Employee Bonus Schemes: Growth Securities Ownership Plan tax avoidance and similar schemes (Spotlight 28)
Published 3 February 2016
© Crown copyright 2016
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/spotlight-28-employee-bonus-schemes-growth-securities-ownership-plan-and-other-avoidance-schemes-based-on-contracts-for-difference/spotlight-28-employee-bonus-schemes-growth-securities-ownership-plan-and-other-avoidance-schemes-based-on-contracts-for-difference
HM Revenue and Customs (HMRC) is aware of a number of tax avoidance schemes, based on contracts for difference. The schemes are being used by some businesses to provide tax free or tax reduced rewards to their employees. One such scheme is known as the Growth Securities Ownership Plan (GSOP).
Promoters claim that any payment made to the employee by the employer on the maturity of the contract for difference is taxable as a capital gain. These gains are chargeable at a highest rate of 28%, rather than as employment income which can include higher percentage rates.
HMRC reviewed a number of contract for difference and Growth Securities Ownership Plan schemes. The firm view is that the schemes do not work.
Any payments made by an employer to an employee on the maturity of the contract for difference should be taxed as employment income. This means subject to PAYE income tax, employer and employee National Insurance contributions (NIC).
Under these arrangements each employee acquires a contract for difference. This entitles the employee to receive a cash payment at a pre-determined date provided a pre-determined hurdle is achieved (often referred to as the “upside”).
The schemes vary in their detail and the hurdle can be linked to company performance or other measures, such as the disposal of the company.
A common feature of all the schemes is that the employee pays a premium for entering into the arrangement. The employee is exposed to a financial loss (often referred to as the ‘downside’) if results fall below a specified threshold, often referred to as the ‘floor’.
In reality, the downside risk is substantially less in cash terms than the potential upside. Furthermore, the likelihood of the downside risk being triggered is also much lower.
Risks for employees
A feature of these tax avoidance schemes is that, on entering the scheme, the employee usually agrees to reimburse the employer for the tax and NIC that HMRC recovers from the employer.
When HMRC recover tax and NIC from an employer, that employer may attempt to recover money from the employees involved. Employees may wish to think carefully about this potentially significant future risk. Especially if they are continuing to take part in these tax avoidance schemes or are invited to take part in the future.
Customers, their advisers and avoidance scheme promoters, should be aware that HMRC consider these schemes and arrangements to be ineffective. HMRC will act swiftly and rigorously to challenge such cases.
Choices for employers
Any employer who has used a contract for difference scheme and wishes to avoid litigation, can pay the outstanding Income Tax and NIC along with any interest accrued. For every day that an employer does not settle, the amount payable is increasing.
If you want advice on how to settle your tax affairs then contact HMRC. Settling would give you certainty over your tax affairs regarding the arrangements and avoid further investigations and the cost, publicity and scrutiny of your tax affairs that litigation can involve.