In Cyclops Electronics Limited and Graceland Fixing Limited V HMRC  TC05234 tax planning involving an award of loan notes to directors as bonuses failed. The loan instruments were held not to be forfeitable restricted securities and were taxable as if they were cash bonuses.
- Both companies deployed tax planning that aimed to pay their sole director employees cash bonuses avoiding PAYE and NICs.
- Their directors received loan notes, these were subject to forfeiture provisions, and it was claimed that under s425 ITEPA, the loans were employment related securities (ERS) and no tax was due on their issue.
- It was claimed that as ERS loan notes, 'redemption' did not equate to disposal and therefore there was no charge under the ERS rules when they were subsequently redeemed.
The First Tier Tribunal (FTT) considered the Deutsche Bank and UBS and other cases relating to the “Ramsay” doctrine. It held that there was no commercial reason for the loan notes to have forfeiture provisions and thus the award of loan notes was subject to tax.
On the redemption issue, the FTT took a purposive approach: it was illogical that parliament would have intended redemption not to be treated as a disposal.
In considering the timing of when a payment was made for PAYE purposes, the FTT decided that as the directors were fully in control of their companies and could convert the loan notes into cash at will, that payment was made at the time of the issue of the loan notes to the individuals.
This decision has now been upheld by the Upper Tribunal.