Aspect Capital Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 June 2012 |
| Neutral Citation | [2012] UKFTT 430 (TC) |
| Date | 29 June 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 430 (TC)
Judge Barbara Mosedale, Jo Neill
Mr M Gammie QC, instructed by SJ Berwin LLP, solicitors, appeared for the Appellant
Mr L Connell, HMRC Officer, appeared for the Respondents
Corporation tax - deemed charge under ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 1s. 419(1) on loans to participators - whether money loaned under employee participation scheme - yes - whether a debt arose immediately on transfer of shares under scheme - yes - appeal dismissed
The First-tier Tribunal decided that the completion of a facility agreement under a scheme resulted in both a loan by a taxpayer company to its employees and a debt by the employees to the taxpayer. The facility amount was the employee's loan from the taxpayer within the meaning of the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 419s. 419. In turn, the taxpayer, acting as agent for the employee, arranged the transfer of shares by the trustee to the employee. The Tribunal could not see the sale of the shares to the employee as an advance. Such shares were not transferred to the employees on the basis that they were advances of salary they would earn, but transferred on terms that they would be paid for, albeit at a later date. Although one of the three "not repayable events" could occur, and at that moment the debt would be waived, the employee owed money to the taxpayer. The contingent events merely determined when the facility amount would be repaid and did not affect the fact that a debt arose upon the completion of the taxpayer's obligations to each employee under the facility agreement.
The taxpayer company appealed against HMRC's assessments and closure notices in respect of years ending 31 December 2006, 2007, 2008 and 2009.
The taxpayer, an investment manager, had approximately 17,000,000 issued shares. Its directors or associated trusts held 77 per cent of the shares and its employees and their trustee ("the trustee") held 20 per cent of such shares. Other persons held the remaining three per cent of those shares. The trustee acquired the taxpayer's shares from the directors and departing employees, while the employees got their shares under the employee participation scheme ("EPS"). The EPS was created to give shares to key employees rather than mere options to acquire shares in the taxpayer. The employees could acquire shares under the EPS in the normal round of bonus awards at the start of the year, or when they joined the taxpayer, or on an ad hoc basis at any time.
The employees had the right to decide whether or not to participate in the EPS. If they wished to participate, they would notify the taxpayer and the latter would then resolve to award the EPS to them. If and when the trustee agreed to transfer the shares to the employees, the taxpayer would enter into a share acquisition agreement with each participating employee. Such employee would then enter into either the UK facility agreement or the US loan facility agreement if he was a US passport holder. Once that employee had completed executing the necessary documents, the taxpayer would pay the facility amount, less the stamp duty payable in respect of the transfer of the shares, to the trustee. The employee received no sum. The trustee then signed the stock and transfer form in favour of the employee and the taxpayer submitted the same for stamping and paid any stamp duty to HMRC. On receipt of the stamped stock transfer form, the taxpayer duly amended and updated its register of members.
The UK facility agreement expressly provided that the taxpayer's payment did not give rise to a creditor-debtor relationship between the taxpayer and the employee unless one of the contingent events occurred. These events included, among others, the termination of the employee's services for any reason other than death. Once that event happened, the facility would become automatically converted into a debt. Where the value of the shares, as determined on the occurrence of a contingent event, exceeded the costs of the shares to the employee, the trustee would pay the amount of the facility to the taxpayer to discharge it and would pay the balance to the employee. However, where the value of the shares was less than the facility amount, the taxpayer would pay to the employee a bonus equivalent to the grossed up amount of the difference in share cost and current value. No money would change hands as the taxpayer would retain the net bonus in part repayment of the facility. The trustee, as purchaser of the shares, would pay the valuation amount to the taxpayer. The net bonus and the payment from the trustee would discharge the facility. The facility would never be repayable in circumstances where the employee died, the taxpayer was under insolvent liquidation, or the taxpayer waived the debt at its sole discretion.
The taxpayer contended that the EPS functioned as an employee-share-incentive scheme, enabling employees to acquire shares from the taxpayer on particular terms. The EPS did neither have as its purpose nor did it involve the making of any loan by the taxpayer to individuals who were participators as contemplated by ICTA 1988, Income and Corporation Taxes Act 1988 section 419s. 419. The taxpayer argued that at no stage was any money ever transferred to employees under the EPS and employees did not contract with the trustee to acquire and pay for the shares that were transferred to them by the trustee. The taxpayer acted throughout in its capacity as employer to procure the transfer by the trustee of shares that it had awarded to employees under the EPS.
