Over the last few years, a number of businesses have implemented contracts for difference ("CFD") / growth securities ownership plan ("GSOP") structures as a way of rewarding directors and key employees, normally in lieu of a bonus so that payments are subject to CGT rather than the normally higher rates of income tax and National Insurance contributions (NIC). HMRC is challenging some CFD/GSOP arrangements on the basis that they are disguised bonus payments and should be taxed as such, and is offering settlement opportunities.

Is HMRC correct?

It remains to be seen. In recent cases such as PA Holdings and UBS/Deutsche Bank the courts have struck down artificial remuneration planning structures which seek to convert employment income into a capital receipt.

HMRC may also challenge how the structure was implemented. One line of attack might be that the CFD was undervalued when it was entered into (which could result in the employee being treated as receiving a taxable benefit).

What is at stake?

HMRC is looking to recover income tax from employers that they believe should have been accounted for as PAYE, together with employer's and employees' NIC. Late payment interest will be payable on any such liabilities. Penalties may also be payable, although the risk of penalties will be reduced if early settlement is reached with HMRC.

Recovering tax

For businesses which have implemented these structures, a key factor in deciding whether or not to settle with HMRC (and the terms of that settlement) may be whether or not the liabilities can be recovered from the relevant employees or directors.

Typically, an employee or director entering into a CFD or GSOP will have given an indemnity to their employer for income tax and employee NIC.

Where CFDs/GSOPs have been put in place as exit planning, potential liabilities, including employer NIC, will often be recoverable from sellers under the sale documents.

Whether recovering under the participator indemnities or from sellers, it is critical that appropriate steps are taken before any relevant limitation period expires.

In the case of claims made under sale documents there will be additional considerations and overlooking them could adversely affect recovery. For instance, there may be very strict requirements on the conduct of discussions with HMRC or an obligation to seek recovery under the participators' indemnities. It also may be appropriate to consider whether a restitution claim can be made against participating employees/directors.