Those old enough to cast their memory back to the early nineties may be able to remember a time when employees would be paid in all manner of assets, such as Persian rugs or Gold Bullion, as a means of avoiding National Insurance Contributions in respect of bonuses (at the time no NIC was due in respect of payments in kind).
In time HMRC challenged these sort of arrangements and, broadly, it was found that a payment was only ‘in kind’ if it was the intention of the parties that the items would be retained and enjoyed – which for my part, in the case of the Persian rugs, brings to mind an image of a tax inspector pressing their face up against a tax payer’s windows in effort to assess the current soft furnishings.
Nowadays there is specific legislation that states that where an individual is paid in a readily convertible asset they are subject to NIC. It further stipulates that this includes assets capable of being realised on the London Bullion Market. Most professionals have therefore clearly regarded this sort of thing as sown up.
It has therefore been of some surprise that over the last few weeks various national news outlets have been putting forward tales of directors paid in gold bullion.
So what has happened? There has finally been an application of the general anti-abuse rule (GAAR).
Broadly, the legislation allows HMRC to issue a counteraction notice in respect of transactions after 17 July 2013 which are deemed to be abusive. Although HMRC may only do so after submitting the details to an advisory panel, who will give an opinion as to whether the arrangements are reasonable. The opinion is not binding on HMRC and they must then come to their own opinion as to the reasonableness.
To apply this to a real-world example: imagine a world where cats are entitled to have as many kittens as they wish in a litter. On average, they have five kittens. Then one day a cat has seven kittens, an inspector takes umbrage at this and refers it to a veterinary advisory panel, who decide this is reasonable. Some time later the inspector arrives with a bin bag, takes two kittens and walks towards the canal.
A cynic might suggest that this arrangement is not weighted in the cat’s favour.
Looking into the details of the transactions, the explanation by the general anti-abuse rule omits some of the technical detail, it would appear that the transactions were as follows:
- A company purchased gold on behalf of its directors, taking on a debt of £300,000. The directors, in exchange, agreed to take on a debt to fund an EBT £300,000 plus indexation.
- The directors immediately sold the gold to a third party for £300,000 and transferred the proceeds to the company in exchange for a debt of £300,000 on the director’s loan accounts (DLA).
- The company used the money to settle its debt to the original third party.
In affecting this without an immediate charge to PAYE under the disguised remuneration rules, the planning relied on an oversight; if an EBT transferred money to an individual in exchange for an asset there was no charge to PAYE, unless there was a tax avoidance motive. However, where a payment was made from an individual to an EBT for an asset, there was no charge to PAYE and no avoidance override.
The net effect of this was intended to be that the company secures an immediate deduction for corporation tax of £300,000 (saving £60,000); the company’s assets were simultaneously reduced by £300,000; and the director’s acquired a £300,000 DLA to draw down tax free (saving £38,350 each at the then higher dividend rate).