The new measures, forming part of the Finance Bill 2011, are designed to close tax loopholes that had been allowing the use of third-party arrangements so that bonuses were paid into a trust and then ‘loaned’ back to the employee. However, the draft legislation alarmed employers who were deferring bonuses for legitimate (in other words non-tax avoidance reasons) by putting them into a share plan.
HMRC has now published a response to all the 50 or so comments received during the consultation period and confirmed that this would not be the case.[1]
However, Carol Dempsey, HR services partner at PwC explains that employers still need to be vigilant:
"Financial Services organisations need to ensure that deferred bonus schemes do not fall under the 'disguised remuneration' tax avoidance rules which were clarified yesterday. While HMRC has confirmed that certain deferred bonus plans would escape the new rules, many may still be caught under the 'disguised remuneration' legislation. For instance, the deferred award must be linked to a performance or service condition, so that the employee does not receive the full payout unless these conditions are met. However, not all deferral arrangements currently operated by banks will meet this requirement. These banks will need to modify the plans urgently to ensure that their staff do not incur a tax liability before the awards are paid out," she said.
PwC also anticipates a rush of alternative pension arrangements expected as rules relaxed around employer-financed retirement benefit schemes (EFRBS). HMRC has relaxed the tax treatment of employer-financed retirement benefit schemes (EFRBs), meaning that until 5 April, it is likely to remain attractive for employers to establish new EFRBs or to make additional contributions to existing schemes.
Marc Hommel, pensions partner at PwC commented:
“For those people hit by the reduction in the annual allowance for pensions tax relief, which from April is being slashed from £255,000 to £50,000 a year, EFRBS may continue to provide a tax efficient option for employer-financed retirement savings. Although some of the current tax advantages will be removed, it does appear that EFRBs remain attractive as a long-term investment vehicle. A number of employers are looking to make contributions for their executives before the end of this tax year while EFRBs the existing rules remain so tax advantageous.”
Other significant clarifications
HMRC has also confirmed that many benefits provided to employees as part of normal remuneration packages will be outside the new rules, such as company cars, most salary sacrifice/flexible benefit schemes and holiday accommodation.
Loans from group companies to employees will not be caught by the new rules (unless they are seen to have an avoidance purpose – as explained above). However, where a loan is within the scope of the new rules and triggers a tax charge, no refund of tax will be available when the loan is repaid. This will not be welcomed by employers and employees.
Dempsey observed: "A tax charge even where loans are repaid seems inherently unfair and will not be welcomed by employers."
[1] www.hmrc.gov.uk/budget-updates/disguised-remuneration-faqs.pdf