Andrew
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 March 2019 |
| Neutral Citation | [2019] UKFTT 177 (TC) |
| Date | 05 March 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 0177 (TC)
Judge Ashley Greenbank
David Yates, counsel, instructed by Reynolds Porter Chamberlain LLP appeared for the appellant
Jonathan Davey QC and Sam Chandler, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Disposal of gilt strips – Determination of loss under FA 1996, Sch. 13, para. 14A – Whether amount paid by transferee to a person other than the transferor is an amount payable on the transfer – Yes – Profit on transactions arising to trustees of settlement – Whether profit should be regarded as income for tax purposes – No – Appeal allowed in part.
The First-tier Tribunal (FTT) denied the appellant's appeal against the disallowance of an income tax loss, but allowed their appeal against an assessment to income tax on profits arising to the trust used in the scheme.
This case concerned participation in a tax avoidance scheme and was a lead case.
The appellant had claimed a loss of £1,844,248 in his self-assessment return for the 2003–04 tax year arising from the transactions in the scheme. HMRC made amendments in its closure notice to:
- disallow the loss; and
- assess the appellant to income tax under ICTA 1988, s. 18, s. 660A or s. 739 on profits of £1,840,342 arising to the NA Trust from transactions in the scheme.
Appendix 1 to the decision sets out the FTT's finding of fact in relation to the implementation of the scheme. There were five main elements:
- the creation of the NA Trust (a non-UK resident trust) for the benefit of the appellant and his family with initial property of £1,000;
- the acquisition of certain gilt strips by the appellant for £1,874,987.94, paying commission of £4,687.47.
- the grant by the appellant to the NA trust of a call option over the gilts for £100 to acquire the gilt strips for 2% of their market value on the date of exercise (with the right to cash cancel the call option at any time whilst the option was exercisable for the market value less the exercise price and notional dealing costs);
- the sale of the gilt strips subject to the call option by the appellant to a third party bank for £30,740; and
- the cash cancellation of the call option where the third party bank paid £1,840,442 to the NA Trust.
The two issues considered by the FTT were:
- whether the appellant suffered a loss within the meaning of FA 1996, Sch. 13, para. 14A; and
- whether the amounts received by the NA Trust pursuant to the scheme constituted income assessable on the appellant under ICTA 1988, s. 660A or s. 739.
The first issue concerned the proper construction of FA 1996, Sch. 13, para. 14A and both parties were in agreement that the legislation was susceptible to interpretation under the Ramsay principle (WT Ramsay Ltd v IR Commrs (1981) 54 TC 101).
The FTT considered three other case authorities: Campbell v IR Commrs (2004) Sp C 421 (Campbell); Berry v R & C Commrs [2011] BTC 1,623 (Berry); and George Rex Bretten QC [2013] TC 02604 (Bretten).
The FTT concluded that a purposive interpretation of para. 14A should seek to provide relief to a person who has sustained a loss from a discount on a strip where that loss reflects a real commercial outcome. In practical terms, for a transaction that is not self-cancelling (like Campbell), the FTT noted that this is achieved by ensuring that the inputs in the formula in para. 14A(3) reflect the reality of the transaction. For a self-cancelling scheme (like Berry), there is no economic detriment and therefore no loss. Therefore, the same result can be achieved by either stating that there is no loss meeting the description in para. 14A(1) or through applying a purposive interpretation to para. 14A(3) (so that the price paid to acquire the security and the amount payable on its transfer are in reality are the same).
The FTT considered how the facts should be viewed realistically in the context of the statutory provisions. As a starting point, the FTT noted that this was a pre-planned tax avoidance scheme. However, the FTT also noted that there had been no argument on the part of HMRC that the trust was a sham. The FTT considered that for the purposes of the scheme, the call option (and its cash cancellation feature) were designed to devalue the appellant's interest in the gilt strips at the time of the transfer to the third party bank by providing a valuable right to the NA Trust, but the NA Trust never had any intention of acquiring the gilt strips and, in reality, the arrangements were simply a means of ensuring that a proportion of the value of the gilt strips accrued for the benefit of the NA Trust.
However, the FTT also considered that unlike Berry, this was not a self-cancelling scheme and that the trust could not be ignored when construing para. 14A.
