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Disguised remuneration regulations are overly complex

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A leading tax body has described new rules intended to tackle tax avoidance as too complicated.

The Chartered Institute of Taxation (CIOT) said that the legislation, which forms part of the Finance Bill, is “penal” and that its scope is “extremely wide”.

The new laws have been devised to combat disguised remuneration when arrangements are made involving third parties and which defer or avoid income tax on rewards from employment or sidestep restrictions on pensions relief tax.

The new legislation now covers 59 pages, whereas the original plans only ran to 25 pages, the CIOT said.

The draft legislation was first published in December 2010. At the time there were concerns that many ordinary commercial arrangements that have no tax avoidance motive would potentially remain within the scope of the rules and that this would add to the administrative burden and the absolute tax cost for larger UK businesses.  

The legislation has now been amended and updated. It includes 14 separate tax avoidance tests governing when and how a set of exclusions will apply. But this, in the view of the CIOT, leaves the exclusions “intricate and heavily qualified”.

Colin Ben-Nathan, chairman of the CIOT’s employment taxes sub-committee, argued that the new regulations override the longstanding rules on which benefits-in-kind are taxed.

Mr Ben-Nathan said: “We think that employers will face real difficulties in trying to assess how they stand with this new legislation and that they are likely to need to take advice to arrive at a considered view.

“Even then that does not necessarily mean that HMRC will agree with the view that has been taken, leaving employers open to potential uncertainty on whether or not tax charges arise and at what point. We suspect many employers will want to seek clearance from HMRC on their particular arrangements and we wonder whether HMRC has the resources to cope and what the turnaround time will be.

“The new legislation is penal and it overrides the longstanding rules under which benefits-in-kind are normally taxed. Notwithstanding the new exclusions, we think it could still impact in mainstream situations involving some employee share plans, some pension schemes, joint ventures, private equity arrangements, smaller businesses, earn-outs and, notably, international businesses looking to locate employees in the UK. Even if these problems are addressed, the approach taken by the legislation risks creating new problems and loopholes.”