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Growth Share Schemes – Part 1

In a recent case heard by the First Tier Tax Tribunal, the case of Jones Bros Ruthin (Civil Engineering) Co Ltd and another v HMRC [2022] it was determined that ‘growth securities ownership plan’ (GSOP) awards were classed as earnings from employment, rather than securities under Part 7 of the Income Tax (Earnings and Pensions) Act 2003.


HMRC has been aware of such schemes since 2016 when it first issued a warning about the tax avoidance which occurs when businesses offer their employees ‘contracts for difference’.


These effectively offer tax-free or reduced tax reward schemes to employees in order to mitigate their tax burden. One such scheme is known as the GSOP and in HMRC’s view they do not work.


In this, the first of a two-part blog series, we examine how these schemes work.


Background to the case

Under GSOP arrangements, employees are offered a ‘contract for difference’ which entitles them to receive a cash payment, often known as ‘the upside’, at a specified date in the future when a predetermined hurdle is achieved. This hurdle can vary but is usually performance-related.


The promoters of these arrangements claim that payments made to the employee when the contract for difference matures is subject to capital gains tax, which is chargeable at a rate of 28% rather than typical income from employment, some of which can include higher percentage rates. This typical income is also subject to PAYE Income Tax, and employer and employee National Insurance Contributions (NIC). The employer and the employee, therefore, are seeking to avoid certain tax liabilities.


A less-publicised but common feature of these arrangements is that in order to enter into these agreements, the employee must pay a premium. As well as having to pay to enter them, they may also experience a financial loss (commonly known as ‘the downside’) if the performance of the predetermined hurdle fails to meet a specific threshold (known as ‘the floor’). However, the risk of them losing money, as well as the trigger risk, is substantially less than the potential gain.


In challenging HMRC, several users of these schemes tried to argue that payments made to them under the GSOP scheme were not taxable as income. Two test cases were brought before the tribunal, with all similar cases being put on hold until a decision was reached. The tribunal agreed with HMRC that the GSOP arrangements did not work and the appeal cases were dismissed. This reinforces HMRC’s position that any payments made to an employee by an employer when a contract for difference matures is taxable as income from employment, and is subject to both NIC as well as income tax PAYE.


The outcome

A minority of users of these GSOP schemes decided to challenge HMRC’s view of them. Two test cases were selected, and the outcome has now been decided in favour of HMRC. Those bringing these test cases now have to settle their liabilities which may be substantial, as have many of the users of the schemes. HMRC is now encouraging all users of GSOP schemes to settle their tax affairs as soon as possible, or face further action.

In our follow up to this blog, we will look at the risks for employees and the implications for both employees and employers, and examine what you can do if you’re caught up in one of the schemes.


Get in touch

If you need advice on growth share schemes or tax avoidance, get in touch with Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.


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