Bankers may see their bonuses sliced into, as the Supreme Court today sided with HM Revenue & Customs (HMRC), agreeing that taxes could not be avoided when using a special scheme to award employees in shares.
UBS and Deutsche Bank set up schemes to pay their bankers discretionary bonuses in redeemable shares in offshore companies. The share awards could be withdrawn under certain conditions, so that the payments qualified for income tax and national insurance exemptions.
However, HMRC, which has calculated that the setup was designed to avoid around £135m in tax, decided that the shares should attract taxes for the employees. Although the Court of Appeal sided with the banks, the Supreme Court disagreed and found in favour of the taxman.
Following today's success, HMRC said that it now plans to chase a further £30m in taxes from 27 other users of similar schemes.
In his judgment, Lord Reed slammed the conditions both the banks had placed on the shares as having no business or commercial purpose and existing only to trigger the tax exemption.
"This is the latest in a series of successful HMRC challenges to such schemes marketed at wealthy individuals to get out of paying tax," said Jennie Granger, director general for enforcement and compliance at HMRC. "We will continue to challenge artificial arrangements such as these in the interests of the vast majority of businesses and people who choose to play by the rules."
David Gauke, financial secretary to the Treasury, added: "The UK is home to some of the world’s most successful banks and we have been clear we expect them and their employees to pay their fair share of tax."
A spokesperson for Deutsche Bank said: "We note today’s decision and can confirm that all tax and national insurance due as a result have already been paid."
Meanwhile, a spokesperson for UBS added: "This matter concerns a disagreement over the interpretation of highly technical tax legislation and dates back to a one-off compensation plan for 2003. While we are disappointed with the outcome, we are grateful to the Supreme Court for their careful consideration of the issues."
Commenting on the judgement, Justin McGilloway, partner and head of pensions & employee benefits at Wedlake Bell, said: "The judgment is potentially a reflection of the current economic climate and a win for HMRC is not a surprise. It's very bad news for the banks involved – they will need to pay the tax on employee bonuses which were delivered over a decade ago."