In James H Donald (Darvel) Ltd and others v HMRC [2015] UKUT 0514 (TCC) two schemes to avoid PAYE and NICs using dividends and partnership profits failed.
The company entered into three different tax schemes:
- Plan 5: it incorporated a company and gave employees shares. They were paid the national minimum wage by Darvel and their pay topped up by dividends from the new company.
- Plan 7: certain employees gave up their employment and became members of a LLP and shareholders in a corporate member of the LLP. Through the LLP they supplied staffing services to their old employer, Darvel.
- Plan 2 there was a scheme using another company in order to avoid benefits in kind on cars.
HMRC did not think that any of the schemes worked, the case went to the First Tier Tribunal (FTT) who found in favour of HMRC: payments under Plan 5 and 7 were emoluments and Plan 2 did not work.
The company appealed to the Upper Tribunal (UT). The UT remitted the Plan 2 decision back to the FTT in order that the FTT give further reasons for rejecting its appeal.
Looking at Plan 5, this scheme was very similar to that of PA Holdings, a case with similar facts that was decided by the Court of Appeal. The UT found that dividends received by the employees were income in their hands and that income derived from an employment relationship.
In looking at Plan 7, the UT considered the arrangements in the round. Whilst the employees had all resigned from Darvel, been given P45s and become members of the LLP, Mr Donald was solely responsible for the management and control of all the business. He was its controlling mind and the object of the arrangement was to facilitate the payment of wages/salaries to Darvel’s employees with a tax saving. The LLP members had no control over their business, the UT noting Autoclenz v Belcher [2011] an employment case where workers were held to be employees when their written contract did not agree to actual practices of the parties. The UT agreed with the FTT: the employees’ share of profits and dividends represented a reward for their services to Darvel. They had been calculated by reference to the entitlement in terms of their contracts of employment with Darvel, albeit rounded up slightly to disguise their legal nature.
Comment
The salaried members changes to Partnership taxation would now counteract the Plan 7 scheme. With hindsight, there was a huge weaknesses with the LLP scheme: its business was totally under the control of one individual : it could never be shown that it was really run by its members.
Links:
James H Donald (Darvel) Ltd and others v HMRC [2015] UKUT 0514 (TCC)
