The UK tax authorities have achieved a significant victory in their battle to crack down on tax avoidance schemes involving employee remuneration.
These schemes seek to take advantage of loopholes in the tax legislation to deliver benefits to employees that either are not subject to tax at all or are treated as capital rather than income. The structure of the schemes varies, but they commonly involve the use of offshore employee benefit trusts or special purpose vehicles. The current legislation has significantly reduced the scope for such tax avoidance schemes, but there are still a number of cases currently going through the courts.
The most recently decided case involved a scheme put in place by Aberdeen Asset Management. The intention of the scheme was to avoid income tax on cash bonuses by channelling them through an Isle of Man based special purpose vehicle.
The interesting point to come from the decision was that the court ignored the strict legal form of the arrangements and instead considered their ultimate purpose. Therefore, regardless of the fact that the employee ended up holding shares in the SPV, the court decided that the employees should be taxed as if they had received the cash. In reaching this decision, the court followed a well established principle of statutory construction, but has taken it further than in previous cases.
The clear message from the decision is that it is no longer possible for taxpayers to rely on the strict wording of the tax legislation where the intention is to avoid tax.
Aberdeen Asset Management PLC v HMRC  CSIH 84
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