The FTT also rejected the argument based on Bretten that a loss which is planned and which arises from a transaction with a connected person cannot be a real commercial outcome.
The FTT finally considered the analysis of para. 14A(3) itself. The parties agreed that the amount paid by the appellant for the gilt strips was £1,874,987.94. The difference of interpretation lay in respect of the amount payable on the transfer. The appellant argued that the amount payable on the transfer was the amount paid by the third party bank of £30,740 and that on a proper construction of para. 14A(3), it was not permissible to take account of any other payments made. HMRC argued that the amount paid by the third party bank of £1,840,442 to the NA Trust to cash cancel the call option should also be treated as an amount payable on the transfer of the gilt strips.
The FTT agreed with HMRC on this point as it considered that the cash cancellation price was an integral part of the arrangements for the transfer of the gilt strips to the bank as this was the way that the parties intended the scheme to operate and how it did operate.
The FTT was of the view that the appellant made a loss of £3,805.94 for the purposes of para. 14A(3).
The appellant had sought to argue that FA 1996, Sch. 13, para. 4 provided a narrow definition of transfer that was limited to the transfer of the gilt strips by the appellant to the bank. The FTT disagreed and considered that on a purposive construction, “transfer” must include all elements of a pre-planned scheme that are designed to pass the interest in the gilt strips to the intended transferee.
The appellant also argued that it was implicit that only amounts payable to the transferor of the gilt strips should be taken into account, based on the approach in FA 1996, Sch. 13, para. 8 and para. 14B. The FTT rejected this argument stating that these were special computational provisions that do not inform the interpretation of para. 14A. Further, para. 14A encompassed circumstances where the consideration may be directed to another person which is why the amount paid for the gilt strips is restricted to the amount paid “by” the holder but there is no restriction that the amount payable on the transfer is the amount payable “to” the holder.
The second issue considered by the FTT was whether the amounts receivable by the NA Trust were income assessable on the appellant under ICTA 1988, s. 660A (income arising under a settlement in which the settlor retained an interest) or s. 739 (transfer of assets broad). There was no dispute between the parties that these provisions could apply to income arising in the NA Trust as a result of the transactions in the scheme. Therefore the FTT had to consider whether any income arose to the NA Trust.
HMRC asserted that there were two possible bases that income arose to the NA Trust:
- profit from the discount on the gilt strips under FA 1996, Sch. 13; or
- profit taxable under Sch. D, Case VI.
HMRC argued that the difference between the cash cancellation price (£1,840,442) and the £100 paid by the trust for the call option agreement was profit within the meaning of FA 1996, Sch. 13, para. 1(2). The appellant argued that Sch. 13 did not apply as the NA Trust never held a gilt strip as it just had a call option over the gilt strips. The FTT noted that although the effect of the call option agreement was to place in the NA Trust an amount broadly equivalent to the value of the gilt strips, under the pre-planned scheme it was never intended that the NA Trust would acquire or sell the gilt strips. This was consistent with the FTT's approach on the first issue and the FTT decided that the NA Trust simply received a proportion of the sale proceeds rather than realising profit from the discount that would be taxable income under FA 1996, Sch. 13, para. 1.
HMRC's second argument was that the transaction entered into the NA Trust gave rise to a profit taxable under ICATA 1988, s. 18 and in particular under Sch. D, Case VI on the grounds that:
- the NA Trustee acquired a short-term asset (the rights under the call option) where the profit was of an income rather than capital nature as it was short term; or
- the NA Trustee made a profit on the provision of a service to the appellant by facilitating the tax avoidance scheme.
On the first point, the FTT reviewed various case law authorities and concluded that that the receipt of the cash cancellation price was capital in nature. On the second point, the FTT found it difficult to characterise the provision of assets to a trust and the realisation of that asset through its cancellation as a reward for a separate service beyond the transactions themselves. Overall, it concluded that the profit realised by the NA Trustee was not subject to income tax under Sch. D, Case VI.
Appeal allowed in part.
HMRC's closure notice had sought to achieve the double whammy of denying the loss sought by undertaking the arrangements (known as AmberBox Income Tax Shelter Arrangements), and also taxing a profit broadly equivalent to the loss claimed. Although this decision may seem like a partial victory for the taxpayer, it has essentially put...
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