Payments to employees should be treated as earnings

The taxpayers participated in a growth securities ownership plan (GSOP) implemented in 2010. Employees entered into a ‘contract for differences’ under which the employer paid a sum to the employee if future profits reached a stated figure. The employee had to pay the employer if the profits failed to reach a lower threshold. On entering into the contract the employee had to make an upfront payment to the employer of an amount equal to the then market value of the employee’s rights under the contract.

The aim was that the employee would be liable to capital gains tax on any gains - to the extent that the capital gains tax annual exemption was exceeded - because they were rights under contracts for differences and thus securities. HMRC said the sums paid under the scheme should be subject to PAYE and National Insurance.

The First-tier Tribunal said that ‘simply because arrangements...