COUNSEL'S
OPINION
DAVID EWART.
Pump Court Chambers, 16 Bedford Row, London, WC1R 4EB
27th September 1994.
ORIENTAL CARPET AND RUG SCHEME (CROXTONS)
1. My understanding of the proposed
arrangements is as follows. An employer wishes to pay a bonus to an
employee in Oriental Carpets rather than in cash. The employer
purchases the Carpets from a dealer. The Carpets are in a bonded
warehouse. The Board of Directors of the employer company then decide
to transfer certain Carpets to certain employees by way of bonus. The
employee is informed that he will receive his bonus in Oriental Carpets
which he may have delivered, keep in bond or sell. The employer
transfers ownership in the Oriental Carpets to the employee. The
employee is then free to keep the carpets or sell them to anyone
including, of course, the dealer from whom the Carpets were originally
purchased.
2. I shall deal with the various taxes
under
individual headings.
National Insurance Contributions
3. National Insurance Contributions
("NICs")
are charged on "earnings". This is defined, for NIC purposes, as
including:
"...........any remuneration or profit
derived from an employment........."
Social Security Contributions and
Benefits Act 1992 section 3 (1).
Thus the receipt of the Carpets, being a
"profit", would be part of the employee's "earnings". However Regulation
19 (1) of the Social Security ( Contributions ) Regulations 1979
provides:
" For the purposes of earnings-related
contributions, there shall be excluded from the computation of a
person's earnings in respect of any employed earner's employment any
payment in so far as it is -..............(d) any payment in
kind......."
In my opinion, the transfer of Oriental
Carpets, under the scheme outlined in paragraph 1 above, would be a "
payment in
kind " for the purpose of this Regulation. In this regard it is very
important that:
( i ) the employee never has a choice
between the Oriental Carpets and a cash sum, otherwise there is a
danger that, on the basis ofHeaton v Bell (1969) 46 TC 211,
the employee would be treated as being paid remuneration ( rather than
a benefit in kind) equal to the cash entitlement foregone;
( ii ) the employer does not discharge any
liability of the employee, otherwise the discharge would be treated as
a payment of earnings in cash: R v DSS ex parte Overdrive Credit
Card Ltd [ 1991 ] STC 129;
( iii ) the asset is not capable of being
surrendered or exchanged for cash, as opposed to being turned into cash
by sale; and
( iv ) title to the Carpets passes from the
employer to the employee before the employee sells the Carpets for cash.
I am satisfied that none of these
difficulties would arise with the arrangements as described in
paragraph 1 of this Opinion.
4. I can, however, see two possible
difficulties with the proposed arrangements. The first is Regulation
21(2) of the Social Security ( Contributions ) Regulations 1979.
This provides:
" With a view to securing that liability
for
the payment of earnings related contributions is not avoided or reduced
by
a secondary contributor following in the payment of earnings any
practice
which is abnormal for the employment in respect of which the earnings
are
paid ( hereinafter referred to as an "abnormal pay practice " ) , the
Secretary of State may, if he thinks fit, determine any question
relating to a person's earnings -related contributions where any such
practice has been or is being followed, as if the secondary contributor
concerned had not followed any abnormal
pay practice, but had followed a practice or practices normal for the
employment
in question. "
It might be argued that, because of the
exemption given by Regulation 19 (1) , the employer is not making a
"payment of earnings" so that Regulation 21 (2) cannot apply. However ,
I find that argument unconvincing. The transfer of the Carpets is a
payment of earnings withinSSCBA 1992 section 3 ( 1 ).
Regulation 19 (1 ) simply provides that certain payments
are to be "excluded from the computation of a person's earnings in
respect
of any employed earner's employment ". It does not restrict the scope
of
the definition in section 3 ( 1 ). It is my opinion, therefore that one
cannot
safely assume that as a matter of law Regulation 21 (2 ) has no
application
to payments in kind. This, of course, leaves the question of whether
this
particular payment is an abnormal pay practice for the employment
concerned.
5. As a practical matter the Regulation 21
(2) power is not often ( if ever ) exercised by the Contributions
Agency. In particular, it has never been employed to counter any of the
schemes involving payments in kind. In recent years the approach has
been to legislate against specific forms of payment. Therefore, I would
not be concerned about a possible application of Regulation 21 ( 2 ) to
these arrangements.
