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.
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.
With the end of the tax year 2010/11 fast approaching there are several opportunities that will be gone come 2011/12.
Here are some of these opportunities:
- Pension Contributions: As of 6 April 2011 the annual allowance for pension contributions will be reduced to £50,000 as opposed to the £255,000 in 2010/11. If you are considering making lum sump contributions to a scheme then it is important to take advice as soon as possible because other factors may affect your planning
- Trusts & Estates: There is still a possibility for Capital Gains taxable on the settlor to be charged at the old rate of old rate of 18% even if the gains are realised after the 23 June 2010.
- National Insurance Contributions: With an increase of 1% due in 2011/12, a bonus paid before the end of the tax year will make an effective saving, compared to the bonus being later.
If you require any help with your tax planning, please contact Eaves & Co at either our Leeds or Southport offices for an initial consultation.