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The UK Supreme Court has held that HM Revenue & Customs were correct to interpret tax legislation to ignore arrangements without a “business or commercial purpose”. This prevented a tax avoidance scheme involving bankers’ bonuses from succeeding.


Certain banks decided to give discretionary bonuses by way of shares in offshore companies instead of cash to their staff in a way that would not trigger income tax and National Insurance Contributions that would normally fall due when shares are acquired by employees.

The schemes attempted to make the employee shares fall within a specific exemption under which no income tax or NICs arises when the shares are subject to restrictions that are capable of lasting no more than five years. A typical restriction would be a risk of forfeiture if some contingency (such as ceasing employment) occurred. Tax and NICs generally arise as and when the restrictions lapse, but not, under the law as it then applied, where the event causing the lapse applied to all shares of the same class, and where the company is owned by its employees, or where most of the shares of the class awarded to the employees are held by members of the public.

The employers in this case (the banks), relied on the exemption because conditions were attached to the shares. However, in reality the contingency imposed by the banks in these instances was unlikely to occur and the banks had hedged against the contingency to ensure that the employees would lose out slightly, but not significantly, if it did occur.


The Supreme Court found in favour of HMRC and interpreted the legislation in light of the purpose of the exemption. In considering the purpose, the Supreme Court did not look at the wording of the provision alone, but rather at the history of the legislation.

The purpose of the exemption was to address the practical problem of valuing contingent shares. The tax relief was denied because the arrangements had no purpose other than qualifying for the exemption itself.

The Supreme Court held that the relevant conditions applying to the shares were arbitrary and had no business or commercial rationale and that the economic effects had been completely nullified by the hedging arrangement. Therefore, the exemption did not apply.

This contrasts with previous case law which suggested that a literal, mechanistic, interpretation of anti-avoidance legislation was appropriate even where the arrangement itself had no commercial purpose.

What does this mean?

There are currently many on-going disputes with HMRC concerning similar bonus arrangements. Businesses who have undertaken tax planning of this type are likely to want to review their position in light of this judgment.

More generally, this case is relevant to all taxpayers to understand the basis upon which tax legislation can be interpreted. While a purposive interpretation of tax legislation has been a common feature in the UK, this case strengthens HMRC’s hands when they argue that an arrangement was designed to avoid tax.

Any arrangements which are relied upon for tax relief may be vulnerable to challenge unless there is a clear business or commercial rationale, but also there is a need to demonstrate that those arrangements have “real world” economic effects.

UBS AG v HMRC and DB Group Services (UK) Ltd v HMRC [2016] UKSC 13


Jeremy Edwards is a partner at Baker & McKenzie´s London office.


Ashley Crossley is chair of Baker McKenzie´s Europe and Middle East Wealth Management Practice Group as well as head of the Wealth Management Department in the London office. He is a member of Baker McKenzie’s Global Wealth Management Steering Committee and coordinating partner for the Firm’s global banking relationships. He also heads the Firm's Russia/CIS practice. He is recognized as a leader in his area of practice by Legal 500, Citywealth and Chambers Global. Ashley frequently speaks at external conferences and seminars, and is the editor of STEP's Russia/CIS directory. Ashley is qualified as a barrister and solicitor.

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