Out-Law News 2 min. read

HMRC confirms how 'disguised remuneration' rules affecting employee incentives will apply

HM Revenue and Customs (HMRC) has finalised its guidance on new rules which will prevent employers using trusts and other third parties to avoid tax liabilities when rewarding employees.

The final guidance, included as part of HMRC's Employment Income Manual, contains further clarifications to the draft guidance produced in August along with some examples of how it sees the rules applying in practice.

However Lynette Jacobs, a tax law specialist with Pinsent Masons, the law firm behind Out-Law.com, said that there were still concerns about how the rules would operate in relation to 'normal' share plan arrangements in some circumstances, particularly for companies using employee trusts to administrate these arrangements.

So-called 'disguised remuneration' rules became law in July but apply retrospectively from 6 April 2011. They were introduced to tackle arrangements where employers use trusts or other vehicles which seek to avoid, defer or reduce tax liabilities to reward employees.

The rules create a charge to income tax where third party arrangements are used to provide what is in substance a reward or recognition, or a loan, in connection with an employee's current, former or future employment. Where this is the case, that amount is deemed to count as employment income and is taxable through pay as you earn (PAYE).

Detailed exclusions are intended to prevent arrangements which are not tax avoidance arrangements falling within the scope of the rules.

Certain types of employee share plans including share incentive plans (SIPs), save as you earn (SAYE) option schemes and HMRC approved company share option plans (CSOPs) are specifically excluded from the new regime. There are also exemptions and reliefs for some types of award under non-HMRC approved plans. However tax specialist Jacobs said that this did not stop the 'earmarking' of shares or money, usually through an employee trust, triggering PAYE and National Insurance contributions (NICs) in certain circumstances.

"There remain concerns in relation to the operation of the new rules, including in relation to 'normal' share plan arrangements. Companies using employee trusts in the operation of their share plans should review their arrangements if they have not already done so, as in certain circumstances they may need to make changes in order to avoid triggered PAYE and NIC charges before benefits are received by plan participants," she said.

"However it appears that HMRC has listened to comments it received on the draft version and has made certain amendments, clarifications and additions to the guidance including further illustrations and examples of how it sees the rules applying in practice. The finalised guidance will be helpful for companies and advisers."

The rules also cover remuneration other than through share plans. The Government has said that the arrangements covered specifically include the provision of a tax-advantaged alternative to saving beyond the annual and lifetime allowances available in a registered pension scheme.

Benefits packages which are available across the employer's workforce are unaffected by the new rules provided that the benefits are genuinely available to substantially all employees and cannot be accessed by only specially-selected individuals.

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