Shares awarded to employees in 'cash box' companies should be subject to income tax, tribunal rules

Out-Law News | 09 Feb 2012 | 9:33 am | 2 min. read

Shares awarded to employees in 'cash box' companies as part of an avoidance scheme are 'readily convertible assets' (RCAs) on which an employer must account for income tax under pay as you earn (PAYE), a tribunal has ruled.

Although transferring the shares was not the same as a "payment of money", they fell within the RCA definition because they could easily be sold or converted to cash, the Upper Tax Tribunal said in its decision (48-page / 191KB PDF).

HM Revenue and Customs (HMRC) can collect income tax through PAYE and National Insurance contributions (NICs) from certain non-cash 'payments' made to employees if they constitute RCAs. This prevents employers from avoiding their liabilities under PAYE by providing benefits to employees as shares, other financial instruments or commodities. Taxable benefits provided to employees that cannot be easily converted to cash will still be subject to income tax, but this will be due under the self-assessment regime.

Investment management group Aberdeen Asset Management (AAM) had conceded that income tax was due on the shares following a 2010 tribunal hearing, but had argued that it was the employees' responsibility to account for any income tax due under self-assessment. HMRC argued that the PAYE regime would apply, making it the employer's responsibility to account for tax, either because the shares were the equivalent of a 'payment' or because they were RCAs.

The company had used an offshore employee benefit trust to set up offshore companies each with one share in the name of a senior employee as a means of channelling additional remuneration to each employee. Employees were then able to receive benefits from their companies, mainly in the form of loans which were not repaid.

AAM successfully argued that the delivery of the shares in the company was not a "payment" for PAYE purposes. Mr Justice Warren agreed that, as employees did not have the "unconditional right" to immediate use of the cash in the company, the transaction could not be considered as equivalent.

However the 'cash box' structure of each company, with only one shareholder and no liabilities, meant that the employee-shareholder would be able to extract a value from the company which was the same as the expense incurred by AAM in providing the shares. This meant that they fell within the RCA regime, leaving AAM to account for income tax under PAYE as well as class 1 NICs.

The scheme ran for three successive tax years leading up to 2002-03 and would no longer be permitted under the relevant laws according to both AAM and HMRC.

Tax law specialist Matthew Rowbotham of Pinsent Masons, the law firm behind Out-Law.com, said that it was "not very surprising" that the tribunal had agreed that the shares fell within the RCA definition.

"More interesting is that [AAM] failed on the first ground - HMRC had put forward an argument which would have significantly broadened how the legislation works as currently understood but the Tribunal refused to be drawn into a substance over form approach. However AAM argued that that the legislation was very much directed at the form, and not the substance, of different benefits and one should therefore pay close attention to the detailed legislation," he said.

"This can be seen as a small victory for taxpayers generally – although that may be cold comfort for AAM since they lost overall," he said.