EBT dividends to be chargeable under PAYE and NIC
PA Holdings Ltd (PA) has withdrawn its appeal to the Supreme Court regarding the decision by the Court of Appeal that dividends paid to the employees via an employee benefit trust structure were in fact bonuses and subject to both PAYE and NIC.
PA transferred the amount assigned as bonuses into an offshore trust, which then paid dividends to the employees through restricted preference shares in a nominee company.
The Court of Appeal concluded that the funds should be considered “on the character of the receipt in the hands of the recipient”. Quite simply, the ruling looks straight through the trust to establish that the amounts were indeed bonuses.
All in all, the structure and all the subsequent litigation have proved fruitless for PA.
Determined by the Court of Appeal to be emoluments, the amounts paid out between 2000 and 2003 are now chargeable to PAYE and NIC. Any other company with a similar fact pattern could also receive the same retrospective treatment.
Why back down now?
It is not the most comfortable climate for companies to be defending their schemes to reduce their tax liabilities, so PA’s u-turn is likely to be a response to the general mood against tax avoidance.
Furthermore, the stance from HMRC and the Court of Appeal suggests that the GAAR or any other proceedings will prevent any such structures in the future.
This is perhaps one door that has been closed off to companies, but HMRC have not clarified the extent to which they might apply this ruling on dividends more generally.
Apparently, companies in a similar position that were waiting for resolution on this point could number in the hundreds. Indeed, it is common practice for many small companies to pay their directors at least in part by way of dividends, although this is not currently considered a means of artificial remuneration by HMRC.
The suggestion is that HMRC will continue to focus instead upon artificial remuneration schemes like that used by PA e.g. where companies are using trusts and other intermediaries to avoid PAYE and NIC.
Once we see the particulars relating to further cases this might shed more light on HMRC’s stance on dividends paid to family members, the use of ordinary shares or variations in the company’s accounting etc. More clarity from HMRC as to where they will be drawing the line between commercial and artificial would be very welcome but unlikely!
The Court of Appeal decision from November 2011 can be found here.
Please contact Piers for more information or comments: PPye-Watson@mdaviesassociates.co.uk