It is often assumed that the mere payment of a sum by way of a dividend, rather than as salary or bonus, will avoid PAYE and National Insurance Contributions (NICs). In the case of PAYE, the tax treatment as payment of a dividend will override that applicable to payment as remuneration, so PAYE will not apply. This does not, however, mean that NICs are not payable.
In a recent case, a company which arranged for its employees to receive a bonus by way of a payment of £24.6 million into an offshore trust, which then paid them dividends, sought to persuade HM Revenue and Customs that neither PAYE nor NICs were payable as a result.
The case reached the Special Commissioners, who decide tax cases based on points of law. They concluded that the legislation which excludes dividends from being treated as remuneration for income tax purposes does not apply for the purposes of NICs. The Commissioners concluded that since the dividends derived from employment, they were therefore subject to NICs.
The facts of this case were based on the law as it applied in 2003. Subsequent to that, anti-avoidance legislation has been enacted with the result that it is now more difficult to make such schemes work. Indeed, in certain circumstances, an ill-thought out scheme could lead to a double charge to tax.
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Partner Note
PA Holdings Ltd. and another v HMRC UKFTT 95 (2009).