6. The second possible difficulty is the
principle of statutory construction ( " the new approach " ) set out in
WT Ramsay v IRC (1982 ) 54 TC 101 and Furniss
v Dawson (1984) 55 TC 324 as explained in Craven v White
(1988) 62 TC 1. This principle could apply if the Carpets were
allotted to the employee and sold back to the supplier in a
pre-arranged series of transactions so that it was a " practical
certainty " from the start that the employee would simply receive cash
at
the end of the day. The effect of this principle applying would be that
the
NIC legislation would operate as if the employee had been paid in cash.
If
, however, the employees genuinely become owners of specific Oriental
Carpets
and are truly free to decide how they deal with these Carpets, I do not
think
that the new approach could be invoked to attack the arrangements.
Again,
in practice, the Contributions Agency have never invoked the Ramsey
principle
in relation to any arrangements involving payments in kind.
Income Tax
7. The Oriental Carpets will be an
emolument
of the employee's employment, under TA 1988 section 19,
because it is convertible into money : Tennant v Smith 3 TC 158.
therefore, although it is a benefit in kind, it is not taxed under TA
1988 section 154 because this section only applies where the benefit is
not otherwise chargeable to tax: see section 154 ( 1 ) ( b ). This does
not, of course, in any way affect the fact that the transfer of the
Oriental Carpets is a " benefit in
kind " for the purposes of the NIC legislation. Although it is an
emolument, it is important to consider whether it is subject to the
PAYE Regulations (SI 1973/334 ).
8. It is my understanding that the dealer
is
prepared to purchase the Carpets from the employee at the market price
of
those Carpets. in other words, he will pay exactly what he would pay
any
third party who was offering to sell him the same carpets. The employee
is,
of course, free to keep the Carpets or to sell them to another dealer,
or
by auction, if that would realise him a better price. There is a ready
market
in the kind of Carpets which the employee will receive. in practice,
however,
the price of Oriental Carpets is very stable and so the employee is
likely
to receive almost exactly the price which the employer originally paid
for
the Carpets.
9. The transfer of Oriental Carpets from
the
employer to the employee is clearly not a " payment " on general
principles
for the purposes of the PAYE Regulations. However the Finance
act 1994has introduced new provisions which govern the
transactions which are caught by
the PAYE Regulations. section 127 has introduced a new
section203F into TA 1988 which provides :-
" (1) where any assessable income of an
employee is provided in the form of a tradable asset, the employer
shall be treated, for the purposes of PAYE Regulations, as making a
payment of that income of
an amount equal to the amount specified in sub-section (3) below.
(2) For the purposes of sub-section (1)
above " tradable assets " means -
(a) any asset capable of being sold or
otherwise realised on a recognised investment exchange ( within the
meaning of theFinancial Services Act 1986 ) or the
London Bullion Market ;
(b) any asset capable of being sold or
otherwise realised on any market for the time being specified in PAYE
Regulations;
and
(c) any other asset for which, at the time
when the asset is provided, trading arrangements exist. "
Oriental Carpets are not covered by (a)
and,
as yet, no regulations have been issued under (b). therefore, one must
consider whether the Carpet transaction, as outlined above, falls
within (c). The term
" trading arrangements" is defined by the new TA 1988 section
203K
(2) (a): -
"(2) Trading arrangements -
(a) for an asset, are arrangements for the
purpose of enabling the person to whom the asset is provided to obtain
an amount similar
to the expense incurred in the provision of the asset."
This definition is further expanded by
section 203K (3) (b):-
"(b) an amount is similar to an expense
incurred if it is greater than, equal to or not substantially less than
that expense."
One must assume that it is very likely that
the amount which the employee will realise by selling the Carpets to
the dealer will not be substantially less than the expense incurred by
the employer in
purchasing the Carpets. The only question is whether the employee
obtains that amount by reasons of an " arrangement ".
10. This is obviously a case which is close
to the line. An argument may well be mounted by the Revenue that there
is an arrangement because the employee is pointed in the direction of
the dealer who will, in practice, always buy back the Carpets for a
predictable price. However, it seems to me that this is caused by the
nature of the market in Oriental Carpets, in particular its stability,
rather than any "arrangement". The term "arrangement" in section 6
(3) of the Restrictive Trade Practices Act 1956 was considered
by Diplock LJ. in Re British Basic Slag
Limited's Agreement [1963] 2 AER 807, where he said , at819
:-
" Cross J. said: "...... all that is
required to constitute an arrangement not enforceable in law is that
the parties
to it shall have communicated with one another in some way and that as
a
result of the communication each has intentionally aroused in the other
an
expectation that he will act in a certain way". I think that I am only
expressing
the same concept in slightly different terms if I say without
attempting
an exhaustive definition, for there are many ways in which an
arrangement
may be made, that it is sufficient to constitute an " arrangement "
between
A and B, if (i) A makes a representation as to his future conduct with
the
expectation and intention that such conduct on his part will operate as
an
inducement to B to act in a particular way; (ii) such representation is
communicated to B, who has knowledge that A so expected and intended,
and (iii) such representation of A's conduct in fulfilment of it
operates as an inducement, whether among other inducements or not, to B
to act in that particular way."
