new provisions will also make it clear that employers
are required to operate PAYE where an employee becomes liable
to income tax under Schedule E because :
he or she exercises a share option, or assigns or
releases that right, and the shares are readily
convertible assets; or
that employee is rewarded by the enhancement of a readily
convertible asset he or she already owns.
7. The measure of the amount on which PAYE has to be
operated where an employee is provided with a tradeable asset
has given rise to some difficulties for employers so the rule
is to be changed. Where an employee is provided with a
readily convertible asset, PAYE will in future be operated on
a reasonable estimate of the income likely to be chargeable
to tax on the employee under Schedule E.
8. The changes will also make it clear that an obligation to
operate PAYE can arise in respect of an award of a readily
convertible asset to a former employee. Where a Schedule E
liability arises under the provisions introduced on
remuneration in shares subject to forfeiture or conversion
and the shares involved are readily convertible assets the
changes will require the employer to operate PAYE. They will
also ensure that PAYE applies to cash and readily convertible
assets provided to agency workers within Section 134 Income
and Corporation Tax Acts 1988 in the same way as to cash and
readily convertible assets provided to employees National
Insurance Contributions.
The Secretary of State for Social Security will take action
where necessary to ensure that these payments attract
National Insurance contributions. This is explained in a DSS
Press Release issued today.
Timing of introduction
10. Changes other than in relation to trade debt schemes take
effect from 6 April 1998 when the Finance Bill receives Royal
Assent.Consequential changes in the PAYE Regulations will
come into effect as soon as possible after Royal Assent.
NOTES FOR EDITORS
1. Seeking to avoid tax by paying remuneration in a non-cash
form is not illegal but it can involve a significant deferral
of the time at which tax is paid. This means that ordinary
taxpayers have to bear a greater share of the burden of
taxation.
2. Schemes to pay remuneration in non-cash form are often
artificial and have no commercial purpose other than to defer
tax and avoid National Insurance Contributions. Such schemes
have involved payment in gold bars, bismuth, hay, trade debts
and reversionary interests in offshore trusts.
3. Action in this Budget will raise up to 25 million pounds
in 1998-99 and 1999- 2000 and will protect the Exchequer from
future tax deferral.
4. These changes will not increase compliance costs for the
great majority of employers and employees who are not
involved in schemes to avoid PAYE. Where employees are
provided with readily convertible assets the changes will
clarify the law and give employers greater certainty as to
the amount on which PAYE has to be operated
ANNEX
Finance (No.2)
DRAFT CLAUSES/SCHEDULES
PAYE: application to non-cash benefits etc.
Transitory provision relating to tradeable assets [j1011]
(1) In relation to any asset provided on or after 2ndJuly 1997 and before 6th April 1998, section 203F of the
Taxes Act 1988 (application of PAYE where payment is in
the form of the provision of a tradeable asset) shall
have effect with the following two modifications.
(2) The first modification is the insertion in
subsection (2), before the word "and" at the end of
paragraph (b), of the following paragraph -
"(ba) an asset not falling within paragraph (a) or
(b) above which consists in the rights of an
assignee, or any other rights, in respect of a trade
debt that is or may become due to the employer;".
(3) The second modification is the insertion in
subsection (3), before the word "and" at the end of
paragraph (a), of the following paragraph -
"(aa) in the case of an asset falling within
subsection (2)(ba) above, the amount of the debt;".
(4) The preceding provisions of this section shall be
deemed, in accordance with subsections (5) and (6)
below, to have come into force on 2nd July 1997.
(5) Subject to subsection (6) below, this section shall
not be taken to have changed -
(a) the amounts which were deductible by any person
under section 203 of the Taxes Act 1988 at any time
on or before 17th March 1998; or
(b) the amounts which should have been accounted
for to the Board under section 203J(3) of that Act
at any time on or before 5th April 1998.
(6) Where, by virtue of this section, any employer would
(but for subsection (5) above) be treated as having been
under an obligation at any time on or before 17th March
1998 to make deductions from payments made by the
employer of, or on account of, an employee's assessable
income -
(a) sections 203 and 203J of the Taxes Act 1988,
and
(b) the provisions of any regulations under section
203 of that Act,
shall have effect, and be deemed to have had effect, as
if the employer had been obliged (subject to section
203J(3) of that Act) to make those deductions from any
payments that were so made on or after 24th March 1998
and before 6th April 1998.
(7) Expressions used in subsection (6) above and in
section 203J of the Taxes Act 1988 have the same meanings
in that subsection as in that section.
5 March 1998