Boyle v HMRC: Crack down on Payroll Tax Avoidance Scheme Continues

In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.

Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.

The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.

The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.

The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.

This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.

With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.

Child Benefit High Income Tax Charge – 5 Points You Might Not Know

From 7 January 2013, where a person earns more than £50,000 and they or their partner claim child benefit, a tax charge will apply in the form of the child benefit high income tax charge. The charge will apply to the person with the highest net adjusted income – which may not be the recipient of the child benefit.

The effect of the child benefit high income tax charge will be to apply a tax liability via the self-assessment tax return system. The amount of the charge will be tapered where the child benefit recipient or their partner earns between £50,000 and £60,000, with the effect that once income reaches £60,000 the entirety of the child benefit payment will be reclaimed through the tax charge.

There are a number of areas where care should be given:

1. The charge applies where either the person claiming child benefit or their partner earns more than £50,000. Therefore it will be necessary to consider the earnings of a taxpayer’s partner. The charge will apply to the person with the highest net adjusted income – which may not be the recipient of the child benefit.

2. The child benefit high income tax charge applies from 7 January 2013 therefore a tax liability could arise in relation to the current (2012/13) tax year with the tax being due for payment by 31 January 2014.

3. Where a person is required to make payments on account, this will include any tax arising as a result of the child benefit high income tax charge thus increasing the tax payable at 31 January and 31 July respectively.

4. Where a person earns more than £60,000 it may be preferable to elect not to receive the child benefit payment (known as a ‘nil award’)

5. Claiming child benefit can protect eligibility for the state pension by way of an NIC credit. Therefore taxpayers earning more than £60,000 that do not currently receive child benefit but become eligible in the future should ensure that they do register for child benefit initially and then elect to receive a nil award so as to preserve this protection.

Top Tax Tips for Owner Managed Businesses – Tip 1 – Remuneration Planning

Top Tax Tips for Owner Managed Businesses

1. Remuneration Planning

Remuneration planning is a key strategy to mitigate the tax liability of a shareholder-director.

The planning adopted will depend on the commercial requirements of the company but may include:

■Bonuses

■Dividends

■Loans

■Capital Distributions (perhaps on a liquidation)

For a stand-alone small company the best strategy remains to pay a small salary complemented by dividends.

Every case is different though and depends on the marginal rate of the company and individual. Utilisation of a spouse’s unused basic rate band should also be considered but must be handled with care and advice taken.

A Payment Cannot be Both Dividend and Employment Income

PA Holdings Limited constructed a complex arrangement in order to try and ensure employee bonuses were taxed as dividends rather than employment income.  The company paid a capital contribution into employee benefit trusts, out of which bonuses were paid to select employees in the form of dividends.

The First and Upper-tier tribunals decided that the payments were employment income under Schedule E and dividend income under Schedule F. The effect of this being that they were not chargeable to tax as employment income, only as dividends; but they were earnings for the purposes of NI contributions.

Both parties appealed to the Court of Appeal.  The Court of Appeal overturned the Upper Tier Tribunal ruling that income can be in both schedules E & F. The judge stated that if income falls within Schedule E, it is precluded from falling within Schedule F.

The Court found that the income fell within Schedule E as the amount of payment received by the employee was dictated by the employer.  Therefore the payments were remuneration for employment and subject to Income tax and NICs accordingly.

No PAYE or NIC’s: Talentcore Ltd v R & C Commrs

 HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.

The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.

Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.

The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:

 (a) Providing, or under an obligation to provide personal services; or

 (b) Subject to (or to the right of) supervision, direction or control.

The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.

 The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.

The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.

Payments are Gratuities

A company created two employee benefit trusts for its employees.

After the sale of the parent company for £39 million, cash payments were made to certain employees by the trustees at the end of October 2002, October 2003 and February 2004. These payments were based on the company’s bonus structure and length of service.

HMRC decided that the company should pay primary and secondary class 1 National Insurance contributions on the payments made to the employees. The company appealed this ruling and claimed that the payments were gratuities and should be exempt from National Insurance under Social Security (Contributions) Regulations 2001 Sch 3 para 5.

The First-tier tribunal stated that a gratuity in this situation was a payment given voluntarily in recognition of services rendered and the amount given depended on the donor.

The payments made to the employees were considered individually in order to see if they satisfied the gratuity test.

The company’s appeal was allowed as a result of the payments being gratuities as the trustees were not obliged to make the payments and the amount was at their discretion.