UK Supreme Court to hear HMRC case on bank bonuses

The UK's highest court is to hear an appeal by HM Revenue & Customs over two offshore schemes designed to avoid paying tax on bankers' bonuses.

HMRC has lost previous court cases against UBS and Deutsche Bank over the two schemes which operated in 2003 and 2004 but the tax authority has now been permitted to appeal to the Supreme Court in a hearing expected to take place later this year.

The case comes at a time when various schemes used by companies and especially banks are being heavily scrutinised by the tax authorities.

HMRC has recently come under fire over its failure to prosecute hundreds of British customers who used HSBC's Swiss bank to evade tax and is currently facing judicial review proceedings by campaign group Avaaz.

In the UBS and Deutsche cases, HMRC had claimed that the sums allocated to employees as bonuses at the start of each scheme were liable to income tax.

It was said that the employee benefit trust schemes, which have not operated since 2004, allowed the banks and employees to derive considerable tax benefits.

An earlier upper tribunal ruling had described both banks as adopting a "carefully planned tax avoidance scheme which was designed to enable the [banks] to provide substantial bonuses to employees in the tax year 2003-04 in a way that would escape liability to both income tax and national insurance contributions".

The two schemes involved employees receiving shares as restricted securities which would escape income tax. The banks then paid the bonuses into the schemes without having to account to HMRC for income tax or for national insurance contributions for the relevant employees or their own liabilities on their earnings.

It had been claimed at an earlier tax tribunal hearing that UBS had devised schemes in 2003-04 to avoid paying £36.9m of tax and £12.7m in national insurance on £92m of bankers' bonuses.

Some 426 employees agreed to participate - 10 of whom had a contractual right to be paid a minimum cash bonus whereas for the remaining 416 any bonus was discretionary.

UBS won its case against HMRC in the tribunal and HMRC failed to overturn the decision at the Court of Appeal.

Deutsche's scheme centred on £91m of bonuses and some share awards to individual bankers were above £2m. The investment bank lost a tribunal case but won its appeal at the Court of Appeal stage.

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HMRC last April wrote to 2,690 employers inviting them to settle disputes over EBTs or face potential litigation. It estimated that at least £1.7bn of tax and national insurance contributions are at stake in the cases. Now hundred of users of EBTs trusts are braced for potential litigation following the expiry of a settlement offer at the end of March.

About 800 users of schemes paid about £1bn to take up the settlement offer, which encouraged taxpayers involved in disputes to capitulate in return for potentially favourable terms.

HMRC warned EBT users that they would potentially face litigation if they did not take up the settlement offer. In one letter, HMRC wrote: "You have a simple choice: settle with HMRC or be prepared to litigate".

Advisers said the companies' willingness to litigate often depended on their size and public profile, with large companies and banks in the public eye often showing reluctance to be involved in a high-profile court case.

Paul Noble of Pinsent Masons, an international law firm, said: "If there is an element of reputational risk, it has an effect on what people do."

He said companies that settled with HMRC often had a specific reason for doing so, such as wanting to sell the company.

The uncertainty about the success of HMRC's legal challenge to users of EBT schemes has been heightened by its defeat in two tribunal cases involving Glasgow Rangers football club, although it is set to appeal.

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