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ITEPA 2003 鈥� sections 554Z11C(1) 鈥� (6)

An employer makes a payment of 拢5m for the benefit of one of their directors into an EBT in June 2010 which gives rise to a charge under . The employer does not operate Pay As You Earn (PAYE) and a Reg 80 determination for 拢2.5 million is raised in May 2014 on the full income of 拢5 million (拢5 million at 50%). For the purposes of section 554Z11C, this is sum Q.

For the purposes of this example no investment growth arises. Please read section 554Z5 鈥� other provisions and section 554Z11B 鈥� identification of sums or assets P and Q for details of how to calculate an overlap where a relevant step is taken which includes investment growth.

The amounts are left in trust with no withdrawals until August 2017 when the trustees make a loan of 拢3 million to the director. This is a chargeable relevant step in 2017-2018 but since it has been taken from the 拢5 million originally contributed to the EBT, there is clearly an overlap between the 2 sums of money. The relevant step gives rise to a tax bill of 拢1.35 million (拢3 million at 45%). For the purposes of section 554Z11C, the loan of 拢3 million is sum P.

The taxpayer may choose to make a payment of tax for one or other of the liabilities. The overlap needs to be considered in terms of the liability which is being settled since payment of one liability will be treated as a payment on account of the other.

Taxpayer makes payment towards earlier tax liability

The earlier tax liability is on the full amount contributed which was 拢5 million. The amount of that income which was used for the later loan is 拢3 million. The overlapping amount of income is 拢3 million.

It is necessary to identify how much of the earlier tax liability relates to the overlap in order to find the value of the earlier charge.

The initial amount charged was 拢5 million. The amount loaned from that income to form the Chapter 2 tax liability was 拢3 million, which is 60% of the income which gave rise to the earlier tax liability. The overlap between the 2 sums is therefore 60%.

This means that the amount of the earlier charge is 60% of the earlier tax liability of 拢2.5 million which in cash terms is 拢1.5 million. This means that 拢1.5 million out of the original charge of 拢2.5 million relates to the income which overlaps with the later charge.

It is also necessary to consider how much of the liability on the later relevant step has been caused by the overlapping 拢3 million.

The entire Chapter 2 tax liability arises from income which overlaps with the income used for the earlier tax liability. The sum of 拢3 million is entirely from the original 2010 contribution of 拢5 million. The overlap in relation to the Chapter 2 overlap charge is 100%. In cash terms this means the Chapter 2 overlap charge will be 拢1.35 million.

The earlier charge in this example is therefore 拢1.5 million and the Chapter 2 overlap charge is therefore 拢1.35 million. The overlapping income is 拢3 million but the differences in the tax bills arise from differing rates of tax applying in the years when the charges arose. In practical terms this means that any payment towards the earlier charge will be available to set off against the Chapter 2 overlap charge and any associated interest to a maximum of 拢1.5 million plus any late payment interest which is associated with that earlier charge.

Having identified the earlier charge and the Chapter 2 overlap charge, it now becomes necessary to consider what the taxpayer pays in order to identify how to treat the earlier charge paid amount.

The taxpayer makes an initial payment of 拢1 million against the earlier tax liability in January 2018. This is the first earlier charge paid amount. It reduces the outstanding balance of the earlier tax liability to 拢1.5 million but it is also less than the full value of the earlier charge. It can be used in full as a payment on account of the Chapter 2 overlap charge. It will therefore reduce the balance of that charge to 拢350,000.

The taxpayer settles the remainder of the earlier tax liability in June 2018 with a payment of 拢1.5 million. This is in excess of the remainder of the Chapter 2 overlap charge so can be used as a payment on account of that charge.

As noted above the balance of that charge is 拢350,000. The earlier charge paid amount for the second payment can be used to cover that remaining balance. It can also be used as a payment on account of any late payment interest on that later charge, to the extent that the total payments towards the Chapter 2 overlap charge and associated late payment interest do not exceed the 拢1.5 million value of the early charge plus any payments towards any late payment interest which has accrued on that charge.

Taxpayer makes payment towards Chapter 2 overlap charge

Using the same scenario above it is necessary to consider how much of the Chapter 2 overlap charge overlaps with the earlier charge. The calculations will remain the same but the effect is different.

The entire amount of the Chapter 2 liability arises from the income included in the earlier tax liability. This means the overlap is again 100% on a tax charge of 拢1.35 million. The Chapter 2 overlap charge is therefore 拢1.35 million.

The earlier tax liability is still 拢2.5 million and the earlier charge is still 拢1.5 million since 60% of the earlier liability relates to the overlap.

Where the taxpayer chooses to pay the Chapter 2 liability, the amount of the payment which relates to the Chapter 2 overlap charge can be used as a payment on account of the earlier charge. This restricts the amount which can be set against the earlier charge and any associated interest to 拢1.35 million plus any associated late payment interest, which is the value of the Chapter 2 overlap charge along with any late payment interest arising from that charge.

The taxpayer makes an initial payment of 拢1 million towards the Chapter 2 tax liability in January 2018. This is the first Chapter 2 paid amount. It reduces the value of the Chapter 2 liability to 拢350,000. It can be used as a payment on account of the earlier tax liability since it does not exceed the earlier charge, which is the amount by which the 2 charges overlap. The payment reduces the earlier tax liability to 拢1.5 million.

The taxpayer then makes a payment of 拢350,000 in June 2018. This takes the total Chapter 2 paid amount up to the value of the Chapter 2 overlap charge. It can be used as a payment on account of the earlier charge so will reduce the earlier tax liability to 拢1.15 million which remains to be settled.