In a recent Supreme Court decision UBS AG & Anor v HMRC [2016] UKSC 13 the Supreme Court unanimously ruled in favour of HMRC and held that the bonus tax arrangements implemented by UBS and Deutsche Bank didn't work.
The schemes involved some complexity but, in essence, instead of the employees receiving discretionary cash bonuses (which would have been subject to income tax when the bonuses were paid) the banks used the amount of the bonuses to subscribe for redeemable shares in offshore companies. The shares were awarded to the employees in place of the bonuses. Conditions were attached to the shares making them subject to forfeiture if a contingency occurred. The idea was that when the shares were ultimately disposed of there would be a capital gains tax liability (or not as the case may be for non-domiciled employees) and at no stage would there be an income tax liability.
The importance of the contingencies was that it made the shares "restricted securities" which was a critical factor in enabling an income tax charge to be avoided. In the UBS scheme the contingency was a specified rise in the FTSE 100 within a three week period and in the Deutsche Bank scheme it was the employee being dismissed for misconduct or leaving voluntarily within a six week period.
In both cases the Supreme Court found that the contingencies were arbitrary and had no commercial or business purpose. On that basis the Supreme Court decided that the contingencies could be ignored with the result that the shares ceased to be restricted securities. This meant that the shares were taxable when they were received.
HMRC is focusing a lot of effort in relation to tax avoidance schemes and is certainly enjoying a "great run of form" in the courts. In the current climate the courts appear increasingly willing to look for ways to strike down tax avoidance schemes. Anyone considering entering into a tax avoidance scheme should therefore approach things with considerable caution. Where steps are inserted into an arrangement with little or no commercial purpose the courts are willing to ignore them and if these steps underpin the success of the scheme this of course is fatal.
Another Nail In The Tax Avoidance Coffin
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