Restriction of deductions for employee benefit contributions
Restriction of deductions
1 (1) This Schedule applies where—
(a) a calculation is required to be made for tax purposes of a person’s
profits for any period, and
(b) a deduction would (but for this Schedule) be allowed for that period
in respect of employee benefit contributions made, or to be made, by
that person (“the employer”).
But it does not apply to a deduction of a kind mentioned in paragraph 8.
(2) For the purposes of this Schedule an employer makes an “employee benefit
(a) he pays money or transfers an asset to another person (“the third
(b) the third party is entitled or required, under the terms of an
employee benefit scheme, to hold or use the money or asset for or in
connection with the provision of benefits to employees of the
(3) The deduction in respect of employee benefit contributions mentioned in
sub-paragraph (1) is allowed only to the extent that—
(a) during the period in question or within nine months from the end of
(i) qualifying benefits are provided out of the contributions, or
(ii) qualifying expenses are paid out of the contributions,
(b) where the making of the contributions is itself the provision of
qualifying benefits, the contributions are made during that period or
within those nine months.
(4) An amount disallowed under sub-paragraph (3) is allowed as a deduction
for a subsequent period to the extent that—
(a) qualifying benefits are provided out of the employee benefit
contributions in question before the end of that subsequent period,
(b) where the making of the contributions is itself the provision of
qualifying benefits, the contributions are made before the end of that
“Provision of qualifying benefits”
2 (1) For the purposes of this Schedule qualifying benefits are provided where
there is a payment of money or transfer of assets, otherwise than by way of
(a) gives rise both to an employment income tax charge and to an NIC
charge, or would do if the conditions in sub-paragraph (3) were met,
(b) is made in connection with the termination of the recipient’s
employment with the employer.
(2) In sub-paragraph (1)(a)—
“employment income tax charge” means a charge to tax under the
Income Tax (Earnings and Pensions) Act 2003 (c. 1) (whether on the
recipient or on someone else);
“NIC charge” means a liability to pay national insurance contributions
under section 6 (Class 1 contributions), 10 (Class 1A contributions)
or 10A (Class 1B contributions) of the Contributions and Benefits
(3) The conditions mentioned in sub-paragraph (1)(a) are—
(a) that the duties of the employment in respect of which the payment
or transfer was made were performed in the United Kingdom, and
(b) that the person in respect of whose employment the payment or
transfer was made fulfilled at all relevant times the conditions as to
residence or presence in Great Britain or Northern Ireland prescribed
under section 1(6)(a) of the Contributions and Benefits Act.
(4) In this paragraph “the Contributions and Benefits Act” means—
(a) the Social Security Contributions and Benefits Act 1992 (c. 4), or
(b) the Social Security Contributions and Benefits (Northern Ireland)
Act 1992 (c. 7).
(5) Where the provision of a qualifying benefit takes the form of the payment of
money, the benefit is treated for the purposes of this Schedule as provided
at the time when the money is treated as received for the purposes of
Chapter 4 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003,
applying the rules in section 18 of that Act (receipt of money earnings).
3 In this Schedule “qualifying expenses”—
(a) does not include expenses that, if incurred by the employer, would
not be deductible in calculating for tax purposes the employer’s
profits for any period, but
(b) subject to that, includes any expenses of the third party (other than
the provision of benefits to employees of the employer) in operating
the employee benefit scheme in question.
Payment “out of” employee benefit contributions
4 (1) For the purposes of paragraph 1(3)(a) any qualifying benefits provided or
qualifying expenses paid by the third party after the receipt by him of
employee benefit contributions are regarded as being provided or paid out
of those contributions, up to the total amount of the contributions as reduced
by the amount of any benefits or expenses previously provided or paid as
mentioned in paragraph 1(3)(a).
(2) For the purposes of paragraph 1(4)(a) any qualifying benefits provided by
the third party after the receipt by him of employee benefit contributions are
regarded as being provided out of those contributions, up to the total
amount of the contributions as reduced by the amount of any benefits or
expenses previously provided or paid as mentioned in paragraph 1(3)(a) or
(3) In applying sub-paragraphs (1) and (2) above no account shall be taken of
any other amount received or paid by the third party.
Transfer of asset to employee
5 (1) This paragraph applies where the provision of a qualifying benefit takes the
form of the transfer of an asset.
(2) The amount provided shall be taken for the purposes of this Schedule to be
the total of—
(a) the amount (if any) expended on the asset by the third party, and
(b) in a case where the asset was transferred to the third party by the
employer, the amount of the deduction that would be allowed as
mentioned in paragraph 1(1) in respect of the transfer.
