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The end of the alphabet?

The recent decision of the First Tier Tribunal, Uniplex (UK), would appear to endanger tax schemes involving alphabet shares. What are the thoughts of AW readers?


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04th Nov 2010 12:19

Tax Avoidance or evasion

The crux of uniplex as I see it is that U failed to carry out the basic steps of any good avoider namely get your basic s correct and carry out the steps you say you intended to do. The main reason for failure seems to be the inability of U to provide documentation both in regard to the issuing of shares, creating of a discretionary trust  and providing the brochure/advertising guff that convinced their "easily convinced customers" that they could have considerably more in their pockets at the expense of the exchequer by merely suggesting that they were doing something.

No doubt Reg 72 would end up passing on the debt to the poorer  "easily convinced customers" when the main company failed to pay its dues into the bargain.

Additionally it does look as though the participants might be guilty of more than being duped into paying good money for something that didn't work. I only mention the possibility of tax evasion as the key to success of the scheme might seem to have been concealment of the transactions from the Exchequer/HMRC as opposed to fully laying out all that had been done and then letting HMRC try their worst. Seems like HMRC managed it here but I do not see that it was anything to do with the "issue" of funny shares as they seemed to be unable - or could it be unwilling - to produce anything that proved shares were issued. 

hope that this helps

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05th Nov 2010 13:00

On the wrong track, slightly

I read a report of the case in a tax magazine and they have reported it incorrectly. The Uniplex scheme actually failed because it was not executed properly, see this summary:

Will these schemes work if executed properly now? Well, the goalposts have subsequently been moved and HMRC has more legislation to counter them so it depends on the finer details. I am actually half way through an article on this very topic (before being distracted by this forum) so if you want further details register on my site and you will get it in the update next week.

Virtual Tax Support for accountants:

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05th Nov 2010 15:50

Uniplex case - Alphabet shares

A full reading of the decision notice is very clear that the problem here was a complete failure of implementation.

My view is that alphabet shares carry a risk at least that HMRC may consider slightly aggresive planning and therefore want to look into taxpayers affairs.  However where these fail it is almost always because of implementation failures.


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By jimlowe
10th Nov 2010 11:27

Get the procedures rights

I am a company lawyer, and not a tax expert, but the feedback I get from my many accountant clients is that using different classes of shares to manage tax liabilities works if it is sensibly done, appears to have some grounding in reality and is properly set up.

My concern is that often the basic legal requirements are not properly implemented. It is much easier to deal with an investigation if the proper paperwork is in place. (Incidentally, it also makes it much easier to deal with other matters that may crop up later, such as dealing with due diligence by a prospective purchaser of the company, or if a dispute arises between the shareholder/directors.) The basic requirements are:Set out the share classes in the articles
While it is possible to issue shares with different rights without doing so, my view is that the proper place for different classes of shares, and the rights attached to them is in the company's articles. It is not difficult to adopt a new set of articles and should be done, even if the share classes are just separate classes of ordinary shares so that differential dividends can be paid.Give the directors authority to vary dividends
Both Table A and the Model Articles require dividends to be paid in accordance with the shareholders' rights, so paying different dividends to different shareholders (even if the capital is divided into different classes of shares) is not in accordance with the articles, unless they specifically allow this. The simplest way is to give the directors (or the members, as appropriate) a power to vary dividends paid between the different classes of shares.Issue the shares by the proper procedures
This is often more complex than people realise, and issues as to whether the directors have authority to allot and whether there are pre-emption rights (statutory or otherwise) affecting share issues are often overlooked. In many cases the allotment should be authorised by the members.Redesignating existing shares
This should be done by a resolution signed by all existing shareholders, because their rights are being amended. This resolution and forms SH08 and SH10 must be registered at Companies House.Complete the statutory registers
The register of member is the primary document showing entitlement to shares. Any allotment or redesignation must be reflected in the register of members.Internal records
Minutes and records of the decisions of the directors and the members should be completed and retained for 10 years.Now the tax planning is up to you guys.Jim Lowe

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10th Nov 2010 12:10

I've never liked alphabet share schemes ..

.. for the simple reason that I think most of them are sham. The shares are usually of no value in themselves and have no rights to speak of any are usually required to be offered for nominal value on leaving the company's employment. What earthly reason is there for issuing such shares other than to avoid PAYE and NICs?

I am very interested in Jim's comments on the company law side which I think offer some valuable insights.

In Uniplex, the intention was there to issue shares but it does appear that they were never actually issued. But even if they had been HMRC would still have been on very good ground because the employees were paid exactly what they would have otherwise received in salary and bonuses (over and above the NMW). To my mind that would have been a sham anyway, because it would seem that the employees would have been legally entitled to the same level of 'remuneration' (perhaps with the exception of bonuses) either way. In other words the payments were given the appearance of dividends but the underlying reality was quite different.

As I say I simply do not believe that in most such cases there has not been at least an oral agreement entitling the employee to a certain level of compensation and so it you replace salary with what purport to be dividends it seems to me that you are asking for trouble. Payment of what would otherwise be discretionary bonuses may be different and I am again grateful for Jim's comments about the rights of different share classes in this respect.

Provided the dividends are legally declared and paid and all the paperwork has been done then, unless the arrangement is sham, which as I say I think Uniplex would have been even if the shares had been issued, I still consider that dividends are taxed as dividends due to the structure of ITEPA and despite the F(No2)A amendment to s447(4). However, that does not dispose of the matter because PA Holdings decided that dividends can still be earnings for NICs. Therefore if in reality dividends are based on personal performance or otherwise represent employment reward, then there is at least a danger of NICs being payable, and that would clobber many arrangements.

Different share classes held by the equity shareholders are another story.

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08th Dec 2010 14:55

Nichola, did you publish your article?

If so, I'd very much appreciate it if you could put the link on this thread please.

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