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James H Donald (Darvel) Ltd and others v HMRC

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In James H Donald (Darvel) Ltd and others v HMRC [2015] UKUT 514 (5 October 2015), the UT found that dividends paid by a company to reward a number of individuals for their employment with another company were taxable as emoluments from employment.

The appeals related to three schemes implemented by a company (Darvel) and its employees to avoid PAYE and NICs in relation to emoluments and benefits in kind. The three schemes each involved the incorporation of a company (a ‘newco’), which issued shares to Darvel and its employees. As a result of two schemes (‘Plan 5’ and ‘Plan 7’), employees received part of their salaries in the form of dividends paid by the newcos. The third scheme (‘Plan 2’) involved the provision of cars by a newco to designated employees.

The FTT had found that the payments of dividends under Plans 5 and 7 had been referable to the recipients’ employment with Darvel and had represented a reward for their services, so that they had been emoluments from employment. Similarly, the cars provided under Plan 2 had been truly provided and funded by Darvel.

Counsel for the appellants contended that the FTT had erred in law, as there was a hierarchy of charging provisions, according to which once the payments had been identified as dividends, they could not also be emoluments.

Referring to Hochstrasser [1960] AC 376, the UT noted that the FTT had found that the payments had been, in substance, income from employment. The FTT had therefore been right to find that they were not dividends. Furthermore, PA Holdings [2012] STC 582 was authority for the proposition that the tribunal should focus on the character of the receipts in the hands of the recipients. Finally, the phrase ‘an emolument from employment’ entailed emoluments paid by a third party by reason of the recipient’s employment.

As for Plan 2, the UT rejected contentions that the recipients had not been employees of Darvel.

Read the decision.

Why it matters: The UT stressed that the ‘fallacy in the appellants’ arguments is the proposition that form trumps substance’. In doing so, the UT rejected the notion of a hierarchy between charging provisions, explaining that the Court of Appeal in PA Holdings had not given priority to one income tax schedule over another, but had simply identified the source of the income. This decision may be relevant in other contexts where two charging provisions could potentially apply.

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Categories: Cases