The Supreme Court has ruled in favour of HM Revenue and Customs (HMRC) in a case examining the tax that should be paid on bankers’ bonuses.
In the cases of UBS AG v Commissioners for HMRC and DB Group Services v Commissioners for HMRC, the banks awarded discretionary bonuses to employees that were paid in the form of redeemable shares in offshore firms. These shares were subject to forfeiture if a contingency occurred, enabling the scheme to qualify for income tax exemptions. Once the exemptions had accrued, employees could redeem the shares for cash.
In the UBS case, the contingency was a specified rise in the FTSE 100 within a three week-period, and in the Deutsche Bank (DB) case the contingency was the employee’s dismissal on the grounds of misconduct or voluntary resignation within a six week-period.
HMRC argued that the tax should be assessed as if employees had been paid the amount of the bonus allocated to them in cash. UBS and Deutsche Bank appealed. These appeals were dismissed by the First Tier Tribunal. The Upper Tribunal subsequently allowed UBS’s appeal but dismissed Deutsche Bank’s. The Court of Appeal then allowed Deutsche Bank’s appeal but dismissed an appeal by HMRC in the UBS case.
In a judgement delivered on 9 March, the Supreme Court allowed HMRC’s appeals in both cases, finding that income tax is payable on the value of the shares at the date of their acquisition, taking into account any restrictive conditions.