Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

UBS win and Deutsche Bank lose £100m bonus appeals

by
5th Oct 2012
Save content
Have you found this content useful? Use the button above to save it to your profile.

Investment bank UBS could be in line for a potential tax refund after a tribunal ruled that bonuses paid into an offshore tax avoidance scheme were not liable for income tax. But Deutsche Bank lost its appeal in its appeal,  which was heard at the same time.

With around £100m involved in each case, the amounts of income tax at 40% (top rate at the time the bonuses were paid in 2002-3) and NICs due from the banks' employees were close to £50m.

In UBS Services & DB Group v HMRC [UKUT 320 (TCC)] the Upper Tribunal overturned a first-tier tribunal ruling in February that more than staff at the Swiss bank were liable to pay income tax and national insurance contributions on the bonus.

The bonus was made in the form of redeemable shares (“restricted securities") paid to an independent vehicle in Jersey. A class of shares was created in the offshore company subject to a number of restrictions, which the bank bought and assigned to around 10 employees as bonuses. On that basis, the payments would only be subject to captial gains tax and not income tax or NICs.

For employees who were UK-domiciled, the scheme was structured so as to enable redemption to take place after the shares had been held by them for two years, by when (with the benefit of business taper relief) the rate of CGT chargeable would be only 10%, unless the employee had meanwhile left the bank’s employment.

Under the arrangement, which the bank appears to have devised itself, USB's head of staff in Jersey was designated as a director of “Company Z”. Deutsche Bank ran a similar scheme through a Cayman Islands vehicle arranged for it by Deloitte. But the tribunal ruled that while Deutsche exerted a degree of control, UBS did not.

The hearing ranged at some length across the definition of “restricted securities” subject to the special taxation regime contained in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the Ramsay principle laid down in the 1982 case ([1982] AC 300) that artificial arrangements designed for no purpose other than to avoid tax should be taxed on the transaction as a whole. But ultimately, the tribunal judges made their split decision on the basis of control.

While the judges admired the ingenuity of HMRC's QC Paul Lasok, who deployed a “kaleidoscopic variety of arguments” to convince them to overturn the lower tribunal's decision, they were “unpersuaded”.

An HMRC spokesman told AccountingWEB.co.uk: “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.”

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.