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Tribunal upholds UBS scheme to avoid tax on bonuses

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UBS is in line for a potential tax refund of £50m, according to reports, after a tribunal held that bonuses paid into an offshore tax avoidance scheme were not chargeable to income tax.

‘The Upper Tribunal overturned an earlier court ruling that more than 400 senior staff at the Swiss bank were liable to pay income tax and NICs,’ The Times reported yesterday under the headline ‘Taxman suffers bloody nose in fight against tax avoidance by banks’. The staff had received ‘£92m in bonuses through a Jersey-based vehicle in 2004’.

An HMRC spokesman told Tax Journal: ‘HMRC is disappointed that the court did not fully support our arguments. We are considering whether to appeal against the decision in the UBS case. Despite this result, HMRC has a strong record of success in litigating tax avoidance. In the last few years HMRC has won in the overwhelming majority of tribunal and court decisions in avoidance cases.’

The Times noted that HMRC ‘avoided a separate payout to Deutsche Bank after the [same] tribunal dismissed a related appeal over a bonus scheme that sought to shelter tax through a Cayman Islands-based vehicle’.

The tribunal judges reported in UBS AG and Deutsche Bank Group Services (UK) Ltd v HMRC that ‘each case involved the use of a carefully planned tax avoidance scheme which was designed to enable the appellant bank to provide substantial bonuses to employees in the tax year 2003/04 in a way that would escape liability to both income tax and national insurance contributions. The mechanism chosen for this purpose was an award of redeemable shares in a special purpose offshore company set up to participate in the scheme.’

Tax Journal’s cases editor Alan Dolton, summarising the decision for this week’s issue, said: ‘HMRC issued determinations under PAYE Regulations, SI 2003/2682, reg 80 on the basis that the sums in question were “earnings received by employees”. The bank appealed, contending that the shares received by the employees were “restricted securities” within ITEPA 2003 s 423. The Upper Tribunal accepted this contention and allowed the appeal (reversing the First-tier decision), holding that the words “entitled to payment” in ITEPA 2003 s 18(1) should be confined to denoting “a present right to present payment”, rejecting HMRC’s contention that they also included a right to a future payment.’

Dolton noted that Mr Justice Henderson concluded that ‘the [UBS] scheme was technically sound and produced the fiscal results which it was planned to produce’. The Deutsche Bank scheme failed on technical grounds, however.

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