Aberdeen Asset Management Plc v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 February 2012 |
| Neutral Citation | [2012] UKUT 43 (TCC) |
| Date | 01 February 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 43 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Warren J.
Kevin Prosser QC and Rebecca Murray (instructed by Ashurst LLP) for the appellant.
Julian Ghosh QC and Iain Artis (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the decision:
Barclays Mercantile Business Finance Ltd v Mawson (HMIT)TAXELR [2004] BTC 414; [2005] 1 AC 684
DTE Financial Services Ltd v Wilson (HMIT)TAX [2001] BTC 159
Garforth (HMIT) v Newsmith Stainless Steel LtdTAX (1978) 52 TC 522
Heaton v BellTAXELR (1970) 46 TC 211; [1970] AC 728
Hickman v Kent or Romney Marsh Sheepbreeders' AssociationELR [1915] 1 Ch 881
Paul Dunstall Organisation Ltd v HedgesSCD (1998) Sp C 179
PT Berlian Laju Tanker TBK v Nuse Shipping Ltd (The Aktor)UNK [2008] EWHC 1330 (Comm)
RogersTAX [2011] UKFTT 167 (TC); [2011] TC 01036
Weight v SalmonTAX (1934) 19 TC 174
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300(1981) 54 TC 101
Income tax - PAYE - Tax avoidance scheme - Discounted options scheme for employees in financial services industry - Establishment of employee benefit trust - Offshore companies - "Money-box" companies - Family trusts - Grant of option by offshore company in favour of family trust - Transfer of shares to nominee of employee - Whether transfer of shares a payment - Whether shares readily convertible assets - Whether taxpayer company liable to account for income tax - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 1 section 19 section 131 section 202A section 202B section 203 section 203Fss. 1, 19, 131, 202A, 202B, 203, 203F - Income Tax (Employments) Regulations 1993 - Income Tax (Pay As You Earn) Regulations 2003.
This was an appeal by the taxpayer company against a decision of the First-tier Tribunal ([2010] UKFTT 524 (TC); [2011] TC 00779) dismissing its appeal against a number of notices of determination in relation to PAYE and National Insurance contributions arising from a tax avoidance scheme known as the Discounted Options Scheme.
The scheme involved establishing an offshore employee benefit trust (EBT), which was a discretionary trust with professional trustees in the Isle of Man. The beneficiaries were senior employees and directors of the company, who were to receive bonuses. Money was paid into the trust and an Isle of Man company ("the money-box company") was created for each employee. The EBT subscribed for two shares in the money-box company: one share at par, the other at a substantial premium ranging from £100,000 to more than £1m. At the same time, a family benefit trust (FBT) was established by the trustees of the EBT for each of the employees. The beneficiaries were the employee and the employee's immediate family. The initial capital of the FBT was a nominal sum of £10 provided by the EBT. The money-box company's authorised share capital was then increased by £10,000 and it granted to the FBT an option to subscribe for 10,000 ordinary shares in the company. The existence of the option was said to dilute the value of the two original shares. One or both shares in the company were transferred to a nominee company to be held for the employee. The option subsisted usually for a year and then lapsed without exercise. The individual employee held the beneficial interest in the money-box company. He benefited by inter alia receiving "soft" loans (i.e. loans at low interest rates which would not be required to be repaid; the interest was not paid either or was funded by a further loan) or the use of property from the company. In that way, the employee received substantial additional financial benefits which were said to be immune from liability for PAYE and National Insurance contributions.
The taxpayer accepted that the scheme was set up as a tax avoidance scheme but appealed against determinations by HMRC assessing the taxpayer under reg. 80 of the Income Tax (Pay As You Earn) Regulations 2003 and notices issued in respect of Class 1A NICs.