(3) But where the amount given by sub-paragraph (2) above is more than the
amount that is charged to tax under the Income Tax (Earnings and Pensions)
Act 2003 (c. 1) in respect of the transfer, or would be so charged if the
condition in paragraph 2(3)(a) were met, the deduction allowable under
paragraph 1(3) or (4) is limited to that lower amount.
Provisional calculation of profits
6 Where the calculation referred to in paragraph 1(1) is made before the end
of the nine-month period mentioned in paragraph 1(3)—
(a) for the purposes of making the calculation, paragraph 1(3) shall be
read as if the reference to that nine-month period were a reference to
the period ending at the time when the calculation is made, but
(b) after the end of the nine-month period the calculation shall if
necessary be adjusted to take account of any benefits provided,
expenses paid or contributions made within that period but after the
time of the calculation.
Life assurance business
7 (1) In the case of an insurance company carrying on life assurance business, the
effect of section 86 of the Finance Act 1989 (c. 26) (spreading of relief for
acquisition expenses) shall be ignored in determining for the purposes of
paragraph 1(1) whether a deduction would (apart from this Schedule) be
allowed for a particular period.
(2) But paragraph 1(4) has effect subject to that section where, in accordance
with sub-paragraph (1) above, an amount is allowed as a deduction for a
particular period under paragraph 1(4).
Deductions to which Schedule does not apply
8 This Schedule does not apply to any deduction that is allowable—
(a) in respect of anything given as consideration for goods or services
provided in the course of a trade or profession,
(b) in respect of contributions under a retirement benefits scheme within
the meaning of Chapter 1 of Part 14 of the Taxes Act 1988 (see section
611 of that Act),
(c) in respect of contributions under a personal pension scheme
approved under Chapter 4 of that Part (see section 630 of that Act),
(d) in respect of contributions under an accident benefit scheme,
(e) under Schedule 4AA to that Act (approved share incentive plans),
(f) under section 67 of the Finance Act 1989 (c. 26) (qualifying share
ownership trusts), or
(g) under Schedule 23 to this Act (relief for employee share acquisition).
9 (1) In this Schedule—
“accident benefit scheme” means an employee benefit scheme under
which benefits may be provided only by reason of a person’s
disablement, or death, caused by an accident occurring during his
service as an employee of the employer;
“employee benefit contribution” shall be read in accordance with
“employee benefit scheme” means a trust, scheme or other
arrangement for the benefit of persons who are, or include,
employees of the employer;
“the employer” shall be read in accordance with paragraph 1(1);
“for tax purposes” means for any purposes of income tax or
“qualifying benefits” shall be read in accordance with paragraph 2;
“qualifying expenses” has the meaning given by paragraph 3;
“the third party” shall be read in accordance with paragraph 1(2).
(2) A reference in this Schedule to a person’s employee includes a reference to
the holder of an office under that person, and “employment” shall be read
10 (1) In section 43 (Schedule D) and section 44 (investment and insurance
companies) of the Finance Act 1989, in subsection (2) (amounts charged in
accounts in respect of employees’ remuneration) for paragraphs (a) and (b)
substitute “for which provision is made in the accounts”.
(2) In Schedule 29 to the Finance Act 2002 (c. 23) (intangible fixed assets), in
paragraph 113(3)(a) (meaning of “potential emoluments”) omit the words
“or benefits” and “, or held by an intermediary,”.
Commencement and transitory provisions
11 (1) This Schedule has effect in relation to deductions that would (but for this
Schedule) be allowed for a period ending on or after 27th November 2002 in
respect of employee benefit contributions made on or after that date.
(2) In relation to any time before the coming into force of the Income Tax
(Earnings and Pensions) Act 2003 (c. 1), this Schedule has effect as if—
(a) the references to tax under that Act were to income tax under
(b) the reference in paragraph 8(e) to Schedule 4AA to the Taxes Act
1988 (approved share incentive plans) were to Part 12 of Schedule 8
to the Finance Act 2000 (c. 17) (employee share ownership plans);
(c) for the words in paragraph 2(5) from “treated as received” to the end
there were substituted “treated as received for the purposes of
section 202A(1)(a) of the Taxes Act 1988, applying the rules in section
202B(1) to (6) of that Act (receipts basis of assessment for Schedule
(3) In relation to any such time, sections 43(11)(a) and 44(9)(a) of the Finance Act
1989 (c. 26) have effect with the omission of the words “or benefits” and “, or
held by an intermediary,”.
