Remuneration Planning Fails at Court of Appeal
A scheme aimed at rewarding employees through special dividends rather than bonuses has failed at the Court of Appeal, with the result that the ‘dividends’ are subject to both PAYE and NIC. The decision could have implications for other employers where dividends have been used as a substitute for remuneration.
In PA Holdings Ltd v HMRC, PA changed its bonus arrangements so that, rather than simply pay cash bonuses to staff, employees instead received preference dividends from a special purpose company set up by an employment benefit trust. PA argued that because the employees received dividends, these were subject to tax at the dividend tax rate rather than being subject to PAYE and NIC. The First Tier and Upper Tribunals had both held that the employees had in fact received emoluments, but because the payments could be taxed as either dividends or employments, a ‘tie breaker’ in the tax legislation meant that the payments must be taxed as dividends. For NIC this was not the case, so we were left with the unusual situation of dividends on which NIC was payable. The Court of Appeal overturned these earlier decisions on the basis that the real character of the payments was that of emoluments, and that it was not necessary to look beyond that to the tie breaker.
Whilst the PA case involved complex tax planning arrangements, the decision could have wider implications for more mundane tax planning. The types of planning most likely to be vulnerable are those where dividends are used as a substitute for remuneration. For example, where an owner manager has a nominal salary but extracts regular interim dividends from his company. Other situations vulnerable include the use of the so called ‘Alphabet’ shares, where there are many different classes of shares with different rights attached to each, meaning that payments can be channelled to one shareholder, or the use of dividend waivers by other shareholders to achieve the same result.
Employers concerned about the implications of this case should seek advice, and can contact either Rosemary Blundell or Richard Service.