Transferring a bond agreement - Shades of Grey by the UK taxman
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Transferring a bond agreement - Shades of Grey by the UK taxman
Has anyone had prior experience with a UK company buying out a bond agreement and any tax implications? After being warned about tax liabilities I decided to get in touch with the taxman for some advice but things don't seem to be as black and white as I hoped. Maybe someone with personal experience might be able to make things clearer?
I gave Mr Taxman relevant information about returning to the UK and how company A is interested in buying my bond from company B (my present employer). I want to avoid any nasty surprise 12 months down the line. They got back to me classing the situation as "pecuniary liability: An example of this is where the employer pays a debt that the employee owes to a third party". Essentially they said if a company offers to buy you out of a bond then it is liable to tax on the sum of the bond! Therefore, when clearing the bond a company needs to pay over and above the amount due in order to cover any PAYE tax! Ouch... that's not going to go down too well at an interview!!!
I'm wondering if this is different if the payment is made directly between companies cutting out the employee?
If anyone is able to share past experiences regarding matters like this or provide details of a good independent chartered tax advisor, it would be appreciated.
For completion and for anyone interested in this in the future I have included the topics that the taxman stated as relevant to the situation.
Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: benefits of direct monetary value to the employee: employer paying employee's debt: the pecuniary liability principle - this explains the basics of pecuniary liability
EIM00590 - Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: the pecuniary liability principle: operation of PAYE - operation of PAYE
EIM07700 - Employment income: tax-free remuneration - where payment is grossed up in order to make it a ‘free of tax’ payment.
If you you're still reading this far down then well done for staying awake!
PT
I gave Mr Taxman relevant information about returning to the UK and how company A is interested in buying my bond from company B (my present employer). I want to avoid any nasty surprise 12 months down the line. They got back to me classing the situation as "pecuniary liability: An example of this is where the employer pays a debt that the employee owes to a third party". Essentially they said if a company offers to buy you out of a bond then it is liable to tax on the sum of the bond! Therefore, when clearing the bond a company needs to pay over and above the amount due in order to cover any PAYE tax! Ouch... that's not going to go down too well at an interview!!!
I'm wondering if this is different if the payment is made directly between companies cutting out the employee?
If anyone is able to share past experiences regarding matters like this or provide details of a good independent chartered tax advisor, it would be appreciated.
For completion and for anyone interested in this in the future I have included the topics that the taxman stated as relevant to the situation.
Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: benefits of direct monetary value to the employee: employer paying employee's debt: the pecuniary liability principle - this explains the basics of pecuniary liability
EIM00590 - Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: the pecuniary liability principle: operation of PAYE - operation of PAYE
EIM07700 - Employment income: tax-free remuneration - where payment is grossed up in order to make it a ‘free of tax’ payment.
If you you're still reading this far down then well done for staying awake!
PT
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The advice you have received from HMRC is correct. If i understand correctly, you leave early to change employer and the bond falls due. The bond liability is therefore yours and so any routing of the payment will still discharge your peculiarly liability. If this happens "by reason of (your) employment" then this is taxable income on your part. The UK employer is required to include the value in your taxable income and account for PAYE.
There would be no UK tax if the payment was not received - from your viewpoint - by reason of your employment. For example, suppose they paid your bond for the privilege of meeting you for interview, with no guarantee they would offer, or that you would accept, employment. Very difficult to believe they would do that (and that would most likely be the view of HMRC if it actually happened!).
Sorry
If you think the potential new employer wold pay your bond, you could hope that they will also pay the tax (the gross-up calculation will apply) or you could offer to pay the tax (the gross-up calculation is avoided, but you get to pay the tax).
There would be no UK tax if the payment was not received - from your viewpoint - by reason of your employment. For example, suppose they paid your bond for the privilege of meeting you for interview, with no guarantee they would offer, or that you would accept, employment. Very difficult to believe they would do that (and that would most likely be the view of HMRC if it actually happened!).
Sorry
If you think the potential new employer wold pay your bond, you could hope that they will also pay the tax (the gross-up calculation will apply) or you could offer to pay the tax (the gross-up calculation is avoided, but you get to pay the tax).
Nemo Me Impune Lacessit
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If your new company pays off your bond direct to your old employer and then bonds you for the amount they paid there is no obvious financial advantage, I would have thought?
Have moved "bonds" several times I have never been taxed ,why would you ? Its part of you going to your new employment. Like a resettlement allowance. I just carried on the bond at my new company.
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JR81, thanks for that although not exactly what I wanted to hear! 
