PAYE and National Insurance contributions, Corporation Tax and Inheritance Tax: using trusts and similar entities to reward employees (Spotlight 5)
Published 5 August 2010
© Crown copyright 2010
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/spotlight-5-using-trusts-and-similar-entities-to-reward-employees-paye-and-national-insurance-contributions-corporation-tax-and-inheritance-tax/spotlight-5-using-trusts-and-similar-entities-to-reward-employees-paye-and-national-insurance-contributions-corporation-tax-and-inheritance-tax
Customers, their advisers and promoters should be aware that HM Revenue and Customs (HMRC) consider this tax avoidance scheme to be ineffective. This means that HMRC will investigate tax returns where this scheme has been used and seek full settlement of the tax due, plus interest and penalties where appropriate. You should also be aware that some ineffective schemes may give rise to unexpected tax consequences.
HMRC are aware that companies have been seeking to reward employees without operating PAYE (Pay As You Earn)/National Insurance contributions (NICs). This is done by making payments through trusts and other intermediaries that favour the employees or their families.
The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated. They also defer PAYE and NICs or avoid them altogether.
HMRC believe that at the time the funds are allocated to the employee or their beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.
HMRC believe that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as:
- the receipt of a loan
- a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company
Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings from the trust that may trigger a deduction to the company would not qualify for relief.
Participants affected by this may need to self assess a liability to Inheritance Tax. There is also further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts .
HMRC are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.