This is an update to Spotlight 28.
HMRC is aware of a number of tax avoidance schemes, based on contracts for difference, which are a type of security, as outlined in this document. The schemes were used by some businesses to provide tax free or tax reduced rewards to their employees. One such scheme is known as the Growth Securities Ownership Plan (GSOP).
HMRC reviewed a number of contracts for difference and Growth Securities Ownership Plan schemes. HMRC’s firm view is that the schemes do not work.
Many users of these schemes have already settled their liabilities, but a minority decided to challenge HMRC’s view of the scheme in the First-tier Tribunal. The First-tier Tribunal decided that 2 appeal cases should proceed as lead cases, with all similar appeals being put on hold pending a decision.
The First-tier Tribunal released its decision on the 2 appeal cases in January 2022. It agreed with HMRC that payments made under the GSOP scheme are taxable as employment income and dismissed both appeal cases in their entirety.
The First-tier Tribunal decision supports HMRC’s view that the GSOP arrangements do not work. HMRC encourages anyone using GSOP arrangements to settle their tax affairs as soon as possible.
How the arrangements are claimed to work
Promoters claim that any payment made to the employee by the employer on the maturity of the contract for difference is taxable as a capital gain. These gains are chargeable at a highest rate of 28%, rather than as employment income which can include higher percentage rates.
Any payments made by an employer to an employee on the maturity of the contract for difference should be taxed as employment income. This means it’s subject to PAYE Income Tax, employer and employee National Insurance contributions.
Under these arrangements each employee acquires a contract for difference. This entitles the employee to receive a cash payment at a pre-determined date provided a pre-determined hurdle is achieved (often referred to as the ‘upside’).
The schemes vary in their detail and the hurdle can be linked to company performance or other measures, such as the disposal of the company.
A common feature of all the schemes is that the employee pays a premium for entering into the arrangement. The employee is exposed to a financial loss (often referred to as the ‘downside’) if results fall below a specified threshold, often referred to as the ‘floor’.
In reality, the downside risk is substantially less in cash terms than the potential upside. Furthermore, the likelihood of the downside risk being triggered is also much lower.
Risks for employees
A feature of these tax avoidance schemes is that, on entering the scheme, the employee usually agrees to reimburse the employer for any tax and National Insurance contributions that HMRC recovers from the employer.
When HMRC recovers tax and National Insurance contributions from an employer, that employer may attempt to recover money from the employees involved. Employees may wish to think carefully about this potentially significant future risk, especially if they are continuing to take part in these tax avoidance schemes or are invited to take part in the future.
Customers, their advisers and avoidance scheme promoters, should be aware that HMRC considers these schemes and arrangements to be ineffective. HMRC will act swiftly and rigorously to challenge such cases.
What this means for employers
Any employer who has used a contract for difference scheme can pay the outstanding Income Tax and National Insurance contributions along with any interest accrued. For every day that an employer does not settle, the amount payable is increasing.
What to do if you’re using this or similar arrangements
If you’re worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC is here to help. We offer a range of support to get you back on track or avoid being caught out in the first place. Contact HMRC if you have any concerns.
Anyone concerned about the schemes they are currently using should consider getting independent professional tax advice or speak to one of the tax charities.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs by making full payment of the Income Tax and National Insurance contributions due, plus interest.
If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.
If you do not have an HMRC contact and want advice on how to settle your tax affairs then contact HMRC. Settling will give you certainty over your tax affairs regarding the arrangements and avoid further investigations.
If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to negotiate time to pay based on your income and expenditure.
Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.
Get more information or report a scheme
Find out more about tax avoidance schemes and how to spot the signs of avoidance.
You can report tax avoidance arrangements, schemes and the person offering you them to HMRC by using the report tax fraud online form. You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC if you cannot use the online form.
