The UK’s highest court has ruled that a major mobile phone group will have to pay tax on loans paid to executives as bonuses from a Jersey-based employee benefit trust.
The Law Lords last month upheld a decision of the Appeals Court that a scheme used by Caudwell Holdings – the parent of the Phones4U mobile phone retailer – to reward its executives would be subject to tax.
Caudwell paid £20m between 1998 and 2001 into a Jersey EBT for the benefit of executives, including its chairman John Caudwell, who received loans instead of salaries or bonuses.
The company avoided having to pay corporation tax on the money while the directors escaped income tax at 40 per cent and National Insurance contributions.
HM Revenue and Customs contended that the company’s contributions to the EBT were ‘potential emoluments’ and therefore subject to tax.
The House of Lords shared this view, ruling that there was a ‘realistic possibility’ that the trustee would use the trust to pay emoluments, however wide the discretion given to them.
This means that Caudwell was wrong to deduct the contributions made to the EBT from its taxable profits.
