EIM47240 | Pt 7A ITEPA 2003: CCG: relevant arrangement, relevant step and relevant transaction – timing and avoidance purpose

ITEPA 2003: sections 554AA(1)(i) and (4)

In order to be within the CCG, the arrangement, so far as it relates to the relevant transaction or the relevant step, needs to have as a main purpose the avoidance of income tax, NIC, corporation tax or a charge to tax under section 455 CTA 2010.

It is necessary to define the period when this must apply. Section 554AA(1)(i) introduces the concept of a relevant period. It states that there must be a time in the relevant period when the arrangement must have avoidance as detailed above as a main purpose.

The relevant period is then defined in section 554AA(4). It states that a relevant period consists of the time of the relevant transaction, the time of the relevant step, the times around each of those two times and any other times between them.

It demonstrates that an arrangement can come into existence but will not be caught by Pt 7A until such time as a relevant transaction is undertaken by the employing company. If a company plans to use an EBT to remove value from a company without properly taxing it and to provide it to a director, they can put the arrangement in place but a relevant period will only come into existence around the time they decide to undertake a relevant transaction.

It also demonstrates that an arrangement must be linked to avoidance. In EIM47220 an employee’s own pre-existing trust was used to facilitate an avoidance scheme. The trust would only have become part of a relevant arrangement at the point the employer decided to use it in this way.

The avoidance purpose link between the relevant arrangement, the relevant transaction and the relevant step is intended to remove genuine commercial transactions from the CCG. As an example any cases involving properly constituted Employee Ownership Trusts will involve relevant arrangements, relevant transactions and relevant steps. However the main purpose of these trusts is to motivate employees by using a recognised, properly tax advantaged, scheme. It does not involve the avoidance of tax so would not satisfy the CCG. Similarly, if an arrangement such as a family trust is originally entered into with an avoidance purpose, if that avoidance purpose does not relate to the relevant transaction or relevant step which may happen a long time later, the avoidance condition in 554AA(1)(i) would not be met.