PA Holdings drops appeal in dividends case

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John Stokdyk
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The Court of Appeal decision in HMRC v PA Holdings that dividends paid to employees through a restricted share plan were emoluments subject to NICs will stand after the company backed down from taking the case to the Supreme Court.

HMRC confirmed the situation in a recent statement that said: “The judgment in the Court of Appeal is now final. HMRC will be contacting those whose appeals remain open or are stayed pending the outcome of this case.”

HMRC indicated that there were significant numbers of very similar cases - running into three figures - that would be directly affected by this latest development, but played down concerns...

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16th Apr 2013 14:04

I think you've got the Court of Appeal's ruling the wrong way round there...

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16th Apr 2013 14:22

The judgment

The full judgment of the Court of Appeal

HM Revenue and Customs v PA Holdings Ltd [2011] EWCA Civ 1414 (30 November 2011)

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16th Apr 2013 17:25

A sanguine view of the PA Holdings case

Some practitioners have expressed concern that the decision in PA Holdings means that HMRC will start to attack small companies which pay regular (say monthly) dividends to their owner-directors rather than salary.  The concern arises because the Court of Appeal held in PA Holdings that rewards paid in the form of a dividend could attract the higher tax charges applicable to payments of employment income.

I am much more sanguine.  PA Holdings concerned a bonus payment that was dressed up as a dividend: the Court of Appeal considered that the tax provisions could strip away the clothing and charge tax on the payment by reference to what it really was (ie a bonus).

In the typical OMB situation, the owner/director of a company will often make regular extractions of cash from the company: such payments will often be made in the form of dividends because that is more tax-efficient than taking a salary.  The subtle distinction between this situation and that in PA Holdings is that (provided that the paperwork is properly in order) the regular payments will be in truth dividends, even though they might be enjoyed by the recipient in the same way as payments of salary might be enjoyed.

Just because they are paid regularly (say monthly, or even weekly) cannot make dividends something else.  Therefore, following the line taken by the Court of Appeal in PA Holdings, the only correct tax treatment would be to tax such payments as dividends.

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By hiu612
17th Apr 2013 11:51


were worried enough about the ambiguity the decision may cause to have written to the supreme court advocating that the right to appeal be granted. The worry might be less "what happens next" and more "what happens in a few years time", when someone at HMRC gets over-zealous and tries to apply the decision to an OMB, a-la Arctic Systems. Relying on HMRC's stated intention not to seek to target certain groups does not sit comfortably in these situations. The same is true of the disguised remuneration rules which, in theory, could be applied to a host of "vanilla" situations.

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17th Apr 2013 12:20

Not sure they could

Moses decision is worth looking at he claimed that the schedules and cases were mutually self-excluding, hence as FTT decided that the sums were emoluments (using the language at the date of the scheme) they could not be considered to be dividends for tax purposes and so would fall within the ambit of the 'tie breaker' provision (s20(2)) which said that they could only be taxed as dividends.

We no longer have the schedules and cases of course, ITEPA when passed in 2003 was silent on the issue of dividends but when ITTOIA was passed in 2005 it inserted a tie breaker into ITEPA which is much clearer than the old s20(2) and doesn't, as I read it, permit the interpretation that Moses LJ placed on the original legislation.

Naturally in the current climate the scheme couldn't work anyway because of disguised remuneration etc but... it still leaves open the interesting question as to whether the rules inserted into ITEPA by ITTOIA do give a degree of protection to emolument/dividends and hence are the reason why HMRC don't seem so keen to use PA Holdings to move into other related areas which we have feared.

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17th Apr 2013 13:49

I agree with Keith Gordon

I'm less sure about Paul's interpretation of S.716A ITEPA 2003 though, since Lord Justice Moses looked beyond the realms of statute.

Too much is being made of the "character of the income in the hands of the recipient" point though in my view. I've searched cases using the phrase "character of the income" and got 186 results (admittedly there will be duplicates).

It's nothing new. It's a test that's been used consistently; to determine whether receipts are capital or revenue; whether they arise from a self-employment; whether they arise from the variation of employment rights or from redundancy; or whether they arise from an employment. It's been applied (albeit expressed in slightly different terms) as recently as 2010 in Kuehne+Nagel.

Lord Reid's comments in Laidler v Perry 42 TC 351 are still good (and they were referred to in PA Holdings); "Did this profit arise from the employment? The answer will be no if it arose from something else."

In PA Holdings there just wasn't a "something else". PAH made an EBT contribution (and took a tax deduction for it) and the EBT contributed the funds to Ellastone in return for the issue of shares to the employees. The same funds that PAH had originally contributed as an EBT contribution passed to the employees from Ellastone but "dressed" (as Keith says) as a dividend. There was no "something else".

Dividends paid genuinely out of profits and on shares genuinely acquired will be a "something else" in most instances. IMHO.

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17th Apr 2013 13:48

Text corrected - I got my Schedules in a twist

Thanks @The Limey for alerting me to the mistake towards the end of the story. The ICTA88 schedules are a little bit outside of my sphere of knowledge and it took your help to spot where I was going wrong.

I double-checked with the original decision and switched the offending schedules around in the offending paragraph.

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