The First-tier Tribunal ([2010] UKFTT 524 (TC); [2011] TC 00779) concluded that the scheme did not achieve its objective and the taxpayer was liable to account for PAYE and NICs on the awards made pursuant to the scheme. The FTT found that there was a composite transaction consisting of a series of steps which began with the establishment of and transfer of money into the EBT and ended with the transfer of the shares to the employees. The cash was put into the hands of the employees by the transfer to them of the control of the offshore money-box company which had no assets other than the cash injected by the EBT received from the taxpayer. The assets of the company, namely cash, were effectively at the disposal of the employee. The directors would, in reality, comply with the individual employee's wishes. The scheme was a mechanism to pay cash bonuses. That was a form of payment which the statutory provisions, construed purposively, were plainly designed to catch. It did not matter whether the payment to the money-box company or the transfer of the shares were treated as having been made by the taxpayer or by the EBT. The provisions of ICTA 1988, s. 203B would result in payment or transfer by the EBT being treated as payment or transfer by the taxpayer. Alternatively, s. 203F(2)(f) applied: the arrangements enabled the employee to use the asset to obtain money, for example in the shape of loans from the company, which would not be repaid, equal to the amount subscribed for shares. The bundle of rights which comprised the shares enabled him to use company law procedures to secure the granting of the loan. Where there was only one share, the practical effect of the arrangement was the same. It was the pre-existing arrangements (i.e. the scheme which created the money box company), which enabled the employee to obtain the amount in question. The provision of the valuable shares was the culmination or result of the underlying arrangements. Thus the ingredients of s. 203F(3A) were all present.
The taxpayer accepted that the scheme failed, because the option did not dilute the value of the shares. The shares fell to be valued on the assumption that the option would not be exercised; on that assumption, their value was the same as the sum of money owned by the company (or one-half of it in the case of a transfer of only one share). It was common ground that income tax and NICs were payable and that the taxpayer was liable to account for the NICs. The taxpayer however contended that the employees were liable for the income tax. It accordingly appealed against the FTT's conclusion so far as it related to PAYE. The taxpayer argued that there was no finding by the FTT and no arrangement that the directors of a company would comply with the wishes of the employee. Furthermore the employees had not received a payment (i.e. a payment of money) within the meaning of s. 203 and 203A and the Income Tax (Employments) Regulations 1993; a transfer of shares from which a PAYE deduction was not possible was not a "payment" for the purposes of s. 203 and the Regulations; the FTT had erred in deciding (in the alternative) that the shares were "readily convertible assets".
Held, dismissing the taxpayer's appeal:
1.Reading the FTT decision as a whole, it was clear that the exit strategy (i.e. how the employee would obtain the benefits which he wanted by virtue of his ownership of the shares) was really a matter for the decision of the employee. Subject to the lawfulness of any request, the directors would comply with the employee's wishes. There was no arrangement that there would be a particular outcome, but the facts, viewed realistically, show unequivocally that control was vested in the employee who had access to the pot of money contained within the corporate money-box. The FTT expressly stated that the directors would, in reality, be inevitably compelled to comply with the employee's wishes. Whether that was a finding of fact or a reflection of the powers which the employee would have as owner of the company did not matter. The point was that, as a result of the arrangements, the employee became the owner of a company from which he could in practice extract the cash within it whenever he wished, albeit that a tax charge of one sort or another, depending on the method of extraction, might result. To use different language, it was preordained that the employee would receive 100% of the shares in a cash-rich company. It was not pre-ordained that he would use his control of the company in any particular way but how he would do so was his choice, a choice which would in practice be observed and implemented by the directors.
2.Section 203 was concerned with the time of the making of a payment and applied where the payment was of "any income assessable to income tax under Schedule E". Not all income which was assessable under Sch. E was provided by way of "payment". The wording of s. 203(1) reflected that, by referring to payment of "income" rather than to payment of "emoluments". Section 203 did not contain any definition of "payment", but it was right to construe it (and the PAYE Regulations) together with sections 202A, 202B and 203A. All of those sections had to operate together and, if they were to provide a coherent scheme, had to be construed together. Section 202B, dealing with the timing of the receipt of emoluments, drew a clear distinction between emoluments which took the form of a benefit not consisting of money and those which did take the form of a benefit consisting of money and s. 202B(11) was clearly drafted on the basis that there could be actual emoluments (and not simply benefits which were treated as emoluments) which were emoluments not consisting of money. Section 203A contained no provision corresponding to s. 202B(11). The reason why it did not do so was that it did not need to do so because...
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