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Supreme Court judges rule against 'Houdini' tax avoidance schemes

Published 09/03/2016

The Supreme Court found in favour of HMRC and ruled that tax should have been paid on the bonuses
The Supreme Court found in favour of HMRC and ruled that tax should have been paid on the bonuses

The Supreme Court has ruled against "Houdini" schemes designed to avoid the payment of income tax on bankers' bonuses.

In test case decisions affecting a number of other similar schemes, five senior judges allowed an appeal by HM Revenue & Customs (HMRC) over employee bonus plans operated by UBS Group AG and Deutsche Bank.

Lord Reed - sitting with court president Lord Neuberger, Lord Mance, Lord Carnwath and Lord Hodge - observed that "a great deal of intellectual effort is devoted to tax avoidance".

The schemes before the court concerned composite transactions. Lord Reed said they were of the same nature as other schemes a judge in a previous case had described as "the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax".

The £90 million plans set up in 2003 involved employees being awarded redeemable shares in offshore companies with the aim of avoiding both income tax and National Insurance in 2004.

HMRC said the plans amounted to tax avoidance, triggering a long legal battle through tax tribunals up to the Court of Appeal.

Appeal judges ruled in favour of the companies, but on Wednesday the Supreme Court found for the Revenue and ruled that tax should have been paid on the bonuses.

The schemes were designed to take advantage of exemptions under Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003, as amended by Schedule 22 to the Finance Act 2003 (Itepa).

In a lead ruling unanimously agreed by the four other judges, Lord Reed said: "The error of the Court of Appeal in these cases lies, in my opinion, in adopting a literal construction of Chapter 2, and applying it to a correspondingly formal analysis of the facts."

The schemes were flawed because of a failure to make provision in the schemes for "a business or commercial purpose, as distinct from provision whose only purpose was the obtaining of the exemption".

Financial Secretary to the Treasury David Gauke 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."

Jennie Granger, director-general for HMRC enforcement and compliance, said: "This is another important success for HMRC against an avoidance scheme, with the top court in the country confirming our view this scheme did not work.

"This is the latest in a series of successful HMRC challenges to such schemes marketed at wealthy individuals to get out of paying tax.

"We will continue to challenge artificial arrangements such as these in the interests of the vast majority of businesses and people who choose to play by the rules."

A spokesman at 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."

The bank said it was "disappointed" with the outcome, but was grateful to the Supreme Court for its "careful consideration of the issues".

A spokesman at 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."

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