Odey Asset Management loses executive pay tax battle

Crispin Odey’s hedge fund Odey Asset Management has lost a tax tribunal case over a staff incentive plan, leaving current and former executives potentially on the hook for additional tax bills.

The firm and 17 executives have been embroiled in litigation with HM Revenue & Customs over a partnership pay plan that ran between the 2011-12 and 2015-16 tax years. The scheme allowed profits that would have been paid to executives involved to be deferred for two to three years until certain targets were met. Crispin Odey himself was not a member of the plan.

Odey executives said the plan was put in place because of pressure they felt from regulators, who were keen to move the financial services industry away from immediate cash bonuses in the wake of the global financial crisis. However, HMRC later raised problems with the plan and said it was owed income tax.

The ruling highlights an issue for the many London hedge funds with similar partnership set-ups. These structures are popular because they offer more flexibility on pay, but schemes created after the crisis to retain profits and incentivise staff have sometimes caused tax problems.

Last year, BlueCrest Capital lost a court case over the tax treatment of its partnership incentive plans. Other disputes between hedge funds and HMRC are believed to have been settled before they reached court.

Other tax-reducing arrangements have also been called into question. In November, former Brevan Howard co-founder Chris Rokos launched legal action against his tax advisers over a commercial property investment he made after the financial crisis. Rokos had expected the investment to produce a tax saving of £39.5m, but HMRC did not accept this and in 2016 demanded payment of the full amount.

Although Crispin Odey was not a member of the plan, it did include high-profile managers including James Hanbury and Tim Bond.

The firm will appeal against the decision, according to a person familiar with its plans. Odey Asset Management declined to comment.

Under the Odey plan, it created shares for the executives involved and put them in a special purpose vehicle called Partners Special Capital Ltd. PSCL then paid out the shares to members two to three years later, if they hit certain targets.

Judge Harriet Morgan of the First Tier Tribunal Tax Chamber ruled that there was additional income tax liability. She ruled that members were subject to income tax when their shares were paid out after targets had been met. These were allocated to them under rules relating to miscellaneous income.

The miscellaneous income tax rule, she said, “is deliberately widely drawn as something of a flexible ‘sweep up’ provision in order to capture income which ought to be taxable”.

However, she concluded the scheme members were not subject to income tax in the tax year in which they were awarded the shares.

The ruling details how the remuneration plan was drawn up for senior staff in 2011, with Crispin Odey as the only exempt partner. “He has motivation enough to remain at his own firm, as the firm’s founder and majority shareholder,” according to the plan documents quoted in the ruling.

The ruling notes that Odey testified to the tribunal that the tax saving was “incidental to the whole thing” and that its importance was fulfilling regulatory wishes on deferred pay. Timothy Pearey, chief executive of the firm, testified that the post 2008 regulatory environment had an “enormous influence in the decision to implement the plan”, according to the judgment. 

After the law changed, Odey Asset Management stopped using the PSCL arrangement.

HMRC said it would consider the ruling and its next steps: “We are pleased that the Tribunal has decided that these arrangements do not work,” it said.