From 2 December 2004 the “otherwise chargeable to Income Tax” exemption (see ERSM90200) does not apply where something has been done which affects the employment- related securities as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or National Insurance contributions.
Where dividends from special purpose vehicle companies (set up to pay bonuses), or dividends from special shares in an employing company, are used for avoidance (being disguised cash bonuses or additional remuneration) Chapter 4 applies and the dividends are liable to full Income Tax and NIC. The charge could be in addition to the tax on the dividends under
because the legal form of the benefit is not changed by the legislation. However (see Example 1 below) the general earnings charge will still be the primary argument in such cases.
In the past some companies gave their employees forfeitable
shares in special purpose vehicle (SPV) companies, whose assets
were simply the cash bonuses that would have otherwise been paid to
those employees, and were instead paid out as dividends.
It has been argued that for pre-2 December 2004 avoidance
schemes which use SPVs to disguise cash bonuses as dividends, there
is no further charge because the dividend paid is 'otherwise
chargeable to income tax'. So for a lower rate taxpayer there might
be no Income Tax or NIC and for a higher rate taxpayer only 25%
Income Tax liability. In such schemes the employer also attempts to
escape PAYE and NIC payments.
HMRC does not believe such arrangements are effective in
reducing income tax or NICs liability or avoiding PAYE obligations
and is pursuing enquiries relating to the use of such schemes.
The primary argument should be to treat such dividends as
general earnings. For dividends paid on or after 2/12/04 under such
an avoidance scheme, the amount of the dividend may, in the
alternative, count as employment income of the employee chargeable
to Income Tax under Chapter 4 Part 7 ITEPA 2003.
There may also be a further amount treated as earnings from
the employment under ITEPA03/S222 if any amount of the PAYE tax
that the employer is unable to deduct from other payments made to
the employee had not been made good by the employee to the employer
within 90 days of the dividend being paid.
Avoidance schemes exist where employers set up schemes to give
employees shares in the employer company that have negligible
rights other than the ability to receive dividends at the
discretion of the employer. Employee A receives one A-share,
employee B one B-share and so on. The employees are paid a small
rate of pay, which is topped up each month by a dividend
individually tailored to that employee.
Again, the primary argument should be to treat such payments
as thinly disguised general earnings. Alternatively, from 2
December 2004, the dividend will be liable to Income Tax under
Chapter 4, on which PAYE will be operable. NIC will also be due.
There may also be a further amount treated as earnings from
the employment under ITEPA03/S222 if any amount of the PAYE tax
that the employer is unable to deduct from other payments made to
the employee had not been made good by the employee to the employer
within 90 days of the dividend being paid.
Following the introduction of the Intermediaries Legislation (commonly referred to as IR35) in April 2000, attempts have been made to circumvent its provisions. Many composite companies pay dividends to the contracted workers in place of income subject to PAYE and NICs in an attempt to avoid the IR35 provisions. In such circumstances, a Chapter 4 benefits charge may arise.
Any NICs liability due on payments in the period 2 December 2004
to 20 July 2005 will not arise until regulations, provided for
within the National Insurance Contributions Act 2006, have been
introduced. The Act received Royal Assent on 30 March 2006 and the
relevant provisions are expected to be in place by early 2007. In
the meantime, until the retrospective regulations are in force, any
NICs liability will only arise in respect of payments made on or
after 20 July 2005 (date of Royal Assent of the Finance (No.2) Act
2005).
Any PAYE liability in respect of benefits held to be received
between 2 December 2004 and 20 July 2005 and chargeable under s.
447 ITEPA by virtue of the amendment introduced by
F(No.2)A 2005 will not arise until PAYE regulations are
introduced simultaneously with the NICs regulations.
Payment of NICs and PAYE liabilities, and submission of
returns reflecting those additional liabilities’, will arise
prospectively from the date regulations are introduced.
