James Quarmby, tax Partner for leading law firm Thomas Eggar LLP, said the plans, introduced in the draft Finance Bill in December last year, were an "affront to the long cherished principles of our tax law".
Under the clampdown on ‘disguised’ remuneration, employers who pay staff through trusts and similar arrangements in order to pay less tax will have to pay income tax and national insurance contributions immediately rather than deferring them.
The result, says Quarmby, is that income tax will be levied on employment income or benefits that have not actually been received from the employer and may never be received. The legislation states that the tax charge will still arise even if the employee has no legal right to any money or other benefit from the employer.
The Government says it is designed to prevent the avoidance of employment income tax by employers and their employees channelling money through third party entities such as employee benefit trusts (EBTs) and employer financed retirement benefit schemes (EFRBS). But Quarmby argues that the new rules are an over-reaction.
"I strongly believe that to tax hard working employees on monies they have not and may never receive is unfair, immoral and an affront to the long cherished principles of our tax law. It will also place an unwelcome barrier to employers who wish to retain and incentivise their best employees. This law must be changed," said Quarmby.
Despite mounting criticism from the tax profession and business leaders, however, HMRC appears determined to push ahead with the change, which has been dubbed the "tax on fresh air". A consultation on the changes closed yesterday (February 9).
"One can understand why the Government would want to stop some of the more abusive uses of EBTs – where the employer would pay money to the EBT and then a little while later that money was lent by the EBT to the employee – but instead of introducing targeted legislation to stop this type of abuse, which would have been relatively easy, it has instead wildly over-reacted and brought in rules which will catch entirely innocent arrangements between an employer and an employee regarding future performance and remuneration," Quarmby said.
Critics of the legislation point out that it is contrary to the Government’s desire to encourage employers to avoid paying large cash bonuses (particularly to bankers) and instead enter into longer-term reward structures. The new law will impose income tax when the parties enter into the arrangement – not when the benefits are received, which is a complete reversal of the previous tax position.
"If employees are going to be taxed when they enter into a deferred bonus scheme then it is highly unlikely that they will cooperate. What you must remember is that many of these schemes are entirely discretionary, which means that employees have no guarantee that they will receive the reward in question. Naturally, the employee will not want to be taxed on a bonus he may never receive. But this, incredibly, is what the legislation seeks to do," said Quarmby.
Another consequence of the rule is that employees will have to fund the payment of income tax out of their own recourses. Normally, employees have their tax deducted from their income before it is paid. Here there is no actual income from which to deduct the tax. While there are a number of exceptions for so-called ‘genuine’ employee benefit arrangements, critics argue that the exceptions are so narrowly drafted that they are useless. "The exceptions include a few of the approved share ownership plans but very little else," says Quarmby.
Some of the new rules have come into effect already, despite being only in draft form, and the rest of the provisions come into effect on April 6.
