Bonuses paid to directors of a company (in the tax year 2004-05) which were structured as dividends under an avoidance scheme have been held by the First-tier Tribunal to be employment income and subject to income tax and NICs - Manthorpe Building Products Limited v HMRC [2012] UKFTT 82 (TC).

In this case, the company conceded that the payments were remuneration but argued that the priority provision in section 20(2) of the Income and Corporation Taxes Act 1988 applied, so that the payments could only be taxed as dividends. However, following the recent Court of Appeal's decision in HM Revenue and Customs v PA Holdings Ltd [2011] EWCA Civ 1414, the tribunal found in HMRC's favour.

The PA Holdings Ltd case held that section 20(2) did not apply where bonuses were structured as dividends, as only the income tax schedule most applicable to the source of the payments applied, which in this case was that for employment income. Since only one schedule applied (rather than the employment income schedule and the dividend income schedule), the statutory priority rule was irrelevant.

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