The Supreme Court has found in favour of HM Revenue & Customs (HMRC) in their legal battle against UBS and Deutsche Bank over bonus schemes totalling £183m, which were designed to avoid tax.
The case dates back 12 years and centred on ‘Houdini’ schemes used by both banking giants, which were set up to take advantage of laws exempting certain types of pay-outs from tax. HMRC claimed that the plans amounted to tax avoidance and asked the banks to pay back around £50m each.
The Supreme Court judges agreed that the schemes were “commercially irrelevant” and had no purpose other than to escape taxes. As one of them commented, it is “difficult to accept” that Parliament intended to encourage, by exemption from taxation, the award of shares to employees when such an award has no purpose other than to obtain the exemption itself.
Meanwhile, one of the other judges compared the banks’ plans to a “Houdini taxpayer” making sophisticated attempts to “avoid the manacles of tax”. He added that there is a great deal of intellectual effort devoted to tax avoidance in our society.
The ruling could have serious implications for employers, as the banks involved will have to pay the tax on employee bonuses delivered over a decade ago and could open the door for HMRC to challenge other so-called tax avoidance schemes, which were perfectly legal when they were originally implemented. In fact, HMRC has now said that it will pursue a further £30m in tax from 27 other users of similar schemes.
Commenting on the case, David Gauke, Financial Secretary to the Treasury said that the ruling was an important victory and confirmation from the UK’s highest court that tax avoidance is simply unacceptable.