(4) In relation to a period beginning before 1st January 2003, the reference in
paragraph 8(g) to a deduction allowable under Schedule 23 to this Act shall
be read as a reference to a deduction allowable to a company for that period
in respect of a person—
(a) acquiring shares that are qualifying shares within the meaning of
that Schedule, or
(b) having a right to acquire such shares,
whether in that period or subsequently, by reason of his or another’s
employment with the company.
Determination of profits attributable to permanent establishment:
The Schedule inserted in the Taxes Act 1988 as Schedule A1 is as follows—
Determination of profits attributable to permanent establishment:
1 (1) The provisions of this Schedule have effect for supplementing
section 11AA as regards the determination of the profits
attributable to a permanent establishment in the United Kingdom
of a company that is not resident in the United Kingdom (“the
(2) In this Schedule “the separate enterprise principle” means the
principle in section 11AA(2) (read with subsection (3) of that
Transactions treated as taking place at arm’s length
2 In accordance with the separate enterprise principle, transactions
between the permanent establishment and any other part of the
non-resident company are treated as taking place on such terms as
would have been agreed between parties dealing at arm’s length.
Application of general provision as to allowable deductions
3 (1) Section 11AA(4) (general provision as to allowable deductions)
applies whether or not the expenses are incurred by, or
reimbursed by, the permanent establishment.
(2) The amount of expenses to be taken into account under section
11AA(4) is the actual cost to the non-resident company.
Prohibition of deductions for payments in respect of intangible assets
4 (1) No deduction is allowed in respect of royalties paid, or other
similar payments made, by the permanent establishment to any
other part of the non-resident company in respect of the use of
intangible assets held by the company.
(2) This does not prevent a deduction in respect of any contribution
by the permanent establishment to the costs of creation of an
(3) In this paragraph “intangible asset” has the meaning it has for
accounting purposes, and includes any intellectual property (as
defined in paragraph 2(2) of Schedule 29 to the Finance Act 2002).
Prohibition of deductions for interest or other financing costs
5 (1) No deduction is allowed in respect of payments of interest or other
financing costs by the permanent establishment to any other part
of the non-resident company, except as provided by sub-
(2) The restriction in sub-paragraph (1) above does not apply to
interest or other costs of financing that are payable in respect of
borrowing by the permanent establishment in the ordinary course
of a financial business carried on by it.
(3) In sub-paragraph (2) “financial business” means any of the
(a) banking, deposit-taking, money-lending or debt-factoring,
or a business similar to any of those;
(b) dealing in commodity or financial futures.
Provision of goods or services for permanent establishment
6 (1) This paragraph applies where the non-resident company provides
the permanent establishment with goods or services.
(2) If the goods or services are of a kind that the company supplies, in
the ordinary course of its business, to third parties dealing with it
at arm’s length, the matter is dealt with as a transaction to which
the separate enterprise principle applies.
(3) If not, the matter is dealt with as an expense incurred by the non-
resident company for the purposes of the permanent
Provisions applicable to non-resident banks
Application of this Part
7 (1) The provisions of this Part of this Schedule have effect where the
non-resident company is a bank.
“Bank” for this purpose has the meaning given by section 840A.
(2) Nothing in this Part of this Schedule shall be read as preventing
the application of principles similar to those provided for in this
Part in applying the separate enterprise principle to a non-resident
company that is not a bank.
Non-resident banks: transfer of financial assets
8 (1) In accordance with the separate enterprise principle, transfers of
loans and other financial assets between the permanent
establishment and any other part of the company are recognised
only if they would have taken place between independent
(2) Such a transfer is not recognised where it cannot reasonably be
considered that it is carried out for valid commercial reasons.
For this purpose the obtaining of a tax advantage is not a valid
Loans by non-resident banks: attribution of financial assets and profits arising
9 (1) In accordance with the separate enterprise principle, loans and
other financial assets, and profits arising from them, are attributed
to a permanent establishment to the extent that they can
reasonably be regarded as having been generated by the activities
of the permanent establishment.
(2) The following provisions have effect as regards the factors to be
taken into account.
(3) Particular account shall be taken of the extent to which the
permanent establishment is responsible for—
(a) obtaining the offer of new business;
(b) establishing the potential borrower’s credit rating and the
risk involved in providing credit;
(c) negotiating the terms of the loan with the borrower;
(d) deciding whether, and if so on what conditions, to make or
extend the loan.
(4) Account may also be taken of the extent to which the permanent
establishment is responsible for—
(a) concluding the loan agreement and disbursing the
proceeds of the loan;
(b) administering the loan (including handling and
monitoring the service of it) and holding and controlling
any securities pledged.