Can an employer substitute an annual bonus with subscription for redeemable shares in offshore companies to avoid the tax that would have applied if the bonus had been paid in the normal way – through the payroll.
No, according to the Supreme Court in the case of USB AG & Anor v HMRC (2016) UKSC 13 in a unanimous judgement given on 9 March 2016.
One of the five judges, Lord Reed, made the following observation – “In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax (to borrow a phrase from the judgment of Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, 979) generally take the form described in Barclays Mercantile Business Finance Ltd v Mawson [2004]UKHL 51; [2005] 1 AC 684, para 34:”
“... structuring transactions in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute. It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge.”
I do not pretend to understand the complex nature of the scheme in this case, but broadly speaking it involved the use of the bonus amount to subscribe for redeemable shares in offshore companies. There were conditions attached that the shares could be forfeited if certain conditions arose. On disposal, there would be a liability for Capital Gains Tax, but not PAYE.
In both cases the Supreme Court found that the contingencies were arbitrary and had no commercial or business purpose. Therefore, the condition were no longer restricted securities.
This is yet another case where HMRC are enjoying a “good run of fortune”
The full judgement can be foundhere.
