Disguised remuneration

By Tolley in association with Karen Cooper of CooperCavendish LLP

The following Owner-Managed Businesses guidance note by Tolley in association with Karen Cooper of CooperCavendish LLP provides comprehensive and up to date tax information covering:

  • Disguised remuneration
  • Introduction
  • What do the rules do?
  • Relevant third party
  • Relevant steps
  • What arrangements are potentially affected?
  • Exclusions for share schemes
  • Exclusions for other employment-related securities and other relieving provisions
  • Other employment-related exclusions
  • Implications for pensions
  • Implications for other EBT-based remuneration planning
  • Anti-avoidance measures


HMRC has, for many years, sought to ensure that the rewards gained from employment are properly subject to income tax and National Insurance contributions (NICs) deducted by employers through the Pay As You Earn (PAYE) system. By contrast, employers have sought to use increasingly innovative ways to structure remuneration by using employee benefit trusts (EBT) and other vehicles to avoid, defer or reduce income tax liabilities.

The ‘disguised remuneration rules’ cover the provision of loans and other forms of benefits by third parties, as well as certain arrangements which provide pension benefits in excess of the annual and lifetime allowances applicable to registered pension schemes.

There are exclusions for certain types of deferred remuneration arrangements, HMRC approved pensions, share plans and certain employee benefits.

The final legislation is contained in ITEPA 2003, Part 7A. Guidance on ITEPA 2003, Part 7A is contained in the Employment Income Manual starting at EIM45000. In addition, HMRC has published draft manual updates  for changes included in FA 2017 and F(No 2)A 2017.

What do the rules do?

The legislation applies where:

  • there is an arrangement which relates to an existing, former or prospective employee (ITEPA 2003, s 554A(1)(a)–(b))
  • it is, in essence, a means of providing rewards, recognition or loans in connection with employment (ITEPA 2003, s 554A(1)(c))
  • the ‘relevant third party’ operating the arrangement takes a ‘relevant step’, and (ITEPA 2003, s 554A(1)(d))
  • it is reasonable to suppose that, in essence, the step is pursuant to the arrangement or there is some other connection between them (ITEPA 2003, s 554A(1)(e))

The definition of ‘arrangement’ is extremely wide and covers an agreement, scheme, settlement, transaction, trust or understanding. Informal arrangements which are not legally binding are also caught.

ITEPA 2003, s 554Z(3)

When the legislation applies, which HMRC refers to as passing through the ‘gateway’, the value of the cash or assets which are the subject of the ‘relevant step’ is treated as employment

More on Extraction of profit: