Landmark case

A long running case regarding the use of a Growth Securities Ownership Plan (GSOP) has been won by HMRC. The tax authority had argued that this was a tax avoidance scheme, and the judgement has agreed. The Upper Tribunal found that use of the scheme was clearly for the avoidance of tax on employment related payments, in particularly, bonuses.

The ruling has come about due to the appeals of Jones Bros Ruthin (Civil Engineering) Co Ltd and Britannia Hotels Ltd. The two companies both participated in GSOP arrangements, which HMRC claimed resulted in obligations to pay National Insurance contributions (NIC) and income tax under the PAYE system. The arrangements concerned the use of marketed schemes using purported Contracts for Differences (CFDs). Britannia Hotels set up the first scheme in 2010 while Ruthin set theirs up in 2011.

The case

In the Ruthin/Britannia case, each company entered into written contracts with certain employees under which it agreed to make a payment to the employee if the employer’s future profits exceeded a stated figure; that payment would only be made if the employee continued to be employed and certain conditions were met; and the employee agreed to make a payment to his or her employer if the profits were less than a lower specific figure.

Upon entering the contract, the employee made an upfront payment to the employer of an amount calculated to be equal to the then market value of the employee’s rights under the contract. The main benefit of this appears to be that bonus payments would be paid in such a way that they would be taxed at the capital gains rate of 28% and would not be liable for income tax.

HMRC argued that the GSOP arrangements were a tax avoidance scheme, with the aim being to remunerate participants with money that was owed to HMRC in the form of NIC and income tax payments. Furthermore, HMRC asserted that the use of supposed CFDs were designed to give the schemes an appearance of commerciality and contingency, however, ‘in reality it was no more than a disguised and artificially contrived method of paying money’.

The judgement went on to state:

‘It was plain from the marketing, design and implementation of the arrangements that the predominant purpose of the parties was to obtain the tax benefit. When viewed in the context of the documentation which clearly marketed the arrangements as a means by which to pay employee bonuses and the purpose of the arrangements it was plain that the appellants’ intention was to avoid the tax on such bonuses. In our judgment, the appellants’ assertion that the driver to implementing the arrangements was to incentivise the employees was implausible and not borne out by the evidence.’

What does the ruling mean?

Several high-profile individuals are likely to be caught out by this ruling as they previously utilised a similar GSOP scheme. These include singer Cheryl Tweedy, who used the GSOP scheme through her personal service company, CC Entertainment.

After the ruling, an HMRC spokesperson said the following:

‘We welcome this ruling which confirms these were tax avoidance schemes. We are committed to ensuring that everyone pays the right tax at the right time to help fund our vital public services.’

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