UK: Benefits received by self-employed subject to income tax charge

UK: Benefits received by self-employed, income tax

Certain benefits received by the self-employed may now be subject to an income tax charge.

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Finance Bill 2017 introduced a charge to income tax on certain benefits received by the self-employed including partners in partnerships, intended to tackle both existing and the future use of disguised remuneration tax avoidance schemes. This follows a consultation, the results of which were published in December 2016. The majority of these schemes involve third parties to whom fees are paid which are treated as allowable deductions. These third parties then make a loan to the participant, which is not taxable, net of an arrangement fee. The new legislation, which applies from 6 April 2017 treats any "relevant benefits;" i.e., the loan made to the participant, as profits and also denies a deduction for the arrangement fee. There is also a charge on any loans in respect of prior year arrangements which are still outstanding on 5 April 2019.

To be caught under this legislation, the taxpayer must meet five conditions:

  • Condition A: they carry out a trade alone or in partnership;
  • Condition B: they are party to an arrangement or arrangements will affect them which are connected to the trade and the purpose of which is to provide ‘relevant benefits’ to them or someone connected to them;
  • Condition C: a relevant benefit arises to the taxpayer or someone connected to them and certain enjoyment conditions are met;
  • Condition D: it is reasonable to assume that the relevant payments has a link with a qualifying third party payment; and
  • Condition E: certain tax advantages are obtained as a consequence of the arrangements.

The legislation goes on to define the meanings of the terms included in the five conditions and in HMRC’s technical update published on 20 March 2017 (this includes the guidance on employee schemes – see section 6 for self-employed schemes here) they advise that changes were made to the draft legislation to ensure that it does not have a wider effect than the intention of combatting anti-avoidance schemes. This includes a provision that, when considering whether this is an arrangement (condition B) “all relevant circumstances are to be taken into account in order to get to the essence of the matter” and relief for double-taxation if the arrangement is taxed under some other provision, such as under the Accelerated Payment regime.

It is hard to see how normal commercial arrangements would be caught under this legislation, however, it is drafted sufficiently widely that unincorporated businesses should review their particular arrangements to satisfy themselves that they are not unintentionally caught.

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