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PA dividends case could go higher

28th Mar 2012
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Management consultancy PA is seeking leave to appeal after losing an appeal court decision millions of pounds of bonus payments made to employees as dividends rather than employment income.

In HMRC v PA Holdings in November, the Court of Appeal ruled in favour of HMRC’s  tax treatment of dividends paid to employees through a restricted share plan (A3/2010/2695 AND A3/2010/2694). The Court of Appeal verdict reversed a decision by the upper tribunal, which said that the dividends were both distributions and earnings.

In the 1990s PA Holdings paid bonuses to its employees in the form of a dividend rather than employment income; this arrangement would incur lower rates of income tax for employees and avoid national insurance contributions for both employees and employer

PA argued that the cash the employees received as dividend income should be subject to the lower Schedule F tax rates and not at the basic or higher rates (Schedule E). It also argued that the payments should not be liable for National Insurance contributions (NICs).

HMRC countered that the dividends were emoluments/earnings and should be taxed at a normal rate and should be subject to NICs.

In his Court of Appeal ruling Lord Justice Moses said that the upper tribunal had made an “error” in deciding that Schedule E and Schedule F could both be relevant.

“Income falls either under the one or the other. The factual conclusion that the income fell within Schedule E precludes any finding that the income also falls within Schedule F,” Justice Moses said.

TAXtv presenter, Giles Mooney, called the appeal court decision a “bit of a surprise” because previously under tax law, payments that could be seen as both dividends and bonuses were treated as dividends for tax purposes.

No word has been received yet whether PA will be able to take its appeal on to the Supreme Court.

Discussing the case in Any Answers in January, Baker Tilly partner and ICAEW Tax Faculty chairman David Heaton commented: “If the Supreme Court upholds the Court of Appeal reasoning (there's probably enough at stake to justify an appeal), and HMRC then announces that all dividends to employee shareholders are fair game, then we can all worry, but there have been assurances from ministers that genuine dividends will be acceptable, and one unsuccessful scheme seems unlikely to change that view.” 

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