Aberdeen Asset Management Plc V. The Commissioners For Her Majesty's Revenue And Customs In Respect Of A Decision Of The Upper Tribunal (tax And Chancery Chamber)
| Jurisdiction | Scotland |
| Judge | Lord Glennie,Lord President,Lord Drummond Young |
| Judgment Date | 23 October 2013 |
| Neutral Citation | [2013] CSIH 84 |
| Docket Number | XA100/12 |
| Court | Court of Session |
| Date | 23 October 2013 |
| Published date | 23 October 2013 |
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION
| |
| [2013] CSIH 84 | |
| Lord President Lord Drummond Young Lord Glennie
| XA100/12
OPINION OF THE LORD PRESIDENT
in the Appeal to the Court of Session under section13 of the Tribunals, Courts and Enforcement Act 2007
by
ABERDEEN ASSET MANAGEMENT PLC Appellants;
against
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS Respondents:
In respect of a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 31 January 2012 _______________
|
Alt: Ghosh, QC; Artis; Solicitor to the Advocate General
23 October 2013
Introduction
[1] The tax-avoidance scheme which has given rise to these appeals is summarised by Lord Drummond Young. The scheme involved a series of linked transactions based on the appellants’ offshore Employee Benefits Trust. The object of the scheme was to pay to senior employees and directors of the appellants large sums of money tax free. The money passed from the appellants to the EBT and thence to a series of companies, aptly named money box companies, which were incorporated offshore for each of the beneficiaries. The benefits received by the employees were expressly provided to them as part of their overall remuneration. At the stage when the money was passed from the money box to the employee, the assets of the company were effectively at the disposal of the employee. The directors were mere ciphers.
[2] The First Tier Tribunal saw through the whole scheme as a tax avoidance device. The appellants now accept that that the sums paid to the employees were taxable under Schedule E (Income and Corporation Taxes Act 1988 (the 1988 Act), section 19) as emoluments.
[3] This appeal, and the cross-appeal by HMRC, concern the consequential question whether the liability to account to HMRC for the tax falls on the appellants under the PAYE regime or on the benefitted employees individually. The question is important for obvious reasons.
[4] There are two issues in the appeal and the cross-appeal. They both relate to the appellants’ contention that the cash box arrangement did not amount to a “payment” of income to the employee.
The Ramsay/cash box issue
[5] The appellants take their stand on the legal principle that the employees received only title to the shares in the company, and not cash; and that the cash held by the company was subject to the control of the directors.
[6] In a case of this kind, our concern is with the reality rather than with any simulation of reality that may be achieved by the interposition of a company, the issue of shares and the oversight of compliant directors. Looking at the matter in that way, I think that it is obvious that the employee had complete control of the company and had immediate access to its cash. The money box company was simply a conduit between the EBT and the employee. The directors’ purpose was that of compliance with the objective of the scheme.
[7] On the Ramsay principle (W T Ramsay Ltd v IRC [1982] AC 300), the transfer to the employee of shares in the company was a payment within the meaning of section 203(1) of the 1988 Act (cf Garforth v Newsmith Stainless Ltd (1978) 52 TC 522). The error of the Upper Tribunal in this case lies, in my opinion, in deciding the question on the basis of the formal legal rights that flowed from the interposition of the company. The Upper Tribunal should have looked at the obvious and inescapable reality.
[8] I would therefore allow the cross-appeal of HMRC.
The readily convertible assets issue
[9] If I am right in my conclusion on the Ramsay/cash box issue, that is sufficient to dispose of this case. However, if the present question had arisen I would have concluded for similar reasons that the effect of the scheme was to give the employee a readily convertible asset in terms of section 203F(2)(f). Lord Drummond Young has discussed this issue at length and has reached the same conclusion for more detailed reasons, with all of which I agree.
Disposal
[10] I propose to your Lordships that we should refuse the appellants’ appeal and sustain the cross-appeal by HMRC.