In my view Diplock LJ, is envisaging a
situation in which A's future conduct is conditioned by the informal
agreement or
understanding with B. In the present case, the dealer is not arranging
to
do anything in particular. at most the employer and (perhaps) the
employee
are informed that the employee will in practice be able to sell the
Carpets
back to the dealer because the dealer is generally in the market to buy
that
type of Carpets and further that the price is almost certain to be,
say,
£500 a piece, if the sale takes place within a week or so of the
original
purchase, due to the stability in the market for Oriental Carpets. In
my
opinion, that does not amount to an "arrangement" allowing the employee
to
obtain an amount similar to the expense incurred by the employer in
acquiring
the Carpets. it is crucial to this view that the dealer can establish
by
evidence that he actually bought similar Carpets from third parties on
the
same terms that he bought them from employees within the scheme.
11. these arrangements are certain to be
closely scrutinised and probably challenged by the Revenue. there is a
serious possibility that this challenge may succeed in the Courts.
Croxtons' advertising material ought to make it clear that, while the
NIC position is clear, the PAYE position is not nearly so certain.
Employers must take their own view, based on their own legal advice, on
how to deal with the bonus in relation to PAYE. this all, however,
summarise the effect of the PAYE provisions if the Carpet payments are
caught by the new section 203F.
12. Where the payment is caught because
there are " trading arrangements", the measure of the deemed income is
set out in section 203F (30 (b) ;-
"(3) The amount referred to is -
(b) in the case of an asset for which
trading arrangements exist at the time when the asset is provided, the
amount which is obtained under those arrangements." ( my emphasis).
It seems to follow that there is only an
amount of deemed income for PAYE purposes where cash is obtained under
the trading arrangements. Therefore, there will be no PAYE liability if
the employee holds
onto the Carpets or sells them to someone other than the dealer.
13. Where there is deemed ( or notional )
income, the employer is required to deduct income tax from actual
payments of income which he makes to that employee in accordance with PAYE
regulations: TA 1988 section 203J ( 1 ). regulation 7 ( 2 ) of the
Income Tax ( Employments ) ( Notional Payments ) Regulations 1994 (
" the 1994 Regulations " ) provides:-
" The time prescribed is any occasion on or
after the time when the notional payment is made and falling within the
same income tax period, on which the employer actually makes a payment
of, or on account of, assessable income of that employee."
An " income tax period " is normally a
period from 6th of one month to the 5th of the following month: Regulation
2 ( 1 ) of the Income Tax ( Employments ) Regulations 1993.
Where the employer is unable to deduct the full amount of the tax from
cash payments in that month, the employer is obliged to account for the
tax within 14 days at the end of the month in which the notional
payment was made: TA 1988
section 203J ( 3 ); Regulation 8 ( 2 ) of the 1994 Regulations.
In
those circumstances, the employee must reimburse the employer for the
tax
for which the employer has accounted. If the employer does not do this
within
30 days of the notional payment, the tax paid by the employer is
treated as
further income of the employee assessable under Schedule E:TA
1988 section
144 ( 1 ). There is, however no provision which makes this
deemed
further income liable to PAYE.
14. As a practical matter, if an employer
is
intending paying a bonus in Carpets, he ought to take an indemnity from
the
employee for the tax which he may have to pay. He must also take an
undertaking
from the employee that he will inform the employer if and when he sells
the
Carpets to the dealer, since that action might trigger a PAYE liability.
Corporation Tax
15. The employer will obtain a deduction for
his expenditure upon the Carpets since it will be incurred in order to
provide remuneration to the employee. This is , of course, subject to
the normal restrictions
that the remuneration must be justifiable as being wholly and
exclusively
for the purpose of the employer's trade.
Pension Contributions
16. The value of the Carpets when received by
the employee will be " relevant earnings" for pensions purposes. This
is because they are emoluments chargeable to income tax under Schedule
E ( see paragraph 7 above) : TA 1988 644 (2) (a).
