HMRC has added more tax avoidance schemes to its Spotlights anti-avoidance page. The share-bonus scheme involves giving employees shares in another company instead of paying bonuses that would otherwise be subject to PAYE. The employee later liquidates his new company and receives cash.
Many advisers will have seen variations of this scheme that tried to take advantage of the restricted securities rules. However, following a change in the law in 2003 this planning is not seen as effective.
In LM Ferro Ltd v HMRC [2013] TC02853 the employer purchased restricted shares in a special purpose vehicle (SPV) at a premium and transferred these shares to its director. Following the 2003 law change extra steps were added to the scheme which ultimately allowed the employee cash when the SPV was liquidated. The tribunal ruled that the payment was actually a cash bonus, and said
“The facts of this transaction, which disclose series of meetings, resolutions, agreements and transfers, whereby Mr Ferro dutifully followed detailed instructions given to him, and signed what he was asked to sign, all performed with the ultimate objective of avoiding tax, can without any hesitation be described as components in a contrived and artificial scheme to avoid tax.”
In Tower Radio v HMRC [2013] TC02784 an employee was given an award of restricted shares in a SPV. Following a change in the law it was decided to liquidate the SPV returning cash to the shareholders. The First Tier Tribunal decided that the scheme did not work on the Ramsay principle: the bonus was taxable. This finding was overturned by the Upper Tier Tribunal in 2015 who decided that the Ramsay principle did not apply in this case.
HMRC would like you to settle your outstanding liabilities: this is certainly a cheaper option than litigation.
Schemes that work
The government is encouraging share ownership, and has created two approved tax schemes which legitimately allow employees to be given shares tax-free:
- see Employee Shareholder Status: tax & planning
- alternatively, employers may award shares using an EMI share option scheme.
Both these schemes can be used to create tax effective exit based bonus schemes - the employee receive value on the event of a trade sale, listing, management buyout etc. For further information contact our Virtual Tax Partner support service.
Links:
Schemes which use dividends to avoid NICs
