Rules tightened to restrict corporation tax deduction to the level paid to an employee in a taxable form.

If an employer pays a gross bonus of £100 it could obtain a corporation tax deduction of £30 and the employee receives £59 after deduction of income tax and employees’ NIC. One bonus planning wheeze involved the employer paying £100 to an employee benefit trust which held the cash in a sub-fund for the employee and dependents. The trustee then either loaned the money to the employee interest free or invested the money which then rolled-up free of capital gains tax. The loan was never written off until death (when the write-off is tax-free).

Schedule 24 Finance Act 2003 was introduced to block this by denying a corporation tax deduction for contributions to an employee benefit trust until the money is actually paid in a taxable form to the employee.

Employers have been side stepping the rules in Schedule 24 by declaring a trust over money instead of contributing it to an employee benefit trust and claiming a corporation tax deduction for the "cost" of declaring a trust over their own assets. This has now been blocked. After 21 March 2007 it will not be possible for an employer to obtain a corporation tax deduction until the money is enjoyed by the employee in a taxable form within 9 months of the end of the relevant accounting period.

If you would like further information on this issue, please contact Guy Abbiss, Tracey Horne or Colin Kendon.

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