The finding was part of an HM Revenue & Customs (HMRC) opinion by the General Anti-Abuse Rule (Gaar) Advisory Panel published last week.
The panel had looked into an arrangement to reward employees using gold bullion, which allowed a company to obtain a corporation tax deduction without any charge to income tax and/or National Insurance contributions arising on the employees.
Advisory panel
The Gaar Advisory Panel provides guidance and non-binding opinions to prevent ‘artificial and abusive’ tax avoidance schemes that fail to pass a ‘double reasonableness’ test, showing that the arrangements “cannot be regarded as a reasonable course of action”.
It was set up in 2013, to coincide with the entry into force of the general anti-abuse rule, which applies to the main direct taxes to counteract tax advantages arising from arrangements that are abusive.
Employee rewards using gold bullion
The Gaar Advisory Panel had been asked for its opinion in a case where a company wished to incentivise two employees, referred to as Mr X and Mrs Y, in a way that “would not constitute remuneration for tax purposes”.
Mr X was a director and 51% indirect shareholder in the company, while Mrs Y was the other director and 49% shareholder.
The arrangements in question involved the purchase and sale of gold bullion for each of the employees, with funds from the sale being available to Mr X and Mrs Y in return for a director’s loan account credit in their favour and a long-term obligation to an Employee Benefit Trust (EBT).
The Advisory Panel ruled that the agreements were contrived and didn’t constitute a reasonable course of action insofar that it was “abnormal” both for an employer to reward its employees using gold and for the asset to be sold “immediately after the purchase”.
“In this case we can see no reason for the steps to involve gold, other than for tax purposes,” the panel said. Accordingly, in this instance, the Gaar rule can be applied to counteract the tax advantage.
Explanation
“Had cash been used, and gold not been involved, other than the saving of fees in relation to the purchase and sale of the gold, neither the company nor the employees would have been in a substantially different economic or commercial position.
“In our view the steps in this case involving gold are abnormal and contrived,” the panel said.
While it was not abnormal for an employer to establish an EBT on behalf of an employee, “it is, however, abnormal for the obligation to fund an employer established benefit trust to be fulfilled by its key employees”, the panel added.
“Quicker” anti-avoidance route
“The first Gaar panel opinion unanimously held that the arrangements were artificial – perhaps not surprisingly, as they involved both gold bullion and an employee benefit trust,” said tax expert Heather Self of Pinsent Masons, the law firm behind the legal news website Out-Law.com.
“While HMRC may well have won the case if it had gone to litigation, using the Gaar panel to give a clear ‘keep off the grass’ warning is a cheaper and quicker route to deter highly artificial schemes.
“What will be more interesting will be if the panel rules against HMRC in a future case, holding that the planning is reasonable. It remains to be seen whether the Gaar panel can be a shield for taxpayers, as well as a sword for HMRC,” Self concluded.
