The UK Supreme Court has ruled a “contrived” scheme used by Deutsche Bank and UBS to allow the firms and their bankers to escape £135m in tax on bonuses was unlawful.
The arrangement, which dates back to 2004, was challenged by the UK’s tax authority in the courts. Under the schemes, the banks decided to award discretionary bonuses to their employees, but rather than pay the bonuses directly, they used the bonus amounts to pay for redeemable shares in specially set up offshore companies. The shares were then awarded to the employees in place of bonuses.
Conditions were attached to them which meant they could be forfeit if something happened. thus allowing them to qualify for tax exemption. The UBS conditions were an unlikely specified rise in the FTSE 100 within a three-week period. Deutsche Bank imposed a forfeit condition involving the employee’s dismissal for misconduct or voluntary resignation within a six-week period. Once the conditions were correctly observed, employees could redeem the shares for cash.
The banks hoped employees would benefit from an income tax break. The Supreme Court said Parliament had not intended the tax exemption to be used in this fashion. Lord Reed, Justice of the Supreme Court, described the conditions as “completely arbitrary” with “no business or commercial rationale”.
A spokesman for Deutsche Bank said all tax and national insurance relating to the scheme had already been paid. UBS said it was disappointed by the ruling.
Treasury minister David Gauke said yesterday: “This is an important victory and confirmation from the UK’s highest court that tax avoidance is simply unacceptable.”