HMRC has managed to shut down a major tax avoidance scheme used by the banks UBS and Deutsche Bank after the Supreme Court ruled in its favour.
UBS and Deutsche paid bonuses to around ten employees in the form of shares in specially created offshore companies, rather than cash.
The banks created a class of shares in the Jersey and Cayman Islands’ companies subject to a number of restrictions.
The banks argued that the initial award of shares and their subsequent redemption would be exempt from PAYE and NICs.
To receive their bonus, the staff only had to avoid being dismissed or not resign within six weeks of receiving their bonus shares.
The scheme’s cost to the taxpayer was £135m, according to HMRC.
- “For employees who were UK-domiciled, the scheme was structured so as to enable redemption to take place after the shares had been held by them for two years, by when (with the benefit of business taper relief) the rate of CGT chargeable would be only 10%, unless the employee had meanwhile left the bank’s employment,”
In his judgement of the UBS case, Lord Reed disregarded UBS’s restrictions, stating that they were “completely arbitrary” and “had no business or commercial rationale”.
The court also ruled that the economic effect of the restrictive condition was nullified by the hedging arrangements, except to an insignificant and pre-determined extent.
The two cases have wound a complex path through the courts since 2012. HMRC won the first tier tribunal decision, before losing (and subsequently appealing) the upper tribunal case.
- “This is the latest in a series of successful HMRC challenges to such schemes marketed at wealthy individuals to get out of paying tax,” said Jennie Granger, HMRC’s director general for enforcement and compliance in a statement.
- “We will continue to challenge artificial arrangements such as these in the interests of the vast majority of businesses and people who choose to play by the rules.”
UBS has already repaid £50m in taxes, mostly from the pockets of the employees who benefitted from the scheme.
In a statement, HMRC said the landmark decision will now enable it to pursue a further £30 million in tax from 27 other users of similar schemes.
In an embarrassing twist, the current business secretary Sajid Javid was a managing director at Deutsche Bank when the bonus scheme was in operation.
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The bonuses were paid to staff via offshore accounts in the form of shares to avoid attracting income tax and national insurance in 2004.
The banks had argued that restrictions placed on the pay-outs meant they were not liable for tax.
But a judge said the UBS restrictions were “completely arbitrary”.
Under tax rules at the time, shares attracted only a 10% capital gains tax rather than income tax and National Insurance contributions.
In the case of Deutsche Bank bonus shares were awarded to staff through a Cayman Islands company, known as Dark Blue Investments.
To qualify for the bonus pay out staff only had to avoid being dismissed, or not resign within six weeks of receiving their bonus shares.
After a period of time had elapsed the shares could then be redeemed by the employees as cash.
‘Unlikely’ scenario
In the case of UBS, the restriction placed on the share pay out involved “a specified rise in the FTSE 100 index” over a three week period.
That scenario was deemed by the Supreme Court as “unlikely to occur”.
The UBS scheme was described by Lord Justice Reed as “completely arbitrary” and “having no business or commercial rationale”.
UBS has already repaid £50m in taxes, with much of that retrieved from those who benefitted from the bank’s scheme.
Business Secretary Sajid Javid was a managing director at Deutsche Bank when the Dark Blue Investments scheme was in operation, having joined the bank in 2000.
A spokesman for Mr Javid said: “This is a matter between Deutsche Bank and HMRC.
“Sajid Javid was paid with all tax deducted already. He received no benefit whatsoever from this scheme and all taxes due have been paid.”
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