The taxpayer further argued that between the taxpayer and its employees under the UK facility agreement, the shares were acquired on terms that expressly did not involve the incurring of any debt or give rise to the relationship of debtor and creditor as between it and the employees at the time at which the shares were acquired. Even if it could be said that a debt was incurred at the time at which the shares were acquired in the sense that the facility agreement might give rise to a debt in the future if a relevant contingency occurred, the amount of the debt until such time as a contingency occurred was nil. The taxpayer considered that Potts' Executors v IR CommrsTAX(1950) 32 TC 211 ("Potts") was the leading authority for its contentions. It pointed out that ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 2s. 419(2) was enacted in 1969 after and in response to the House of Lords' decision in Potts.
HMRC averred that the debt arose at the moment that the share acquisition and facility agreements were entered into. Such an interpretation would give rise to an immediate liability to tax on the taxpayer under ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 1s. 419(1), as extended by Income and Corporation Taxes Act 1988 section 419 subsec-or-para 2s. 419(2).
The taxpayer argued that the debt arose at the earliest when one of the contingent events first occurred, and if one of the "not repayable events" occurred before a contingent event, then no debt ever arose. It referred to the case of Grant v Watton (HMIT)TAX[1999] BTC 85 ("Grant") in support of its submission.
Whether the UK facility agreement involved the making of any loan or any advances by the taxpayer to the employees or, in the alternative, whether the employee incurred a debt to the taxpayer.
Held, dismissing the taxpayer's appeal:
The Tribunal held that it was not bound by the authority of Potts because of the lack of majority view of the House of Lords. In so far as the interpretation of ICTA 1988, Income and Corporation Taxes Act 1988 section 419s. 419 was concerned, it considered that Parliament would have and did intend such a situation to be within the meaning of "loan" because ICTA 1988, Income and Corporation Taxes Act 1988 section 419s. 419 was an anti-avoidance measure. The amendment to ICTA 1988, Income and Corporation Taxes Act 1988 section 419s. 419 after the decision in Potts was consistent with this view in that the amendments were made because the legislature had concerns that the meaning the courts would give to "loan" was not as wide as intended.
The Tribunal held that the facility amount was a loan by the taxpayer to the employee within the meaning of ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 1s. 419(1). The taxpayer, acting as agent for the employee, arranged the transfer of shares by the trustee to the employee in which the price of the share was a loan itself by the taxpayer to the employee. The facility amount comprised not just the price of the shares, but included the stamp duty payable on any transfer. The employee covenanted to use that amount only to acquire the shares and pay the stamp duty, if applicable. The employee would have had no choice as the taxpayer never made the funds available to the employee, but paid the trustee to transfer the shares to the employee. It was also an assumption, if not an express term, that the taxpayer would discharge the employee's liability to stamp duty.
The Tribunal's finding that the facility amount was a loan would matter to dispose the appeal depending on when the loan arose. The terms of the UK facility agreement were that no debtor-creditor relationship arose until a contingent event occurred. If this provision was effective, that would mean the loan did not take place or the debt did not arise until the moment that it was due to be repaid. This in effect would mean that there would be no tax charge under ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 1s. 419(1), as the tax charge only existed between the date the loan was created to the date it was repaid (ICTA 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para 4s. 419(4) (subject to ...
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RKW Ltd
...the meaning of the word "debt" depends on its context. With that I am in full agreement. [35]In the recent case of Aspect Capital Ltd[2012] TC 02112 which turned on the meaning of "debt" (para 155), the Tribunal does not appear to have been addressed on Marren v Ingles and stated (at para 2......
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Aspect Capital Ltd v Revenue and Customs Commissioners
...participators. The Appellant appealed against the assessments to the First-tier Tribunal. The First-tier Tribunal (Aspect Capital LtdTAX[2012] TC 02112) dismissed the Appellant's appeal, finding that the Appellant was liable to a tax charge under Income and Corporation Taxes Act 1988 sectio......