A client is an employee. He used to get an annual monetary bonus based on his performance and that of the UK ltd company he works for. Client is UK res.
The employer has replaced the bonus with a "contract for difference" and is described as such by the employer. The CFD is taxed as a capital gain at 28%, thus providing a significant tax saving to both employer and employee.
It seems too good to be true.
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If it's paid like a duck
I'd be interested in seeing the paperwork, but this seems like classic disguised remuneration to me. It is going to look especially suspicious given the past history of paying a bonus to the employee. They have had a bonus every year in the past, and suddenly they are getting an annual gain instead? I can't see HMRC standing for that if they get wind of it.
No...
... it's an employment-related security. Securities are defined in S. 420(1)(g) ITEPA 2003 as including "rights under contracts for differences or contracts similar to contracts for differences (other than contracts of insurance)". So I'd say it was liable to income tax.
Whether it's liable to NIC will then depend on whether it's readily convertible.
Is this good for the employee?
I may be missing something here, but isn't one of the characteristics of a contract for difference (especially if it's equity-based) that it could swing either way - so the employee could end up paying his boss!
Oh well that's OK then
If a well-known firm of CAs say it is fine and not notifiable, who are we to question them? We must have misinterpreted the obviously artificial nature of the arrangement and the employment-related security aspect.
You've done all you can by warning the client. It might be an idea to put your misgivings in writing for when....I mean if this comes back to bite them. Be sure to couch it in terms of being sure your esteemed colleagues have checked, but that you still have concerns as covered above.
HMRC are now asking Employers to settle CFD schemes
As reported by Smith & Williamson in thier newsletter dated 26 Oct 2015 HMRC has started to issue letters to employers inviting them to settle tax due on Contracts for Differences (CFD) schemes in order to avoid litigation.
It appears that HMRC are maintaining that the contract awarded to the employee is not a true CFD, as not really being to secure profit for the employee but merely to pay him earnings.
Smith and Williamson go on to say that HMRC may consider the scheme to have been notifiable under the DOTAS rules and thus susceptible to the Accelerated Payment Notice (APN) process, with employers required to pay the alleged tax due first and argue the toss later.