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Guidance issued on "disguised remuneration" rules affecting employee incentives

HMRC has issued guidance on new "disguised remuneration" rules introduced to prevent avoidance of income tax. The draft guidance, issued by HMRC, will help employers to interpret the complex new legislation.26 Aug 2011

The disguised remuneration rules became law in July but apply from 6 April 2011. They were introduced to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities. The legislation has been widely criticised for its far reaching ambit.

Tax law specialist Judith Greaves of Pinsent Masons, the law firm behind Out-Law.com, said that the guidance is useful but may not allay all companies' and individuals' concerns.

"The draft guidance is helpful, as it supports the specific legislative exemptions introduced to protect those operating ordinary share plans on a commercial basis with no tax avoidance motive," said Greaves. "However, of continuing concern for share plans, is the fact that 'earmarking' of shares, or money, usually through an employees' trust, can trigger PAYE and NIC charges in certain circumstances. Although some comfort has been provided in the guidance, companies may not feel comfortable relying just on guidance – they may prefer to review their incentive arrangements to ensure that they come within the statutory exemptions".

HMRC is not formally consulting on the draft guidance although urgent comments on the guidance can be sent to HMRC by 2 September 2011. The finalised guidance will be incorporated into HMRC's Employment Income Manual later this year. It is expected that the parallel NIC regulations and guidance will be published shortly.

HMRC has also confirmed this week in its online magazine Spotlights that it will pursue schemes that seek to avoid income tax and national insurance contributions which are being advertised to contractors, highly paid employees and those using recruitment agencies to get round the disguised remuneration rules. Such schemes involve, amongst other things, payments being passed through a series of companies, loans from a third party and secondments.

"In HMRC’s opinion these arrangements do not succeed in avoiding the tax and NICs due," it said in the magazine. "HMRC will challenge these arrangements and litigate where necessary to recover unpaid tax and NICs."

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We are leading advisers on employee share plans and incentives. Our highly specialised team is led by lawyers who are independently recognised experts in this field, with significant experience of advising clients on all aspects of their equity-based incentives and wider executive remuneration issues. Our team is at the forefront of innovation and thinking in this area.

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