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 "trading arrangements" 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.