Income tax avoidance on bankers’ bonuses
Section 425(2) Income Tax (Earnings and Pensions) Act 2003 exempts employment-related “restricted securities” from income tax. Pursuant to ss420(1) and 423(2) ITEPA, “restricted securities” include shares which are subject to forfeiture if certain circumstances arise or do not arise.
UBS AG (“UBS”) and DB Group Services (UK) Ltd (“DB”) awarded redeemable shares to its employees, as opposed to paying bonuses directly, in a special purpose offshore company established solely to facilitate the avoidance of income tax. Conditions were attached to the shares, which were removed after a short time thereby allowing the employees to redeem their shares for cash.
The Supreme Court, construing the legislation purposively, held that, since Part 7 was intended to counteract opportunities for tax avoidance, Parliament could not have intended to encourage the award of shares to employees where this had no purpose other than obtaining an exemption from income tax. The Court therefore concluded that the exemption for “restricted securities” should be construed as limited to provision for a commercial or business purpose. This precluded the UBS and DB bonus schemes from exemption.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
