PA case raises dividend fears

The tax tribunals have been busy with dividend-related cases in recent months. Following on September's TAXtv analysis of the Patmore case, Tim Good turned his attention in this month’s episode to PA Consulting v HMRC.

October's TAXtv was filmed at the SESCA annual conference at the University of Sussex and included a Q&A session in which one of the audience members asked for advice about issuing non-voting shares to senior employees so that dividends could be paid without diluting the owners’ shareholding.

Both PTP lecturer Mark Ward and Tim Good were against it. Good warned that HMRC was quite likely to pick up on this issue, especially following its victory in the recent PA Consulting case.

The consultancy's challenge related to millions of pounds of dividends paid to employees in what HMRC argued was disguised remuneration. Where non-voting 'Alphabet' shares (A shares for Andrew, B shares for Barry etc.) are issued purely as a conduit for remuneration, HMRC will argue they are emoluments from employment and that they are therefore subject to National Insurance.

The upper tribunal held that PA's dividend payments were emoluments, so for NI purposes, the earnings should have been subject to primary and secondary Class 1 NIs. "Perversely those dividends will be treated as dividends for income tax, because of the 'tie-breaker' clause in tax legislation," Good explained. "If an amount is a distribution, then it must be taxed as a distribution so there could be an advantage to get dividends instead of earnings."

While not wishing to "scare monger", he raised a concern that the PA decision could affect low salary, high dividend proprietary directors who take up to the £5,715 personal tax threshold in salary and the rest in dividends. While there is no evidence yet that HMRC is moving in this direction, Good explained, "Counsel for the taxpayer did make an unfortunate reference to this and suggested the logical conclusion of the first tier was that dividends could be subject to National Insurance."

This possibility has not been picked up yet, and with small business taxation under review there could be something different in place by next year, he warned. Co-presenter Giles Mooney amplified this point: "With the Office of Tax Simplification starting to get into full flow, we need to find out what's going to happen. This will be an on-going issue people need to face on National Insurance, particularly as it increases."

Also covered in the October TAXtv episode are the following tribunal cases:

• Total People v HMRC, concerning motoring expenditure for a team of roving trainers
• Reiter v HMRC on allowable travel expenses for a locum consultant working on a temp contract for an NHS hospital trust
• Harris v HMRC – whether post-death variations benefiting a family trust qualify for Gift Aid.

If you want to find out more about PA Consulting v HMRC or any of these other cases, commentary is available in October's 40-minute TAXtv episode – click here for subscription details.