Out-Law News 1 min. read

HMRC will act 'swiftly and rigorously' to challenge contract for difference tax scheme


A tax avoidance scheme designed to avoid income tax and national insurance contributions (NICs) known as the 'Growth Securities Ownership Plan' is ineffective and will be challenged, HM Revenue and Customs (HMRC) has warned.

The warning came in the latest 'Spotlight' published by HMRC to warn potential users about schemes that HMRC considers are ineffective.

The scheme is designed to save income tax and NICs on payments to employees, with payments to employees being taxable as a capital gain, rather than as employment income. The highest rate of capital gains tax is 28%, in comparison to the 45% top rate of income tax.

Under the scheme each employee acquires a 'contract for difference' which entitles the employee to receive a cash payment at a pre-determined date provided a pre-determined hurdle is achieved. The hurdle can be linked to company performance or other measures such as the disposal of the company.

The employee pays a premium for entering into the scheme and is exposed to a financial loss if results fall below a specified threshold. HMRC said that, in reality, the downside risk to the employee is substantially less in cash terms than the potential upside and the likelihood of the downside risk being triggered is also much lower.

"Our firm view is that the schemes do not work and that any payments made by an employer to an employee on the maturity of the contract for difference should be taxed as employment income and subject to PAYE income tax and employer and employee National Insurance Contributions (NIC)," HMRC said in the Spotlight.

"HMRC consider these schemes and arrangements to be ineffective, and will act swiftly and rigorously to challenge such cases" it said.

The Spotlight said that employers who have used the scheme and wish to avoid litigation can pay the outstanding tax and employer and employee NIC together with interest.

It also warned employees that on entering the scheme they will usually be required to reimburse the employer for any tax and NIC that HMRC recovers from the employer and so "may wish to think carefully about this potentially significant future risk".

Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com, said: "This announcement from HMRC doesn’t change the position as to whether these arrangements work or not. That will depend on the technical and evidential position".

"However, this is an indication that employers can expect HMRC to be investigating and employers will need to decide whether they wish to defend their arrangements or pursue the matter to Tribunal. Companies that have used such schemes need to take specialist advice on the best course of action" he said. 

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