EBTs and dividends – PAYE and NICs
The first-tier tribunal recently passed judgment on a case which required consideration as to whether a large employer was obligated to pay PAYE tax and NIC contributions on dividends paid to employees.
The case involved a complicated planning scheme that included Employee Benefit Trusts (EBTs) and the award to certain employees of shares on which dividends were to be paid. The plan was to re-route employee bonuses so that they were paid as dividends and hence taxed at 25% (rather than 40%) with an additional saving of employer and employee NICs. The tax years involved were 2000-01, 2001-02 and 2002-03.
The core dispute between the parties was the tax effect of the arrangements. Were they effective in converting sums payable to employees as bonuses into sums that were taxable only as distributions received by the individuals concerned as shareholders in a company. HMRC claimed that the dividends paid to employees should be treated as earnings and therefore subject to PAYE tax and to NIC contributions.
The tribunal determined that the disputed payments were both distributions and earnings. However the tribunal had to also accept that because the sums were taxable as distributions they could not also be taxed as remuneration. So as regards this element of the appeal they found in favour of the taxpayer. However, in respect of the NIC contributions, the tribunal found for HMRC and commented that there was no bar in law which prevented the tribunal reaching the conclusion that the payments received were in fact earnings.