Banks Lose Case Over 'Houdini' Tax Schemes

Banking giants UBS (LSE: 0QNR.L - news) and Deutsche Bank (LSE: 0H7D.L - news) have lost a marathon legal battle over bonus schemes totalling £183m that were designed to avoid tax.

The Supreme Court ruled in favour of HM Revenue and Customs over the case dating back 12 years, which centred on "Houdini" schemes that were set up to take advantage of laws exempting certain types of pay-outs from tax.

Judges found it was "hardly likely that Parliament intended it [the exemption] to apply to tax avoidance schemes" and ruled in favour of HMRC.

The tax authority pursued the two banks over £50m it said each owed in tax. It (Other OTC: ITGL - news) says the total figure plus interest now stands at £135m. HMRC now plans to pursue a further £30m in tax from 27 other users of similar schemes.

Business Secretary Sajid Javid was a managing director at Deutsche Bank at the time its scheme was set up in 2004. A spokesman for Mr Javid said he was paid with all tax deducted already and that "he received no benefit whatsoever from this scheme".

The case went through two tribunals and up to the Court of Appeal which found in the banks' favour before its decision was unanimously overturned by the Supreme Court.

David Gauke, financial secretary to the Treasury, said: "This is an important victory and confirmation from the UK's highest court that tax avoidance is simply unacceptable."

The case centred on bonus schemes worth £91.9m and £91.3m set up by Swiss bank UBS and Germany's Deutsche at the end of the 2003/4 tax year.

The UBS scheme covered 426 employees and Deutsche’s 300, according to court papers.

These schemes took advantage of laws meaning that share awards to employees would be exempt from tax if they were subject to a condition that made them liable to be given up in certain circumstances – such as performance targets not being met.

But in these cases – which were test cases for a number of similar schemes – the contingencies put in place were ones which were unlikely to occur. The shares could then be redeemed for cash.

Giving the lead judgment, Lord Reed said the cases were of the same nature of other schemes a judge in a previous case had described as "the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax".

Deutsche said in a statement: "We note today's decision and can confirm that all tax and national insurance due as a result have already been paid."

UBS said: "While we are disappointed with the outcome, we are grateful to the Supreme Court for their careful consideration of the issues."

Jennie Granger, director general for enforcement and compliance at HMRC, said: "We will continue to challenge artificial arrangements such as these in the interests of the vast majority of businesses and people who choose to play by the rules (Other OTC: UBGXF - news) ."