Dividends liable to NI

The defendant company was employee-owned and used to pay most of its profits into employee trusts from which bonuses were paid subject to tax and National Insurance as emoluments.

In 1999 they implemented a scheme which used the funds to finance a distributable capital reserve in a separate company E the shares in which were held beneficially for the employees in specific amounts.

The reserve was distributed to these employees as a dividend. The intention was to escape National Insurance entirely and for the employees to be taxed on the income as dividends not as employment income.

In the First-tier Tribunal it was held that i) the payments were emoluments from employment; ii) they were also dividends; iii) TA 1988 s20(2) meant that they were therefore not chargeable to tax as employment income only as dividends;...