The Government have become aware of an artificial and aggressive avoidance scheme that seeks to abuse tax reliefs available for employment-related liabilities incurred by employees and former employees.
This scheme relies on the creation of losses through a series of arrangements connecting the individual and a company that provides services to trusts, some of which may be offshore, which are established for the purposes of the scheme.
A loss is created through an intentional act of maladministration by the individual acting as a trustee in the course of a contrived employment. The maladministration triggers a compensation payment payable by that individual. This compensation creates a loss that the individual can set off against other taxable income.
The Government do not accept that these highly contrived arrangements have the effect that is sought, but will remove any doubt by introducing appropriate legislation in the 2009 Finance Bill to prevent tax deductions being allowed where liabilities relating to an employment are incurred by employees and former employees with a main purpose of the avoidance of tax. This legislation will have effect from 12 January 2009.
The legislation will not affect genuine cases where tax avoidance arrangements are not involved and will have no impact on the treatment of normal insurance premiums paid by employers to indemnify employees against employment-related liabilities.
Details of this action are contained in a technical note published on HMRC's website.