(1)The Trustees of the Eyretel Unapproved Pension Scheme (2)Mr R L Keenan (3) Mrs J Keenan v Her Majesty's Revenue & Customs, SPC 00718

Spc00718

CAPITAL GAINS TAX – tax avoidance scheme – whether subscription for shares followed by the return of the subscription money by way of dividend (by an unlimited company), followed by disposal of the shares for a nominal amount five months after the subscription was a self-cancelling composite transaction – yes – whether HMRC can tax the settlor on the trustees’ gain under s 77 TCGA 1992 when the did not open an enquiry into the trustees’ return which claimed an offsetting loss – yes – whether (assuming that the dividend had not been ignored as part of the composite transaction) the settlor was taxable on the dividend under s 660A Taxes Act 1988 – no – or whether the trustees were taxable on it under s 686 – no

(1) THE TRUSTEES OF THE EYRETEL UNAPPROVED PENSION SCHEME

(2) MR R L KEENAN

(3) MRS J KEENAN Appellants

- and -

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in public in London on 24 and 25 October 2008

Kevin Prosser QC and James Rivett, counsel, for the Appellant

David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1. These are appeals by Mr and Mrs Keenan as settlors of the Eyretel Unapproved Pension Scheme (“the Eyretel Pension Scheme”) against assessments for 2000-01 and 2001-02 (1) to capital gains tax in respect of chargeable gains accruing to the trustees of the Eyretel Pension Scheme, (2) in respect of dividend income of the Eyretel Pension Scheme, and (3) (alternatively to (2)) on the trustees of the Eyretel Pension Scheme in respect of dividend income of the Scheme. The Appellants were represented by Mr Kevin Prosser QC and Mr James Rivett, and the Respondents (“the Revenue”) by Mr David Ewart QC.

2. The issue relating to assessment (1) above concerns an extremely elegant and simple tax avoidance scheme for creating a capital loss. This consists of trustees of an unapproved pension scheme borrowing money, subscribing for shares at a premium in a company, receiving a similar sum back as a dividend (the company then being an unlimited company that can pay a dividend out of share premium account), repaying the borrowing, and selling the shares for a small sum representing the assets left in the company less a turn for the purchaser (together “the Transactions,” which is not intended to imply that they are necessarily a single composite transaction). Since the dividend is received as income, although the tax credit covers the tax, it is claimed that the dividend is ignored in computing the capital loss on the shares of the difference between the subscription price and the sale price. The issue also concerns a procedural question of whether since the Revenue did not make an enquiry into the trustees’ return they can disallow the loss shown in that return in taxing the settlors. The assessments at (2) and (3) above relate to the taxation of the dividend either under s 660A of the Taxes Act 1988 as income of the settlors, or alternatively under s 686 on the trustees to the trust rate of tax.

3. There was an agreed statement of facts as follows:

   1. By a deed dated 23^rd November 1994, the directors of Eyretel Limited established a retirement benefit scheme for the benefit of Eyretel’s employees, which was called the Eyretel Pension Scheme. The trustees of the Eyretel Pension Scheme, Anthony Davies and Cormac Murnion, owned some 31,602,000 shares in Eyretel Limited.

   2. On 14^th April 2000, the Trustees of the Eyretel Pension Scheme disposed of 6,320,000 of their shares in Eyretel. The net proceeds after disposal costs were £9,006,570.

   3. On 16^th June 2000 Anthony Davis retired as a trustee of the Eyretel Pension Scheme. He was replaced by Dr. Simon Emblin.

   4. On 26^th September 2000 the Children’s Fund was created by a deed of amendment to the Eyretel Pension Scheme trust deed, whereby the Children’s Fund was to be administered as a separate sub-fund of the Eyretel Pension Scheme. By the same deed, the Trustees of the Eyretel Pension Scheme transferred £350,000 to the Children’s Fund.

   5. On the 2^nd October 2000 the Trustees of the Eyretel Pension Scheme instructed UBS to transfer £350,000 from the Eyretel Pension Scheme bank account to a new account held by the trustees of the Children’s Fund at Kleinwort Benson.

   6. GW 652 Limited was incorporated on 4^th July 2000, with GW Incorporations Limited as director and GW Secretaries Limited as company secretary. Its registered office was Windsor House, 3 Temple Row, Birmingham, B2 5JR. The first board meeting of GW 652 Limited took place on 22^nd September 2000. Various matters of business were undertaken. Notice was given of the intention to call an Extraordinary General Meeting, one subscriber share was transferred by GW Incorporations Limited to Glyn Jones, and thereafter one ordinary share was transferred for value to the Trustees of the Eyretel Pension Scheme, and Cormac Murnion and Dr. Simon Emblin were appointed as directors, and the existing director (GW Incorporations Limited) resigned from office. Thereafter, the Extraordinary Meeting was held, in the course of which (1) the authorised share capital of GW 652 was increased from £100 to £1000 by the creation of 900 new ordinary shares of £1 each (2) the name of the company was changed from GW 652 to JMNI Limited and (3) new articles of association of JMNI Limited (previously GW 652) were adopted. The issued share capital remained at £2.

   7. On 6^th October 2000 an Extraordinary General Meeting of JMNI Limited was held, in the course of which the authorised share capital of the company was reorganised into 1 “A ordinary share” of £1 (the share belonging to Glyn Jones), and 999 “B ordinary shares” of £1 (which included the share belonging to the trustees of the Eyretel Pension Scheme, and the 998 authorised but unissued ordinary shares in the capital of the company). The rights attaching to the different share classes were to be subject to new Articles of Association, which were adopted in the course of that meeting. The new Articles of Association included the following provisions in relation to the rights attaching to the company’s share capital:

      1. The share capital of the Company is £1000 divided into 1 A ordinary share of £1 each (“the A share”) and 999 B ordinary shares of £1 each (“the B shares”).

      2. The respective rights and privileges attached to the shares in the capital of the Company are as follows: -

(a) As regards income: -

(i) The provisions hereof shall apply to distributions of any kind whether consisting of cash (in whole or in part) or not.

(ii) If the Company achieves in respect of its investment business for the period commencing on 6 October 2000 and ending on 5 January 2001 (“the Relevant Period”) a gross rate of return (including income, capital gains and capital losses, whether realised or unrealised, and if unrealised then calculated by reference to market value) before any commissions, costs, charges and expenses on an annualised basis of at least 6.136 per cent (“the Investment Return”) the Company shall pay a cash dividend (“the B Dividend” of £8,809 per share to the holders of the B shares on the register as at the close of business on the said 31 December 2000, and shall pay the same as soon as possible after the said 31 December 2000 and no...