Income Tax (Earnings and Pensions) Act 2003 section 554AC

Meaning of "excluded transaction"

Section 554AC defines which transactions are treated as "excluded transactions" and therefore fall outside the close companies' gateway in the disguised remuneration rules, provided they are genuinely commercial and not motivated by tax avoidance.

• Three types of transaction can qualify as excluded: distributions made by the third party (B), transactions carried out by B in the ordinary course of business on arm's length terms, and transactions facilitating the disposal of shares in B on arm's length terms.
• None of these qualifies as an excluded transaction if the main purpose, or one of the main purposes, of the distribution or transaction is the avoidance of tax.
• The definition of "distribution" is broadened for these purposes to include distributions made in a winding up of the company, which would not normally count as distributions under the standard corporation tax rules.
• Where a transaction does qualify as excluded, the close companies' gateway in section 554AB does not apply, so no charge to income tax arises under the disguised remuneration provisions in respect of that transaction.