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HMRC internal manual

Employment Income Manual

PAYE avoidance: application of the Ramsay principle

The Ramsay principle (sometimes referred to as the Ramsay approach) involves looking beyond the individual components of the arrangements and applying the relevant legislationto the series of transactions intended to be carried out as a whole.

The Courts have decided that the Ramsay principle can be applied to the concept of payment in the context of the both the PAYE and National Insurance contributions legislation.

NMB Holdings Ltd v Secretary of State for Social Security

In the NMB case (see NCR2/2000) the High Court considered whether Class 1 NIC liability arose in respect of a payment of a bonus to directors of the company. Payment was madeunder arrangements whereby the employer purchased a quantity of platinum sponge andtransferred that asset to directors who sold the asset for cash to the person who hadoriginally supplied it. The company argued that the transfer of the asset was a payment in kind and so the value was excluded from the computation of earnings for the purpose of determining Class 1 NIC liability. The High Court held that the Ramsay principle should be applied to the arrangements so that the value was not excluded in the computation of earnings.

DTE Financial Services Ltd v Wilson

In the DTE case (see TCR14/01) the Court of Appeal considered the requirement for the employer to operate PAYE on an award of bonuses to 3 directors. The bonuses were in the form of reversionary interests in an offshore trust (RIOT). The trusts were structured so that the directors would receive the capital within the trusts only a few days after the beneficial interest in the trust was transferred to them, a transfer that took place very shortly after the company had acquired the beneficial interest. The Court of Appeal held that the Ramsay principle should be applied so that the arrangements should be regarded as a payment for the purposes of the PAYE legislation.

Full review of the facts

Where the commercial reality is that the employee receives money from his or her employment then the payment is within Part 11 Chapter 2 ITEPA 2003 regardless of how this is achieved. However, whether it is legitimate to apply the Ramsay principle in any particular case can only be determined following a full and detailed review of the relevant facts.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)