Value added Tax
17 When the employer transfers the Oriental
Carpets to the employee there will be a deemed supply of goods under VATA
1983 Schedule 2 paragraph 5 ( 1 ) as the Carpets will no
longer form part of the assets of the employer's business. However,
since the goods ( the Carpets
) are subject to a " warehousing regime " and the " duty point " has
not
been reached, the supply of those goods is treated as taking place
outside
the UK: VATA 1983 section 35 ( 1 ). therefore there is
no UK
VAT charge : VATA 1983 section 2 ( 1 ). There would only
be
a VAT charge if the employee were to remove the Carpets from the bonded
warehouse.
FURTHER OPINION
DAVID EWART. Pump Court Chambers, 16 Bedford Row, London, WC1R
4EB
Ist May 1995
Re : CROXTONS ORIENTAL CARPET SCHEME
1. Regulation 3(a) of the Social
Security ( Contributions) Amendment (no4) Regulations 1995 has
added a new paragraph 9c to Schedule 1A to the Social Security
(Contributions)
Regulations 1979as follows
" 9,C Any other asset, including any
voucher, for which trading arrangements exist and any voucher capable
of being exchanged for such an asset".
Regulation 3(c) of the 1995 Regulations
also
adds a new paragraph 19 to Schedule 1A in the following terms:
" 19. For the purposes of paragraph 9c of
this Schedule " trading arrangements" has the meaning assigned to it in
203K(2)(a) of the Income and Corporation Taxes Act 1988."
2. This means assets in respect of which "
trading arrangements" exist are added to the list of assets which are
not regarded as benefits in kind for the purposes of regulation
19(1)(d) of the 1979 Regulations, and so are liable to NIC. The term "
trading arrangements" is defined by reference
to the definition for PAYE purposes in TA 1988 section 203K(2)(a). This
does
not explicitly bring in further further definitions in section 203K(3).
However,
the Agency would probably argue that subsection (3) is part of the
definition
in subsection (2)(a). It would , in my opinion, be unsafe to assume
that
sub-section (3) does not apply.
3. My opinion of 27th September 1994 must
now be applied for the purposes of NIC as well as PAYE. Paragraphs 3-6
of that opinion will only apply if "trading arrangements" do not exist.
4. In paragraph 12 of my opinion, I point
out that, for PAYE purposes, the amount of the deemed Income is the
amount obtained under the trading arrangements: see section 203F(3)(b).
Therefore, there is
only a charge where cash is actually obtained under the arrangements.
However,
regulation 2(b) of the 1995 Regulations has inserted a new paragraph
(9)
in regulation 18 of the 1979 Regulations as follows:
"(a) The amount of earnings which is
comprised in any payment by way of the conferment of a beneficial
interest in any
assets, including a voucher, falling within paragraph 9c of Schedule 1A
to
these regulations and which falls to be taken into account in the
computation
of a person's earnings shall, for the purpose of earnings-related
contributions, be calculated or estimated by reference to the amount
obtainable under the trading arrangements in question as if that amount
were obtained on the day on which the beneficial interest was conferred."
This means that if there are "trading
arrangements" in existence there will be an NIC charge on the amount
obtainable under the arrangements at the time when the carpet is
transferred to the employee. This
charge will apply whether or not the employee takes advantage of the
"arrangements"
and obtains a cash sum. As a result paragraphs 12-14 of my Opinion are
not
applicable to NIC..
FURTHER OPINION
DAVID EWART. Pump Court
Chambers, 16 Bedford Row, London, WC1R 4EB
2nd May 1995
RE: CROXTONS ORIENTAL CARPET SCHEME
1. I understand that my Further Opinion of 1st
May 1995 has caused some confusion. Apart from one point the NIC
provisions on " trading arrangements" are identical to the PAYE
provisions which I dealt with in my
opinion of 27th September 1994. Therefore, rather than repeating what I
said
in that Opinion, I simply referred to the points on PAYE which could be
applied
to NIC.
2. My opinion is, on the basis of the
evidence which I have seen and heard in Conference, that the Persian
Rug scheme does not involve "trading arrangements". My reasons are set
out in detail in paragraph 10 of my opinion of 27th September. Briefly,
this is because the dealer is prepared to buy the carpets for the open
market price which he would offer to any other seller. In my view, this
does not amount to a "trading arrangement".
|
The Informed
Investor
a)
That the revenue should not pursue taxes that are NOT owed, and they
should not presume without evidence. Our story goes back many years and
to this day no court of law has found in favour of Mr Hartnett and his
underlings. However he & his underlings have not been slow in
wasting taxpayer's money chasing revenue on which legally they have no
hope in collecting.
Accountancy Age Page 2
January 20th 2005
THE DIRECTOR'S CUT
