TAX AVOIDANCE schemes that are based on contracts for difference have been labelled “ineffective” by HMRC as it looks to challenge any employer that’s using the initiative.
These claims by the tax department come nearly seven years after a major accountancy firm was criticised for introducing the scheme to its clients.
The Growth Securities Ownership Plan (GSOP) is a tax avoidance scheme which is based on contracts for difference, a system that employers use to provide rewards for their employees without having to pay any income tax or national insurance.
The ownership plan allows employees to purchase a contact for difference, enabling them to receive a cash reward at a pre-determined date if they achieve certain targets, targets that are usually linked to company performance.
Employees do have to pay a premium to enter into the plan, which means they are at risk of making a loss if certain targets aren’t achieved. However the cash loss is on average much lower than what they stand to gain.
Part of the scheme also includes the employer reimbursing their employee for any NI or income tax they are charged by HMRC, who are now working hard to clamp down on the tax avoidance scheme.
“Our firm view is that the schemes do not work and that any payments made by an employer to an employee on the maturity of the contract for difference should be taxed as employment income and subject to PAYE income tax and employer and employee National Insurance Contributions (NIC),” said HMRC, after it reviewed a number of GSOP and contract for difference schemes.
“Customers, their advisers and avoidance scheme promoters, should be aware that HMRC consider these schemes and arrangements to be ineffective, and will act swiftly and rigorously to challenge such cases.”
In 2009 accountancy firm Grant Thornton were subject to criticism after it was revealed that the service had been taken up by around 30 of its clients.
“It is not a tax wheeze,” said Grant Thornton tax partner Clive Fathers at the time. “It is a share based incentive arrangement to align employees’ interests with those of the company.”