Upper Tribunal upholds decision that bonuses paid as dividends were not taxable as employment income, but subject to NICs | Practical Law

Upper Tribunal upholds decision that bonuses paid as dividends were not taxable as employment income, but subject to NICs | Practical Law

A legal update about the decision of the Upper Tribunal (Tax and Chancery Chamber) in HMRC v PA Holdings Ltd [2010] UKUT 251 (TCC).

Upper Tribunal upholds decision that bonuses paid as dividends were not taxable as employment income, but subject to NICs

by PLC Share Schemes & Incentives
Published on 27 Jul 2010 • England, Wales
A legal update about the decision of the Upper Tribunal (Tax and Chancery Chamber) in HMRC v PA Holdings Ltd [2010] UKUT 251 (TCC).
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In HMRC v PA Holdings Ltd [2010] UKUT 251 (TCC), the Upper Tribunal (Tax and Chancery Chamber) upheld decisions of the Tax Chamber of the First-tier Tribunal (FTT) concerning discretionary bonuses paid in the form of dividends from a UK resident company, set up and funded by an offshore employee benefit trust (EBT), which was in turn funded by the employer. HM Revenue & Customs (HMRC) and the employer had each appealed against different aspects of the FTT decision that:
  • The payments were emoluments from employment, but also company distributions.
  • The payments were not taxable as emoluments from employment, but only as distributions. However, the payments were earnings subject to NICs.

Background and Facts

As reported previously, in PA Holdings Ltd & Anor v Revenue & Customs [2009] UKFTT 95 (TC), the Tax Chamber of the First-tier Tribunal (FTT) held that discretionary bonuses paid in the form of dividends from a UK resident company, set up and funded by an offshore employee benefit trust (EBT) (which was in turn funded by the employer), were not taxable as emoluments from employment, even though paid "by reason of employment", because:
  • The payments were both emoluments from employment and distributions, but the taxing provisions for company distributions took precedence over those applying to employment income, under section 20(2) of the Income and Corporation Taxes Act (ICTA 1988).
  • The FTT did not consider that the arrangements should be re-characterised as giving rise only to employment income under the case law applying to pre-ordained avoidance arrangements, in the line of cases including WT Ramsay Ltd v Inland Revenue Commissioners (1981) 54 TC 101 (Ramsay v IRC).
However, the FTT also found that National Insurance contributions (NICs) were due on the dividend payments, as there was no equivalent to section 20(2) of ICTA 1988 in NICs law, so there was nothing to prevent NICs arising on earnings even if the same payments could only be taxed as dividend income.
Section 20(2) of ICTA 1988 has now been re-enacted. The re-enacted legislation preserves the precedence of the dividend income tax charge over the employment income tax charge, so tax planning could still make use of this. However, avoidance schemes like those considered in this case will no longer work, because of anti-avoidance provisions added to the restricted securities tax regime for securities acquired on or after 2 December 2004.
For more information, see Legal update, Bonuses paid as dividends were not taxable as employment income, but were subject to national insurance contributions.

Decision

HM Revenue & Customs (HMRC) appealed to the Upper Tribunal (Tax and Chancery Chamber) (Upper Tribunal) against the decisions of the FTT that:
  • The payments were company distributions.
  • The payments were not taxable as emoluments from employment, but only as distributions.
PA Holdings Ltd (PA) cross-appealed to the Upper Tribunal against the decisions of the FTT that:
  • The payments were emoluments from employment.
  • The payments were earnings subject to NICs.
Both appeals failed and the Upper Tribunal upheld the decision of the FTT in all respects.

Comment

The Upper Tribunal's analysis of the arguments raised in the appeals may be of interest to income tax specialists (and to a lesser extent NICs specialists). The Upper Tribunal:
  • Confirmed that the approach taken in the line of cases including Ramsay v IRC was applicable when interpreting the employment income tax charging provisions in ICTA 1988. That approach led to the conclusion that the payments were from employment (as the FTT found primarily on the basis of other case law), but this did not exclude the conclusion that they were also company distributions.
  • Carefully considered and rejected PA's argument that the House of Lords' judgment in Abbott v Philbin (Inspector of Taxes) [1960] UKHL 1 (21 June 1960) excluded the taxation of the payments as employment income (for more information on this judgment, see Practice note, Important cases in share schemes and incentives: Abbott v Philbin (Inspector of Taxes) [1961] AC 352.
  • Considered and rejected arguments that income could not be from employment if it also derived from some other source. The appropriate question was whether the income "had the taxable quality of remuneration or reward for services". In any case, the contrast between employment and the payment of a dividend on shares as the source of the income was of no assistance, because the arrangements to pay the dividend arose from the employment.

Case

HMRC v PA Holdings Ltd [2010] UKUT 251 (TCC).