The Government announced in December 2010 that anti-avoidance legislation will be introduced in Finance Bill 2011 concerning third party arrangements used to avoid, reduce or defer liabilities to income tax and NICs on rewards from employment or to avoid restrictions on pensions tax relief.
A new income tax charge will apply where a third party provides an employee with reward, recognition or a loan in connection with the employee's employment. The Government has stated that third party arrangements that do not amount to tax avoidance will be excluded "in so far as this is possible without creating additional avoidance risks".
The legislation will apply to arrangements involving trusts or other third parties where:
- sums or assets are "earmarked" for employees;
- loans are provided to employees;
- assets are made available to employees; or
- sums or assets are paid or provided to employees.
The legislation will also apply to pension arrangements involving third parties and which are used in addition to, or instead of, registered pension plans and where, at present, the rules on the annual and lifetime allowances do not apply.
The new charge will be based on the full amount of any sum of money made available or the higher of the cost or market value where an asset is used to deliver the reward. The amount will count as a payment of employment income and the employer will be required to account for PAYE accordingly.
The Budget documentation has confirmed HMRC's intention to amend the legislation where there are unexpected results without an avoidance motive, and there are a number of prescribed exceptions, inevitably still be many commercial arrangements which will not tick all the required boxes.
Given the complexity of the legislation, and the very wide range of circumstances in which third parties are involved in the provision of reward to employees, whether this be in relation to share plans, pension plans, medical insurance cover, relocation assistance etc. employers will have to carefully review their remuneration arrangements which involve any party other than the employer alone (and whether this is another group company or otherwise) to see whether they fall foul of the new rules.
The new rules will take effect from 6 April 2011, with anti-forestalling rules already applying.
Income Tax and NIC Merger
The government has announced that it will consult on a proposed merger of income tax and National Insurance contributions ("NICs"). This is intended to be a simplification measure and not a tax raising measure. The government has stated that the intention is not to extend NIC to individuals above State Pension Age or to other forms of income such as pensions, savings and dividends. A consultation document will be published later this year and it is anticipated that the merger is likely to take several years to complete.
PAYE and NICs – Security
Legislation will be included in the Finance Bill 2011 to give HMRC power to make regulations to seek security from employers for PAYE and NICs which is at serious risk of non-payment. This measure was originally announced in the March 2010 Budget Draft Finance Bill clauses, and regulations were published for consultation in December 2010. The government has confirmed that changes will be made to the draft regulations to take account of comments received during the consultation.
A consultation response document will be published on 31 March 2011.
The previous Government introduced sweeping reforms to the taxation of non-UK domiciled individuals (non-doms") in Finance Act 2008. The taxation of non-doms will be further reformed as follows:
- the annual £30,000 charge will be increased to £50,000 for those non-doms who have been resident in the UK for 12 or more years and who wish to be taxed on the remittance basis; and
- the tax charge will be removed for non-doms who remit foreign income or gains to the UK for the purposes of commercial investment in UK businesses.
A consultation document is to be issued in June, with legislation to be included in Finance Act 2012 to take effect from 6 April 2012.
Statutory Residence Test
The current case law principles for determining whether an individual is resident in the UK are unclear and complex. A statutory residence test is to be introduced.
The Government will consult on this issue in June, with legislation to be introduced in Finance Act 2012 to take effect from 6 April 2012.
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