The First-tier Tribunal has decided that tax was due on the value of employees' shares in cash-box companies, set up and funded by an offshore EBT in place of cash bonuses (Aberdeen Asset Management plc v HMRC [2010] UKFTT 524 (TC)). (Free access.)
The First-tier Tribunal decided that a tax avoidance scheme intended to provide tax-free benefits to senior employees did not succeed. (Aberdeen Asset Management plc and The Commissioners for HM Revenue & Customs [2010] UKFTT 524(TC).)
The scheme was used in the three tax years ending in 2002-03. An offshore employee benefit trust (EBT):
Incorporated offshore companies (with one share in each subscribed at a substantial premium).
Settled a trust for the benefit of each participating employee's family (family trust).
Transferred the shares in each company to the relevant employee and granted that employee's family trust an option to subscribe at par for another 10,000 shares (to reduce the taxable value of the issued shares).
Employees then received benefits from their companies, mainly in the form of loans which were not repaid.
The tribunal found:
The scheme comprised a series of steps intended to operate together, and was a means of channelling additional remuneration to each employee, which could be taxed under a purposive interpretation of the tax and NICs statutes, following the anti-avoidance case law of the line of cases starting with WT Ramsay v Inland Revenue Commissioners (1982) 54 TC 101 (Ramsay) (for more information, see PLC Tax, Practice note, Anti-avoidance case law and tax: Direct taxes and stamp duties).
The share values roughly equalled the subscriptions paid by the EBT, and were not reduced by the family trust options.
The shares were readily convertible assets (RCAs) and therefore PAYE income tax and class 1 NICs were due from the employer.
The relevant legislation has now been replaced by the amended Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the parties agreed that under ITEPA 2003 the scheme would not work. However, the decision deals with some issues which will be of interest to incentives practitioners, including:
Whether "trading arrangements" can be instrinsic to the asset, or must be external, for the purposes of determining whether an asset is an RCA. (The statutory provisions are now in section 702, ITEPA 2003.)
The independence (or lack of it) of professional EBT trustees appointed to administer "scripted" incentives arrangements. The tribunal held that the EBT was genuine, and the trustee had genuine discretion, but that discretion was not exercised in implementing the scheme. This may cause some concern for more mainstream arrangements, where it is often the case that the trustee closely follows the recommendations of the settlor company.