GSOPs and CFDs were mechanisms designed to reward Directors and key employees in return for achieving specific targets. The promoters argue that any payments out to an individual under a GSOP or CDF were subject to Capital Gains Tax (CGT).
However, in in Spotlight 28 issued in February 2016, HMRC argued that such payments should be taxed as remuneration and subject to PAYE and NIC. Two “lead cases” were heard before the First Tier Tribunal (FTT) in March 2021. No decision has been announced yet. By having just two test cases, the costs of defending the scheme to date have been funded and shared by all participants in the scheme.
It has been suggested that a GSOP is not a tax avoidance scheme. It is. GSOPs were simply not registered under the Disclosure of Tax Avoidance Schemes (DOTAS) and given a Scheme Reference Number.
Who will win?
It depends how a “win” is defined. If the promoter wins, the taxpayer still has to pay the tax. But it may be more tax and possibly in an earlier year triggering interest and possibly a penalty.
- Is that called a “win”?
What will HMRC do?
If HMRC is successful before the FTT, it is likely to issue Follower Notices to employers that implemented similar arrangements. The fact that the individual employees will have paid CGT is a separate matter between HMRC and the employee, not between HMRC and the employer.
If HMRC lose, HMRC might appeal – they are unlikely to simply withdraw.
It is more likely that HMRC will continue to investigate each taxpayer separately, not on a group-wide basis. Each taxpayer will be viewed as both company and the individual.
HMRC’s next argument is likely to focus on the calculation and validity of the individual valuations used to set the benchmarks. HMRC will seek less of the payment out to fall under GSOP (and CGT). Instead HMRC will seek to have that payment fall under the heading of remuneration.
More professional costs and for each taxpayer even assuming the valuations are defended without alteration.
- Is that still called a “win”?
What is the opportunity to reach a Settlement?
It will depend upon the facts of each case and the strength of any arguments that can be put forward. But in my experience, HMRC are at least open to being persuaded.
Settlements are negotiable. It follows that how the payments are to be treated for tax purposes is negotiable.
However, once the FTT decision is announced, this will all change. Now is the time to act.
Who participated in GSOPs?
The schemes were often sold to owner managed businesses. These schemes were sold to minimise the tax impact where the imminent results of the company were anticipated to be exceptional. At the time, these businesses were about to enjoy exceptional growth due the markets they were in, for example in alternative fuels (wind and solar power, electric vehicles etc.) where markets were somewhat in their infancy but about to grow exponentially. Today, these companies are subject to a great degree of interest in terms of being acquired by those with a greater ability to fund the next level of their growth.
What are the benefits in seeking a Settlement now?
Taxpayers have not had any certainty over their tax affairs for some years. This in itself can be stressful and worrying for any individual. For companies and shareholders alike, they may not be able to move on be that by way of a sale or takeover.
Timing of any amount due to/from HMRC
Any Settlement may include terms such that any underpayment by the company is coordinated with any claim for Overpayment Relief that may be necessary for the individual.
Recovery of tax from current directors and employees
For any company that has implemented this arrangement, a key factor may be whether or not the liabilities can be recovered from the relevant directors and key employees concerned. A director or key employee entering into a CFD/GSOP will typically have given an indemnity to their employer for income tax and employee NIC.
Recovery of tax from former directors and employees
In another scenario, where CFDs/GSOPs have been put in place as exit planning, potential liabilities, including employer NIC, will often be recoverable from sellers under Warranties and Indemnities. It may therefore be critical that steps are taken before the expiration of any limitation period as these arrangements took place between 2009 and 2016.
The stress and strain of uncertainty
Any further delays will continue the uncertainty. The terms of any Settlement on offer now are likely to be more favourable.
What should taxpayers do?
Some GSOP users might wish to wait for the FTT’s ruling before deciding what to do.
But if you wish to explore your options and see if a Settlement now is at least palatable, please contact me.
Might that be called a win?