View more on these topics

Paye: Bonus paid to directors by way of interest in overseas trust

The use of trusts (sometimes generally referred to as employee benefit trusts and sometimes established offshore) to avoid National Insurance contributions (NICs) is not unknown in the UK.

In the case of DTE Financial Services Ltd v Wilson (Insp of Taxes) three shareholding directors decided to distribute a total amount of £120,000 (split three ways – £40,000 each) amongst themselves as a bonus.

From then on a complex series of transactions were undertaken with the objective of avoiding NICs on the bonus and deferring the payment of income tax under the PAYE system.

The series of transactions were as follows:

– M (a director) asked IFM (a Monaco company) to set up the NIC avoiding arrangement.

– On April 21 GV (an Isle of Man loan company) resolved to settle £40,300 – drawn from BIL ( a Luxembourg bank ) to provide discretionary benefits to GV. On the face of it then GV was a settler and potential beneficiary under the trust. IFM was also a potential beneficiary under the trust.

The payment from BIL to MTC (a trust company resident in the West Indies) was made and MTC appointed the entire capital to GV and the entire income to IFM with effect from 4 days in the future ie April 28. On April 25 GV assigned its entire beneficial interest in the £40,300 to the taxpayer company (DTE Financial Services), the employer of M (and the other directors). The taxpayer company, on April 26, then transferred its interest to M in recognition of his services to DTE over the year ending 30 April. The bonus was thus effectively paid and received as intended. Similar arrangements were carried out in respect of each shareholder/director. All of the transactions took place within a very short period of time.

The Inland Revenue issued a notice of determination that the company, DTE, should have accounted for tax under PAYE on the bonus paid via the trustees, MTC.

It appears that the £40,000 + in the Luxemburg bank (BIL) was deposited there by the employer company, DTE. It was the Commissioner`s view that when the payment was made from the Luxemburg bank to GV (the Isle of Man company) it was done in the firm expectation that the payment would eventually find its way through to the shareholding director, M.

PAYE was not, however, due by virtue of &#34trading arrangements&#34 existing as contemplated by section 203 ICTA 1988. However, it was felt that the Ramsay principle could be applied to ensure that income tax should be deducted under PAYE. It was felt by the Commissioner that although the main object of the scheme was to avoid NICs, a further object was to avoid, by deferral, PAYE.

The Commissioner felt that there was no reason why the principle of fiscal nullity should not operate, so the company was treated as having made a payment within section 203 ICTA 1988 and tax was due under PAYE.


This case serves as a timely reminder of the fiscal nullity/substance over form argument and how it can be used in obviously contrived cases where the sole or main objective of transactions is to avoid tax.

Advisers, for example, who have contemplated ostensibly discretionary employee benefit trust schemes that are set up for the clear benefit of one or two key directors who receive funds from the settlement (in whatever form) in relatively short order should be especially beware.


Lambeth Building Society to hold AGM on July 1

Lambeth Building Society has rescheduled its annual general meeting to July 1. The meeting was due to be held last month but was rescheduled because of problems with the mailout to members.

Scottish Life appoints business development manager

Scottish Life has appointed Ian Buchan as its business development manager.His main role will be the development of new third party administration business at Scottish Life.He was formerly a consultant at Punter Southall & Co. He has also worked at Buck Consultants and Scottish Provident.

Halifax survey shows sharp rise in prices

The Halifax house price survey for May shows an increase in prices of 2.1 per cent. The annual rate now stands at 5.7 per cent.The rise is the highest increase since last October and reflects the low interest rate environment. The greatest rises were seen in Greater London.

Morgan Grenfell Managed Portfolio gets triple A rating

Morgan Grenfell&#39s Managed Portfolio Fund has been awarded a frAAA rating by Standard & Poor&#39s. The Managed Portfolio Fund has £108m under management and has produced an annualised return of 12.1 per cent over the past five years. It invests in a range of Morgan Grenfell unit trusts in line with the house view on […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm