New disguised remun-eration provisions do little more than codify as earnings what was actually remun-eration in any case, so why is there so much of it?
Much of the legislation is taken up by the provisions defining the transactions that will not be caught by the legislation. The basic premise is that everything paid or provided for an employee by an employer, that is not already taxed as earnings from employment, will be caught except that which is excluded.
Because this legislation imposing PAYE on the “caught” payment is so wide-ranging, anyone advising SMEs on any aspect of tax and financial planning, specifically on employee benefits and on remuneration/reward strategy for senior executives and owner-managers, must be aware of these new rules and what is and is not caught.
Simply put, the new rules will give rise to a tax charge in three main circumstances:
- certain loans of money or assets by third parties to the employee;
- the earmarking of money or assets for the employee by a third party and, in very limited cases, by the employer; and
- the outright payment of money or transfers of assets to the employee by a third party where these are not otherwise charged to tax as earnings from the employment.
Of great interest to financial advisers will be that on or after December 9, 2010, all employer-financed retirement benefits schemes (EFRBS) and employee benefit trusts (EBTs), where benefits are earmarked for a particular individual or individuals, will be caught, resulting in income tax and a National Insurance contribution charge on the payment made. It should also be noted that the charge to PAYE paid by the employer must be made good by the employee.
In other words, the employee has to pay the tax on the benefits out of aftertax money, significantly increasing the effective cost. To work out the total effective cost of a payment into an earmarked EFRBS/EBT, it is necessary to gross up the value of the payment to account for income tax and National Insurance. For every £1,000 paid into a caught arrangement, the tax and NIC could easily amount for a higher-rate taxpayer to £520 – more for an additional-rate taxpayer.
This would need to be paid for by the beneficiary out of after-tax income. Alternatively, if the beneficiary were to be left economically unaffected, the employer would need to pay enough additional remuneration so that, after deductions, there is enough to meet the amount of tax and NIC due on the caught payment.
Payments into registered pension arrangements and approved share schemes are excluded. However, it would seem there could be danger in setting aside an amount to put into pensions in a way that it could be classified as earmarking but without it actually being transferred into the scheme, that is, as an interim step.
A rule of thumb is to avoid anything that could be viewed as earmarking. For the purposes of the disguised remuneration provisions, earmarking would seem to exist where any money or other asset held by any third party is earmarked, however informally, for an employee and that earmarking should be with a view to another relevant step being taken.
At the point of initial earmarking, there does not have to be any decision as to who is going to benefit from the property subject to the step, simply a step that may eventually lead to the employee obtaining some benefit from the property. Quite penal.
From a financial planner’s perspective the most important outcomes of the disguised remuneration provisions would appear to be that:
- contributions to registered pension arrangements are not caught;
- contributions to earmarked benefit EFRBS and EBTs are caught;
- most loans from trustbased schemes, whenever established, are caught; and
- it will be important to consider the application of the disguised remuneration provisions to any employer-sponsored arrangement involving third parties/ trustees that are not registered pension arrangements and are not otherwise charged to tax as earnings from employment.
Access full CPD, technical updates and business generation ideas through Techlink Professional. Go to www.techlink.co.uk and click the Contact Us link at the top of the screen and then request your free trial from the dropdown menu