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Bonuses paid to directors of a company (in the tax year 2004-05)
which were structured as dividends under an avoidance scheme have
been held by the First-tier Tribunal to be employment income and
subject to income tax and NICs - Manthorpe Building Products
Limited v HMRC [2012] UKFTT 82 (TC).
In this case, the company conceded that the payments were
remuneration but argued that the priority provision in section
20(2) of the Income and Corporation Taxes Act 1988 applied, so that
the payments could only be taxed as dividends. However, following
the recent Court of Appeal's decision in HM Revenue and
Customs v PA Holdings Ltd [2011] EWCA Civ 1414, the tribunal
found in HMRC's favour.
The PA Holdings Ltd case held that section 20(2) did
not apply where bonuses were structured as dividends, as only the
income tax schedule most applicable to the source of the payments
applied, which in this case was that for employment income. Since
only one schedule applied (rather than the employment income
schedule and the dividend income schedule), the statutory priority
rule was irrelevant.
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