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION
| |
|
| [2013] CSIH 84 |
| Lord President Lord Drummond Young Lord Glennie
| XA100/12
OPINION OF LORD DRUMMOND YOUNG
in the Appeal to the Court of Session under section13 of the Tribunals, Courts and Enforcement Act 2007
by
ABERDEEN ASSET MANAGEMENT PLC Appellants;
against
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS Respondents:
In respect of a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 31 January 2012 _______________
|
Alt: Ghosh, QC; Artis; Solicitor to the Advocate General
23 October 2013
[11] The appellants are the parent company of an investment management group. In the tax years 2000/2001, 2001/2002 and 2002/2003 they entered into a tax avoidance scheme known as the Discounted Options Scheme (hereinafter referred to as “the Scheme”) to provide additional remuneration to a number of their employees. The Scheme was intended to avoid liability to account for income tax under the PAYE system and corresponding national insurance contributions. On 16 January 2007 HMRC issued a number of Notices of Determination in respect of the Scheme. These determined the tax that was said to be payable by the appellants under regulation 80 of the Income Tax (Pay as You Earn) Regulations 2003. On the same date HMRC also issued a number of Notices of Decision under section 8 of the Social Security Contributions and Benefits Act 1992. These determined the amounts that the appellants were said to be liable to pay as primary and secondary Class 1 and Class 1A National Insurance Contributions in respect of the earnings of employees who received awards under the Scheme. The appellants appealed against those Notices of Determination and Notices of Decision. On 29 October 2010 the First-tier Tribunal rejected the appeal. The appellants then appealed to the Upper Tribunal in respect of certain parts of the decision of the First-Tier Tribunal. On 31 January 2012 the Upper Tribunal rejected that further appeal. The appellants have now appealed to the Court of Session in respect of part of the decision of the Upper Tribunal, and the respondents, HMRC, have cross-appealed against another part of that decision. The total amount of income tax claimed is in the order of £5.4 million. The amount of national insurance contributions claimed is in the order of £1.6 million. The appellants now accept that they are liable to pay that sum.
The Scheme
[12] The basic features of the Scheme are summarized in the decisions of the First-tier Tribunal and the Upper Tribunal. The appellants established an offshore Employee Benefits Trust (hereinafter referred to as the “EBT”) for certain of their employees. This was a discretionary trust with professional trustees set up in the Isle of Man. The beneficiaries of the trust were senior employees or directors of the appellants who were to be rewarded with additional remuneration for past performance. Substantial funds were transferred by the appellants into the EBT. An Isle of Man company, referred to by the First-tier Tribunal as a “money box company”, was incorporated for each employee who was to be benefited. Each such company had a share capital of £2. The directors of those companies were professional administrators from Jersey or the Isle of Man, taken from the same organization as the professional trustees. The EBT subscribed for the two shares issued in each of the Isle of Man companies. One share was paid for at par (£1); the other was paid for at a very substantial premium, which ranged from approximately £100,000 to nearly £2.9 million. Thus each of the companies received payment of large amounts of cash.
[13] At about the same time a Family Benefits Trust (hereinafter referred to as an “FBT”) was established by the trustees of the EBT for each of the benefited employees. The beneficiaries of each FBT were the employee in question and his immediate family, with a charity as a long stop beneficiary. The trustee of the FBT was a professional trustee drawn from the same organization as the trustees of the EBT. The trust fund of each FBT was a nominal £10, provided by the EBT. The authorized share capital of each of the money box companies was then increased by £10,000. Each company granted the FBT an option to subscribe for 10,000 ordinary shares in the company. The existence of that option was intended to dilute the value of the two original shares. One or both of the shares in each of the money box companies were then transferred to a nominee company for behoof of the favoured employee. The option granted in favour of the FBT subsisted usually for one year and then lapsed without exercise. In practice, none of the early options, exercisable for one year, was exercised. Later options were granted for 10 years; none of these has been exercised. The argument for the appellants was that the grant of the options had the effect of diluting the value of the two original shares at the time when they were transferred to the favoured employees through the insurance company. The First-tier Tribunal held, however, that they did not have this effect, and that the value of the shares at the time of transfer to the employees accordingly reflected the large amount of cash held in each company. The appellants now accept that this decision was correct. On that basis the Scheme fails as a tax avoidance device.
[14] Each individual employee held the beneficial interest in the money box company set up for his benefit through his ownership of the shares in that company. In the cases where only one share was initially transferred to the employee, the second share was transferred to him at the end of the same financial year; this was designed to function as “golden...
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