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Companies face NIC charge on dividends as PA Holdings withdraws appeal

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Some companies are facing the prospect of significant bills for national insurance contributions on dividends after PA Holdings Ltd withdrew its appeal to the Supreme Court against a decision that payments in the form of dividends as part of a tax avoidance scheme were, in substance, emoluments chargeable to PAYE and NICs.

‘The judgment in the Court of Appeal is now final. HMRC will be contacting those whose appeals remain open or are stayed pending the outcome of this case,’ HMRC announced today.

‘Anyone who has a situation like PA Holdings is now going to have to accept that PAYE and NIC are going to be payable, potentially, on dividends,’ Philip Fisher, a partner and employment tax expert at BDO, told Tax Journal.


There was no question, Fisher suggested last year, that the arrangements put in place by PA Holdings were ‘prima facie artificial’. Writing in Tax Journal, he noted that in the Court of Appeal Lord Justice Moses had ‘taken a highly moral line’.

But Fisher warned then that ‘there has to be every chance that missives are being fired around tax offices up and down the country encouraging inspectors to review dividend payments to see whether they might reasonably be taxed as bonuses’.

He told Tax Journal today that the ‘big question’ now was how HMRC would react to the company’s decision. ‘I imagine they are going to take action in cases that are on all fours with PA Holdings. But the question is how much more they want to push it – whether they will try to extend the PA Holdings “principle” to other situations where they believe there has been tax avoidance through creation of alphabet shares etc,’ he said.

Stephen Woodhouse, a tax partner at Deloitte, has suggested that if a general anti-abuse rule had been in place, the litigation in PA Holdings would not have been necessary. ‘The plan was established to deliver bonus amounts in a form reducing tax and NICs. It would seem reasonable to regard that as being an unreasonable course of action, taking into account the underlying legislation and its policy objectives,’ he wrote last July, in a reference to the ‘double reasonableness’ test.

The Court of Appeal decision

The Court of Appeal unanimously allowed HMRC’s appeal in HMRC v PA Holdings Ltd CA [2011] EWCA Civ 1414. For 2000/01 to 2002/03, the company entered into complex arrangements under which it paid employees’ bonuses in the form of dividends. Tax Journal’s cases editor Alan Dolton reported, in December 2011, that the dividends were financed from a capital contribution to the company from employee benefit funds. The funds, in turn, were derived from the company.

‘HMRC imposed determinations under Income Tax (PAYE) Regulations, SI 2003/2682, reg 80. The company and one of its employees appealed, contending that the income was chargeable to income tax under Schedule F and could not also be subjected to PAYE or charged to national insurance contributions,’ Dolton said.

However, Lord Justice Moses held that the court ‘should focus on the character of the receipt in the hands of the recipients’. The payments ‘arrived in the hands of employees, as they were intended to do, as bonuses’.

LJ Moses added: ‘The insertion of the steps which created the form of dividends or distributions did not deprive the payments of their character as emoluments. The insertion had no fiscal effect because [ICTA 1988 s 20], construed in its statutory context, does not charge emoluments under Schedule F … The award of the shares and the declaration of the dividend were, in reality not separate steps but the process for delivery of the bonuses.’