GAAR Advisory Panel issues significant conclusion in recent case.

In a recent company and taxpayer case concerning employee rewards the GAAR Advisory Panel concluded that:

  • ‘entering into the tax arrangements isn’t a reasonable course of action in relation to the relevant tax provisions
  • carrying out of the tax arrangements isn’t a reasonable course of action in relation to the relevant tax provisions’.

The above opinion concerned an employee benefit trust, the company and two directors who held 100% of the shares in the company. The arrangement as outlined in the GAAR decision highlighted that:

  • ‘4.1 The Company wished to reward and incentivise its key employees Mr X and Mrs Y. Advice was sought on how to structure this reward so it would not constitute remuneration for tax purposes.
  • 4.2 The reward was structured in the following way: a purchase of gold for the Employees was funded by the Company; that gold was immediately sold by the Employees; the Company’s liability to pay the third party gold supplier was settled by the Employees in return for a director’s loan account credit in favour of the Employees; in connection with the purchase of the gold a long term obligation was created under which the Employees were required in the future to pay to the trustees of the EBT an amount at least equal to the purchase price of the gold (plus indexation).’

In arriving at its conclusion the GAAR panel summarised in the section ‘The arrangements – contentious facts’ that:

  • ‘5.1 HMRC maintains that the Employees’ obligation to fund the EBT in return for receiving his reward is not a bargain on arm’s length terms. The Company and the Employees disagree.
  • 5.2 We reach our conclusion without having to take a view on, and without being influenced by, whether or not the obligation to fund the EBT is a bargain on arm’s length terms.
  • 5.3 HMRC maintains that there is no evidence to suggest the Employees’ obligation to fund the EBT will be met. The Company and the Employees maintain that the obligation is genuine.
  • 5.4 We reach our conclusion without having to take a view on, and without being influenced by, whether the Employees intended to meet their contractual funding obligations.’

Section 10 is interesting reading as the panel conclude that:

  • ‘10.7 In our view the steps in this case involving gold are abnormal and contrived.
  • 10.8 It is not abnormal for an employer to establish an employee benefit trust. The scheme of legislation for employee benefits recognises employers have a choice as to whether to reward employees direct or via an employee benefit trust.
  • 10.9 It is, however, abnormal for the obligation to fund an employer established employee benefit trust to be fulfilled by its key employees.
  • 10.10 In this case we can see no reason, other than for tax purposes, for the steps involving the EBT to include the assumption by the Employees of the Company’s trust funding obligation.

Had the EBT been funded in the normal way by the company and the trustees lent funds to the employees, none of the company, the employees or the EBT would have been in a substantially different economic or commercial position.’

Article from ACCA In Practice