EIM11912 - PAYE: meaning of readily convertible assets: trading arrangements: judicial guidance
Section 702 ITEPA 2003
The Courts have considered the meaning of trading arrangements on two occasions.
### NMB Holdings Ltd v Secretary of State for Social Security
The NMB case (see NRC2/2000) considered whether Class 1 NIC liability arose in respect of a payment of a bonus to directors of the company. Payment was made under arrangements whereby the employer purchased a quantity of platinum sponge and transferred that asset to directors who sold the asset for cash to the person who had originally supplied it.
In NMB, the High Court considered the NIC legislation that applied at the time the payments were made. The legislation has since been amended but for trading arrangements remains broadly the same. Although the High Court held that there was NIC liability, the decision did not rely on consideration of the issue of trading arrangements. Nevertheless, the High Court chose to comment on that issue.
NMB had made arrangements enabling the directors to sell the platinum sponge to the original supplier and the directors followed those arrangements. The Revenue argued that, by facilitating an early sale, these were arrangements enabling the directors to obtain a similar sum to the expense incurred by NMB. However, NMB contended that the directors could also have made their own arrangements to sell the platinum sponge independently. As the arrangements put in place by NMB only provided for a sale at the market price, rather than a guaranteed price, any arrangements entered into independently may also have enabled the directors to obtain a similar amount to the expense incurred by NMB in providing the platinum sponge. The arrangements put in place by NMB may have enabled the directors to make a sale more easily and at a price closer to the amount paid in providing the platinum sponge but no more. NMB argued therefore that the arrangements were not for the purpose of enabling the directors to obtain an amount similar to the expense incurred in providing the asset.
The High Court rejected NMB’s argument both as a question of construction and fact. That an asset could be sold otherwise does not preclude arrangements that are made for its sale being arrangements made for the purpose of enabling it to be sold. The fact that there is no point in making arrangements does not preclude them from having a purpose. The directors were provided with a ready buyer at a price capable of calculation and which, in practical terms, would be similar to the price paid by NMB.
### DTE Financial Services Ltd v Wilson
The DTE case (see TCR14/01) considered the requirement for the employer to operate PAYE on an award of bonuses to 3 directors. The bonuses were in the form of reversionary interests in an offshore trust (RIOT).
In DTE, the Court of Appeal considered the legislation that applied at the time the payments were made. The legislation has since been amended but for trading arrangements remains broadly the same. Although the Court of Appeal held that DTE was required to operate PAYE in respect of payment of the bonuses, the decision did not rely on consideration of the issue of trading arrangements. Nevertheless, the Court of Appeal chose to comment on that issue.
The trust deed stipulated that the trust would inevitably cease on a date that fell 7 days after the trust was created by settlement of a sum of money. On that day the interest in the trust would revert to the beneficiary who would automatically receive the capital held in the trust. The beneficial interest in each trust could only be assigned twice. There were 3 trusts. Each was first assigned to DTE. The trusts were then assigned by DTE, one to each of the 3 directors, by way of payment of a bonus. Following assignment of the beneficial interest by DTE, the director was the sole beneficiary and duly received payment of the capital from the trustees.
When commenting on the trading arrangements issue, the Court of Appeal accepted DTE’s argument that trading arrangements did not exist in respect of the RIOT. The Court held that the definition of trading arrangements requires arrangements that are external to the asset. In DTE there were no such arrangements. When the beneficial interest in the trust was assigned to the directors, they could do no more than wait for the trust to fall in, thus enabling them to obtain an amount similar to the expense incurred by DTE in providing the RIOT. This was an integral feature of the asset established in the trust deed. As it was not necessary for any external arrangements to cause the trust to cease, and trigger the cash payment, there were no trading arrangements.
### RIOT awards
A reversionary interest in an offshore trust is now within the definition of a readily convertible asset under Section 702(1)(b)(iii) ITEPA 2003 (see EIM11907).