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TAX AVOIDANCE

In a recent case the High Court held that a reversionary interest scheme failed and the employer was required to account for employer`s Class 1 national insurance contributions (NIC) under Pay As You Earn (Section 203B ICTA 1988 “PAYE: payment by intermediary”). The three directors involved were also partners in a firm of accountants, whose financial services arm the employer could be regarded as being. Between 30 and 60 clients had taken part in the scheme.



In DTE Financial Services v Wilson the employer paid a sum to a non-resident company on day 1 to acquire a reversionary interest in an offshore trust. On day 2 the company assigned its reversionary interest in the trust to the employee in recognition of his services during the year concerned. He was not allowed to assign his reversionary interest. On day 4 the trustees who were acting at arm`s length informed him that he had become entitled to the capital. This was paid into to his bank account.



The court held that the payment by an intermediary acting at arm`s length could be treated as a payment by the employer. It had previously been thought that the legislation applied only to intermediaries (e.g. trustees) who were connected with the employer.



In addition, the court held that there were “trading arrangements” in relation to the reversionary interest in the trust ie. the employee could obtain an amount similar to the sum paid by the employer. Hence PAYE would have been due. It had previously been thought that “trading arrangements” meant arrangements which were external to the relevant asset but the court held that “trading arrangements” could simply mean arrangements directly involving the relevant asset itself.




COMMENT



Although the Inland Revenue won the case the court rejected its contention that this was a prordained scheme under the Ramsay principle. This would have involved “re-characterising” the payment for the purchase of the reversionary interest as a payment direct to the employee. “Re-characterising” is not allowed following the decision in Countess Fitzwilliam & Others v CIR. In that case the House of Lords held by a 4 to 1 majority that even if individual steps formed part of a pre-planned tax avoidance scheme this was not sufficient in itself to negative the application of an exemption from liability to tax which the series of transactions was intended to create. It would be sufficient if the series was capable of being construed in a manner inconsistent with the application of the exemption. In general, individual steps could not be treated as a single and indivisible whole in which one or more of the steps was simply an element without independent effect.


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