A tax tribunal has ruled that PAYE tax and National Insurance Contributions should have been paid on bonuses given to directors through companies which were specially set up just to be liquidated and pay out the cash report Harris & Co chartered accountants Northampton who are specialist small business accountants.
In a scheme promoted by accountancy firm Barnes Roffe LLP and used in tax years 2003/4 and 2004/5, Tower Radio Ltd and Total Property Support Services Ltd [ UKFTT 387 (TC)] were lead cases at the First Tier Tribunal (FTT).
The FTT’s decision is relevant to 104 other companies which used the same tax avoidance scheme to try to pay bonuses without any PAYE tax or NICs. The companies set up subsidiary companies as special purpose vehicles (SPVs) funded with surplus cash. The directors were awarded restricted shares in the SPVs which were then liquidated and the cash paid out to the directors as distributions in respect of their shares.
The defendants’ case revolved around the Ramsay principle but this was dismissed; the tribunal judge ruled that PAYE tax and NICs must be paid on the money received by the directors.
Tribunal judge Peter Kempster stated in the judgment:
‘Our view is that the scheme was a composite transaction consisting of a series of steps that began with the decision to use the BR [Barnes Roffe] scheme and ended with the receipt of the liquidation distributions by the employee.’
The decision has protected £22m in PAYE tax and National Insurance, according to HMRC. The hearing was conducted under Tribunal Procedure Rule 18, which is used when there are other cases with common or related issues of fact or law at stake.
Treasury secretary David Gauke said:
‘This scheme was designed specifically to avoid paying tax and National Insurance; the ruling is another important win for HMRC in its work to ensure the right amount of tax is paid by everyone. This is a clear result and should act as a warning to others who try to manipulate the system.’
The decision is available HERE.