PAYE140001 - The PAYE discretion at s684(7A)(b) ITEPA 2003 and contractor loans avoidance schemes: contents: definitions, introduction and scope of guidance

Definitions
Introduction
Scope of guidance

Definitions

A number of key terms are used throughout this guidance. These are defined below for the purpose of this guidance only. 

Agency rules

Legislation at Chapter 7 of Part 2 Income Tax (Earnings and Pensions) Act (ITEPA) 2003 that determines who should operate PAYE where more than one party is involved in the provision of an individual’s services.

Before/From 2014

The agency and employee of non-UK employer rules changed from 6 April 2014. These changes may impact how an officer of HMRC considers the PAYE discretion. When this guidance refers to before or from 2014 it means before or from 6 April 2014 when the relevant legislation changed. 

Contractor loans scheme

Schemes which claim to avoid the need to pay income tax and national insurance contributions. They normally involve a loan or other payment, possibly from a third-party, to an individual which is unlikely to ever be repaid to any significant extent.

End client

A business that an individual provides their services to. 

Individual

An individual who provides services to an End Client that does not directly engage them.

Loan Charge

A tax charge a person may be liable for if they received a disguised remuneration loan or credit on or after 9 December 2010 where the balance was still outstanding on 5 April 2019, unless tax has been paid in full in respect of the original loans.

Employee of non-UK employer rules

Legislation at section 689 ITEPA 2003 that sets out who is responsible for operating PAYE where an employee is supplied to a UK person (via an intermediary or otherwise) by an offshore employer who is not legally required to comply with the PAYE regulations.

Original loans

The loans or other payments received via a contractor loans avoidance scheme that HMRC views as taxable as income.

PAYE discretion

Legislation at s684(7A)(b) ITEPA 2003 that gives HMRC the discretion to determine that a person paying PAYE income (a ‘payer’) is not required to comply with the PAYE Regulations in circumstances in which an officer of HMRC is satisfied that it is unnecessary or not appropriate for the payer to do so.

In addition, references to

  • ‘employment’ should be read as including any deemed employment
  • ‘employer’ should be read as including any entity with which an individual is treated as holding a deemed employment
  • ‘employment income’ should be read as including any amounts treated as earnings of an employment
  • ‘employee’ should be read as including an individual who is treated as holding a deemed employment
  • ‘loans’ includes loans and other payments received via a contractor loans scheme
  • ‘scheme’ should be read as contractor loans scheme
  • ‘Counter Avoidance’ should be read to include other directorates within HMRC acting under the direction of Counter Avoidance

Introduction 

This guidance has been moved from its previous location in the HMRC Avoidance Handling Process (AHP) to make it more accessible to colleagues working in Counter Avoidance. This guidance was published on 27 September 2023 and replaces all previous versions of the guidance.  

This guidance only applies to avoidance schemes being dealt with by Counter Avoidance where the scheme is an

  • offshore employer scheme used in any tax year, or  
  • offshore trading income scheme used in any tax year, or  
  • onshore trading income scheme used from 2014 

These schemes are referred to collectively as ‘relevant schemes’ throughout this guidance.  

Where this guidance refers to trading income schemes it refers to trading income schemes where HMRC accepts that the agency rules applied such that there is a deemed employer who should have operated PAYE on payments made to an individual. This may occur where an individual provides new information to HMRC that suggests the agency rules may apply. This guidance does not provide detailed guidance on how to assess a claim that the agency rules apply and should only be considered in relation to trading income scheme after HMRC has accepted the agency rules apply. 

This guidance also only applies where: 

  • HMRC has or intends to issue an assessment to protect the tax due from use of a scheme, or has or had an open enquiry 
  • the loans received by individuals using a relevant scheme may be taxable as employment income and as a consequence the PAYE Regulations may apply 
  • an officer is considering use of a PAYE discretion in relation to relevant schemes used from 6 April 2004. Where an officer is considering potential PAYE obligations arising before this date they should contact the Counter Avoidance Operational Policy team for advice 

This guidance does not apply

  • when considering exercising the discretion in relation to Loan Charge liabilities except for Loan Charge liabilities which arise from offshore or onshore trading income schemes used from 2014 where HMRC accepts that the agency rules apply. Any officer of HMRC working in Counter Avoidance who is considering use of the discretion in relation to a scheme not covered in this guidance should contact the Counter Avoidance Operational Policy team
  • where any officer of HMRC working outside Counter Avoidance is considering use of the PAYE discretion in any scenario (including schemes and usages otherwise covered by this guidance). Anyone outside Counter Avoidance considering exercise of the PAYE discretion should contact the PAYE Regimes team in CS&TD TAD

The PAYE discretion cannot be exercised in relation to National Insurance contributions (NICs) liabilities. If there is a NICs liability, this should be considered separately. 

The purpose of this guidance is to suggest some of the factors that an officer of HMRC might consider when deciding whether it is appropriate to exercise the PAYE discretion in different circumstances. Different pieces of legislation are relevant to different types of schemes and the guidance indicates where different considerations of schemes and usages may apply. There may also be different considerations depending on whether exercise of the PAYE discretion is being considered in respect of the original loans or in respect of the Loan Charge. When this is the case, the guidance explains which specific types of schemes and/or usage that specific information applies to.  

This guidance is intended to be read as a whole. Before any decision or approval is made under any section, the officer making the decision must have read and understood all of the guidance.  

Scope of guidance

This guidance groups the types of schemes, and when they were originally used by customers, according to some of the factors that an officer might consider, for exercising the PAYE discretion. The guidance is grouped into three categories, listed below.   

When considering applying the PAYE discretion in relation to liabilities arising from the original loans received via an

  • Category 1: Offshore employer scheme used anytime and/or offshore trading income scheme used before 2014. 
  • Category 2: Offshore and onshore trading income scheme used from 2014.  

When considering applying the PAYE discretion in relation to the Loan Charge

  • Category 3: Offshore and onshore trading income scheme used from 2014.  

In Categories 1 and 2 above the guidance can only be used if an officer is satisfied from the information available to them that the sums received by the individual purportedly in the form of loans could be taxable as employment income and tax has not been fully accounted for or paid to HMRC under PAYE in respect of the taxable amount. In Category 3 an officer should be satisfied from the information available to them that the Loan Charge applies and tax has not been fully accounted for or paid to HMRC in respect of the taxable amount.