So even if the company paid direct to the new employer cutting out the employee, under normal circumstances, an individual will be liable to tax. If it isn't normal circumstances the taxman would get suspicious!
Parabellum, lowfat & HC I was with you and assumed there's no tax implications. However, I'm glad I caught this early and certainly before the taxman. The bonding situation within our industry seems a bit unusual and I'm left wondering if the taxman understands this unique situation because a bond isn't a "tangible good" like a suit (which they use as an example in the links). It represents training which enables the fulfillment of your duties. It is a contract to protect a company's investment which is paid back over time. Unfortunately, it seems that once the contract is broken the taxman sees it as money!
It has been proven in court within the UK that it isn't tax deductible, have a look at this: Airline pilots: payment of training costs: Milsom & Hinsley v HMRC (SpC569) - very relevant to us as pilots!
PT
So even if the company paid direct to the new employer cutting out the employee, under normal circumstances, an individual will be liable to tax. If it isn't normal circumstances the taxman would get suspicious!Parabellum, lowfat & HC I was with you and assumed there's no tax implications. However, I'm glad I caught this early and certainly before the taxman. The bonding situation within our industry seems a bit unusual and I'm left wondering if the taxman understands this unique situation because a bond isn't a "tangible good" like a suit (which they use as an example in the links). It represents training which enables the fulfillment of your duties. It is a contract to protect a company's investment which is paid back over time. Unfortunately, it seems that once the contract is broken the taxman sees it as money!
It has been proven in court within the UK that it isn't tax deductible, have a look at this: Airline pilots: payment of training costs: Milsom & Hinsley v HMRC (SpC569) - very relevant to us as pilots!
PT
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PT I am afraid that is the answer if the bond is settled for you.
Parabellum and Lowfat are assuming that the bond is not settled and there might be an option if the value of the bond against you is to continue, but the doorway is narrow and you need to fit exactly into it.
If the bond is not settled but purchased by the new employer then as Parabellum is thinking, there is no benefit. That applies only if the bond is assigned, i.e. the same contract you have with employer 1 continues with employer 2. Take a look at your contract and make sure that it does not preclude the assignment of the bond (with or without your consent). Then you just need employer 1 and2 to ply ball.
If the bond is paid by your new employer then a benefit arises, and taking on a new bond to your new employer does not involve you in meeting the expense met by your new employer relating to the old bond.
Practically these two routes achieve the same thing but the tax effect is not the same.
Parabellum and Lowfat are assuming that the bond is not settled and there might be an option if the value of the bond against you is to continue, but the doorway is narrow and you need to fit exactly into it.
If the bond is not settled but purchased by the new employer then as Parabellum is thinking, there is no benefit. That applies only if the bond is assigned, i.e. the same contract you have with employer 1 continues with employer 2. Take a look at your contract and make sure that it does not preclude the assignment of the bond (with or without your consent). Then you just need employer 1 and2 to ply ball.
If the bond is paid by your new employer then a benefit arises, and taking on a new bond to your new employer does not involve you in meeting the expense met by your new employer relating to the old bond.
Practically these two routes achieve the same thing but the tax effect is not the same.
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When someone leaves an employer while under bond, they trigger a liability. If your new employer offers to remove some or all of that liability to the old employer and replace it with a new potential liability in the form of a bonding agreement with them, I do not see how there can be a benefit in kind which would generate a tax liability.
I have never worked for a company rich enough to clear new employees' bonds with previous employers, but I do know of large UK AOC holders, both fixed and rotary wing, who do this for both pilots and engineers. I cannot imagine that they do so without being confident that HMRC are not going to pursue them for tax on a benefit in kind (it being easier for HMRC to pursue the employer rather than the employee).
RHRP
I have never worked for a company rich enough to clear new employees' bonds with previous employers, but I do know of large UK AOC holders, both fixed and rotary wing, who do this for both pilots and engineers. I cannot imagine that they do so without being confident that HMRC are not going to pursue them for tax on a benefit in kind (it being easier for HMRC to pursue the employer rather than the employee).
RHRP
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RHRP - you have it in the first para. If the liability is triggered under the bond and new employer settles it for you then a BIK arises and is taxed. The new bond that you accept does not create an offsetting tax deduction. That may seem unfair, but there you go.
To avoid a BIK you need the old bond to continue and to be assigned by employer 1 to employer 2, then the payment between them is not a BIK for you.
To avoid a BIK you need the old bond to continue and to be assigned by employer 1 to employer 2, then the payment between them is not a BIK for you.
