Inland Revenue 37
17 March 1998
______________________________________________________________
TACKLING EXPLOITATION OF THE PROVISIONS FOR PROFIT-RELATED
PAY
The Chancellor today proposed a measure to prevent the
exploitation of the provisions to phase-out the income tax
relief for profit-related pay (PRP). The proposal is part of
the Government's policy of tackling tax avoidance and
establishing a fairer tax system.
The proposed measure will prevent certain employees, who are
in a registered PRP scheme, from obtaining a higher tax
relief limit for a longer period by becoming a member of
another scheme, on or after today. It will apply where the
scheme employer for the two schemes is the same person, or
where the employers are connected.
DETAILS
The phasing-out provisions
1. The provisions to phase-out the income tax relief for PRP
were introduced in the first Finance Act of 1997. They are
designed to withdraw the relief over a three year period.
The maximum limit for tax-relieved PRP will be reduced for
"profit periods" (normally the firm's annual accounting
period) beginning
1 January 1998 to 31 December 1998: from 4,000 pounds to
2,000 pounds
1 January 1999 to 31 December 1999: from 2,000 pounds to 1,000
pounds
on or after 1 January 2000: no relief will be available.
The estimated Exchequer yield from these withdrawal arrangements is
200 million pounds in 1997-1998,
800 million pounds in 1998-1999,
1,800 million pounds in 1999-2000, and
3,100 million pounds in 2000-2001.
Exploitation
2. Some employers who already have PRP schemes have
attempted to exploit these phasing-out arrangements. They
have done so by, for example, setting up a new company to
which they transfer their employees. This new company seeks
to register a new PRP scheme, whose profit period begins
later in a calendar year than the profit period under the old
scheme. (For example, it may begin on 31 December, rather
than on 1 January under the old scheme.) The employers'
purpose is to manipulate the start dates of their businesses'
profit periods in order to delay the progressive reductions in
the relief for their employees for as long as possible.
3. If this attempted exploitation were successful the
potential tax loss to the Exchequer could be very
substantial.
The countermeasure
4. Under the Budget proposal, an employee, who is in a
registered PRP scheme, will be prevented from obtaining a
higher tax relief limit for a longer period by becoming a
member of another scheme where
- the employee becomes a member of that other scheme on or
after 17 March 1998; and
- the profit periods of the two schemes start on different
calendar dates.
Employees in schemes which last only one year, where the
schemes are replaced annually by fresh schemes starting on
the same day and calendar month (that is, schemes whose
profit periods are not being manipulated) will not be
affected by the proposal.
Exclusions
5. The new rules will not apply where the scheme employer
for the two schemes is not the same person or where the
scheme employers are unconnected. This exception is intended
to ensure that the measure targets the schemes of employers
who are attempting the manipulation, leaving employees who
change jobs in the normal way, and move between unconnected
schemes unaffected.
The effect of the new rules
6. Where the new rules apply, the employee will, in effect,
be subject to the PRP limit which would have applied to him
or her, either
- under a scheme with a start date of 1 January or
- under the earlier, connected scheme.
If the second alternative is to apply, employers must exercise
their choice by notifying the employee. The option of
applying the limit for a scheme commencing on 1 January is
intended to help employers if, for example, they are unable
to find out the start date of the earlier scheme, or if they
decide that it would be administratively more convenient to
treat all those who join their schemes, from other connected
schemes, on the same basis.
Administration
7. The Inland Revenue's Profit-Related Pay Unit will be
writing as soon as possible to scheme employers, in order to
explain the new legislation.
Future monitoring arrangements
8. The Inland Revenue will continue to monitor the operation
of the PRP tax relief phasing-out provisions closely.
NOTES FOR EDITORS
1. PRP is that part of pay which varies with changes in the
profits of the business in which the employee works. Income
tax relief is available, subject to the limits set out
earlier in this release, for PRP paid under a scheme which
has been registered by the Inland Revenue before the date on
which the scheme is due to start.
2. The legislation governing the provision of tax relief for
PRP is contained in Sections 169 to 184 of, and Schedule 8
to, the Income and Corporation Taxes Act 1988, as
subsequently amended.
3. The new rules governing when scheme employers are
connected will be based on Section 839 of the Taxes Act 1988,
but they will be extended to cover connections involving
partnerships.
4. PRP tax relief was first introduced in 1987 to help get
profit-related pay schemes off the ground. In November 1996,
when there were some 14,000 live registered PRP schemes,
covering over 3.7 million employees, the previous Government
announced that the relief had successfully served its
original purpose and so would be withdrawn.
5. The main purpose of the measure is to promote the
principle of fairness by preventing further exploitation and
by protecting the revenue yield from the withdrawal of relief
for PRP. The estimated yield is 5 million pounds in each of
the years 1998-1999, 1999-2000 and 2000-2001.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171-438 6692/6706/7327
(Out of hours: 0860-359544)
Non media enquiries to: 0171-438 6420/6425
(Office hours only)