Bonus tax schemes set for showdown

Last Wednesday the Treasury released its long-awaited financial services
white paper aimed at addressing concerns over fat-cat bonuses, but the role
accountants will play in bonus tax schemes remains largely unanswered.

Chancellor Alistair Darling’s proposals last year to rein in City bonuses
following the financial meltdown have not materialised, with the Treasury
neither restricting nor capping bonuses, but rather tying remuneration into an
institution’s profits over time.

But, given the publicity now afforded to banking sector bonuses, tax advisers
formulating new tax planning structures in this area must be increasingly
conscious of how close they come to breaching rules under the government’s
disclosure regime.

Between 2004 and April 2009, 1,859 tax notices were issued to firms suspected
of peddling tax avoidance schemes.

Mid-tier firm Grant Thornton has recently come under pressure in the media to
justify one of its own schemes.

Clive Fathers, tax partner at Grant Thornton, disputes accusations the firm
is deliberately attracting investment bankers to a scheme which would see them
avoid the 50% tax rate on bonuses by as much as 40%.

‘A tax saving was never the main driver. To suggest we’ve designed it
specifically for the banking sector couldn’t be further from the truth,’ he

According to Fathers, the plan was hatched 12 months ago, well before the
introduction of the 50% income tax rate. The new rate, which will come into
effect next year, will apply to individuals earning more than £150,000 a year
and, more significantly, has no bearing on discretionary bonuses, he says.

Instead, major beneficiaries of the plan would include privately owned
businesses ­ not banking institutions. He adds: ‘We don’t think it’s an
aggressive tax planning scheme… in developing the idea we conducted a robust
analysis and consulted with a third-party tax counsel. It’s not disclosable
under the new anti-avoidance rules.’

The main drive in developing the plan, says Fathers, was to offer share
schemes in place of discretionary bonuses, which could then be used as an
incentive tool to acquire or retain staff.

He went as far as to say he is aware of other firms offering a similar
scheme, but stopped short of naming them.

The coverage will inevitably raise questions and intrigue among tax
administration officials.

Dave Hartnett, permanent secretary of tax at HM Revenue and Customs, says the
department would be keeping a close eye on potential tax avoidance structures.

‘I’m surprised that given the recent history of tax avoidance schemes there
can be any doubt about the strength of HMRC’s commitment to ensure that people
do not get out of paying their fair share by using aggressive tax arrangements,’
he says.

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