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Income Tax (Earnings and Pensions) Act 2003

Section 223: Payments on account of director’s tax other than by the director

888.This section derives from section 164 of ICTA and denies a tax advantage to directors where their company pays their fees without deduction of PAYE and the company (or another person) then separately pays the PAYE due. If this were done, the cost to the company would be less than paying the equivalent gross fee subject to deduction of PAYE. The amount assessable on the director would be the amount actually received.

889.The section counters this device by treating the amount paid to the Board of Inland Revenue as earnings of the employment chargeable to income tax. It applies only to payments that fall within section 203 of ICTA. It does not apply to “notional payments” in respect of readily convertible assets that fall within section 222 above. It is the different nature of the respective payments that provides the main borderline between this section and section 222. The reference to “the Board” has been retained here (rather than changing to “the Inland Revenue”) so as to be consistent with the provisions dealing with the payment of tax.

890.The section applies only to directors. However the same device in the case of non-directors could fall within the scope of Chapter 10 of Part 3 of this Act (taxable benefits: residual liability to charge).

891.Subsection (1) derives from section 164(1) of ICTA and sets out the basic conditions for the section to apply. The source legislation says that the section applies where “the whole of that amount is not so deducted” (“amount” there means the tax due). This section makes it clear that the provision is not restricted to cases where nothing is deducted, but also applies where not all of the amount is deducted. The fact that section 164 of ICTA applies to partial deductions is clear from the reference in section 164(1) to the amount “so deducted”.

892.Subsections (2) and (3) clarify how the words in section 164(1) of ICTA “where in any year” are interpreted. This change in approach is explained more fully in Note 14 in Annex 2.

893.Subsection (4), which also derives from section 164(1) of ICTA, makes the amount of tax accounted for to the Board of Inland Revenue count as earnings of the director. The year of charge is made explicit. See Note 7 in Annex 2. The amount charged is subject to possible reduction under subsection (6).

894.Subsection (5) derives from the first proposition in section 164(3) of ICTA and provides a timing rule where the tax is accounted for in a year after the employment has ceased.

895.Subsection (6) brings together the provisions regarding the amounts to be deducted in arriving at the net taxable amount. Two of the rules derive from the last part of section 164(1) of ICTA and the other rule from the second proposition in section 164(3) of ICTA.

896.Subsection (7) derives from section 164(2) of ICTA.

897.Subsection (8) derives from section 168 of ICTA. It is necessary to bring the definitions into this section because this provision is not in the benefits code.

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