Shortly after the decision in the “Dextra” case, which gave a resounding victory to the taxpayers with deductibility for the contribution to the trust being permitted regardless of the fact that there was no simultaneous assessment of the benefit on the beneficiaries, the Government published draft legislation to align deductibility and assessability. The legislation will be included in this year's Finance Bill although it takes effect in respect of the computation of profits and in respect of deductions for accounting periods ending on or after 27 November 2002.
Broadly speaking, the legislation provides that there will be no deduction from an employer's profits in respect of a contribution to an employee benefits trust (EBT) unless the amount sought to be deducted is used (usually be EBT trustees) for a "qualifying purpose" ("QP") in the accounting period in question or within 9 months of the end of that period. Any amount disallowed under this rule can be allowed as a deduction in a subsequent accounting period to the extent that payment of a Qualifying Benefit (“QB”) is made in the same period. QPs comprise the paying of a QB or meeting a Qualifying Expense ("QE").
The main QB is a payment of money to an employee (not by way of loan) or a transfer of assets by the trustees which gives rise to a charge to income tax under Schedule E and National Insurance. The main QE is one incurred in setting up and/or operating the EBT.
The new legislation does not apply in respect of payments made by an employer to provide certain retirement benefits and share-related benefits to which specific legislation applies, ie. approved schemes. To be precise the following payments are permitted as deductions for the company despite the lack of assessability on the employee:-
- (a) in respect of anything given as consideration for goods or services provided in the course of a trade or profession,
(b) in respect of contributions under a retirement benefits scheme and a personal pension scheme,
(c) under approved share incentive plans and qualifying share ownership trusts, or
(d) under the new legislation that will give effect to the statutory deduction for certain employee share schemes.
In his Budget speech, the Chancellor confirmed that the legislation will appear in the Finance Bill in “Tax Law Re-write” style and updated to take account of the Income Tax (Pensions and Earnings) Act 2003.