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Readers' Forum - A worrying problem

09 June 2005
Issue: 4011 / Categories:

My query concerns the Inland Revenue's technical note dated 2 December 2004, which was entitled 'Avoidance and employment-related securities — proposals to amend ITEPA 2003, Part 7' and in particular paragraph 30.
First, it seems to be generally accepted that the shares held by a director/shareholder of a family company with, say, just husband and wife shareholders, are employment-related securities.

My query concerns the Inland Revenue's technical note dated 2 December 2004, which was entitled 'Avoidance and employment-related securities — proposals to amend ITEPA 2003, Part 7' and in particular paragraph 30.
First, it seems to be generally accepted that the shares held by a director/shareholder of a family company with, say, just husband and wife shareholders, are employment-related securities.
ITEPA 2003, s 447(4) therefore seems to apply to husband and wife companies as well as the obvious cases of avoidance at which it is primarily aimed. The proposed revision to s 447(4) seems to mean that all dividends paid by family companies will be reclassified as earned income, since the main purpose of paying dividends rather than directors' remuneration is 'the avoidance of tax or NICs'.
If this is correct, it is a very worrying development, however, there does not appear to have been an outcry in Taxation magazine or elsewhere. I therefore hope that my analysis is incorrect and should be very grateful if readers could explain why.
I realise that these provisions, although included in Schedule 2 of the original Finance Bill, did not make it into the initial FA 2005 because of the election, but they will presumably be included in Finance (No 2) Act 2005.
Query T16,620 — Worried.


Reply from 'The Weather Man'

I am sure that, to the general tax practitioner, the subject of 'employment-related securities' is starting to seem like a grass-covered quagmire; what might seem like a green and pleasant meadow could, when strayed into, turn out to be a muddy bog that entraps the unsuspecting. Simon's Direct Tax Service — at E4.508A — states that 'The provisions in ITEPA 2003, Part 7 Ch 4
(ss 447 — 450) perform something of a “sweeping-up” function. The drafting is, presumably deliberately, broad. It is designed to encompass any benefits that are received through ownership of employment-related securities, provided that such a benefit is connected with the employment, rather than ownership per se, and provided that the benefit is not otherwise chargeable to income tax'.
When we look at s 447 ('Charge on other chargeable benefits from securities'), it seems — like our green and pleasant land — fairly innocuous at first sight. It states that 'This Chapter applies if an associated person receives a benefit by virtue of the ownership of employment-related securities by that person or another associated person'.
S 447(4) then qualifies matters by providing that 'This section does not apply if the benefit is otherwise chargeable to income tax'. The section therefore seems fairly narrow in that it only applies where a benefit is received by an associated person and there is the qualification that it does not apply if the benefit has already been charged to tax.
The problem is that the original Finance Bill 2005 proposed that s 447(4) be rewritten, such that 'if the benefit is otherwise chargeable to income tax this section does not apply unless [my italics] something has been done which affects the employment-related securities as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or National Insurance contributions'. Now in the light of the scenario posited by Worried this looks rather more serious.
At first sight, my thoughts were that this was an example of poor legislative drafting; 'shome mistake surely', the Revenue would not be advocating double taxation, would it? But any hopes in that regard are dashed by a look at the Explanatory Notes which confirm the intention that a double charge to tax can arise.
To be fair to Taxation, this possibility was mentioned by Amanda Flint in 'More uncertainty' (17 February 2005), where she warned that 'there is potential for Chapter 4 to be used, in effect, as a penalty for arrangements viewed with disfavour by the Inland Revenue'. The question is, what might those arrangements be?
The CIOT has commented on this. Anne Redston, chair of the personal taxes sub-committee has expressed concern that the provision is 'very broad' and there is difficulty in reconciling the double tax nature of the proposed section with Dawn Primarolo's desire to see people paying 'the proper amount of tax'. The fact that FA 2005 was passed after only four hours of debate by the House of Commons in what was called a 'travesty of democracy' by the Low Incomes Tax Reform Group does not exactly reassure one that this will receive detailed review. Putting political affiliations aside, this cannot be helped by the deselection of Howard Flight MP, who in previous years has been a major contributor to the debating of Finance Bills. I am sorry to sound cynical, but perhaps the best that we can hope for is probably some guidance from HMRC as to what 'somethings' they think will be caught by s 447(4).
Just remind me; self-assessment was going to be simple, wasn't it?

Issue: 4011 / Categories:
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