The Supreme Court has ruled that Deutsche Bank and UBS should pay tax on bonuses, which were funnelled into an avoidance scheme.
Bankers used the scheme to take their bonuses in the form of shares in specially created companies, rather than cash, in the hope the initial award of the shares and their subsequent redemption would be exempt from PAYE and National Insurance contributions.
According to HMRC this scheme, which was in operation around a decade ago, was designed to avoid some £135m in tax.
But in the UBS case the judges ruled the set up was “completely arbitrary” and that it had “no business or commercial rationale beyond tax avoidance”.
Deutsche Bank’s scheme was “equally artificial”, they added.
David Gauke, financial secretary to the Treasury, said: “This is an important victory and confirmation from the UK’s highest court that tax avoidance is simply unacceptable.
“The UK is home to some of the world’s most successful banks and we have been clear we expect them and their employees to pay their fair share of tax.”
The encouragement of such schemes...would have no rational purpose, and would indeed be positively contrary to rationality, bearing in mind the general aims of income tax statutesThe two schemes took advantage of the Income Tax (Earnings and Pensions) Act 2003, which applied an exemption on the award to employees of “restricted securities”.
Under the schemes, the banks awarded discretionary bonuses to their employees but rather than paying them directly they use the money to pay for redeemable shares in offshore companies set up for this purpose.
To qualify for the exemption, conditions were attached to the shares making them subject to forfeiture if a contingency occurred - in the case of UBS this was a specified rise in the FTSE 100 within the next three weeks while in the Deutsche Bank case it was the employee’s dismissal or resignation within the next six weeks.
In his judgement Lord Reed said: “It is difficult to accept that Parliament can have intended to encourage by exemption from taxation the award of shares to employees, where the award of the shares has no purpose whatsoever other than the obtaining of the exemption itself: a matter which is reflected in the fact that the shares are in a company which was brought into existence merely for the purposes of the tax avoidance scheme, undertakes no activity beyond its participation in the scheme, and is liquidated upon the termination of the scheme.
“The encouragement of such schemes, unlike the encouragement of employee share ownership generally, or share incentive schemes in particular, would have no rational purpose, and would indeed be positively contrary to rationality, bearing in mind the general aims of income tax statutes.”
HMRC has said it will now pursue a further £30m in tax from 27 other users of similar schemes.
A spokesman for UBS said: “This matter concerns a disagreement over the interpretation of highly technical tax legislation and dates back to a one-off compensation plan for 2003.
“While we are disappointed with the outcome, we are grateful to the Supreme Court for their careful consideration of the issues.”
A spokesman for Deutsche Bank said: “We note today’s decision and can confirm that all tax and national insurance due as a result have already been paid.”
