Aspect Capital Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 February 2014 |
| Neutral Citation | [2014] UKUT 81 (TCC) |
| Date | 19 February 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0081 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Warren, Chamber President, Judge Greg Sinfield.
Malcolm Gammie QC, instructed by King & Wood Mallesons SJ Berwin, appeared for the Appellant
Richard Vallat, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - Deemed charge under Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 419s. 419(1) on loans to participators - Whether company made loan to employees under employee share scheme - Yes - Whether company made an advance to employees under scheme - No - Whether employees incurred a debt under scheme - Yes - Whether debt has any value before occurrence of contingent event - Yes - Appeal dismissed.
The Upper Tribunal has upheld the decision of the First-tier Tribunal that the payment by a company of a facility amount under an Employee Participation Scheme represented the making of a loan by the company for the purposes of the charge to tax under what is now CTA 2010, Corporation Tax Act 2010 section 455 subsec-or-para 1 section 455 subsec-or-para 2ss. 455(1) and (2).
Aspect Capital Ltd (the Appellant) is an investment manager based in London. At the time of the appeal, 77 per cent of the Appellant's shares were held by the Appellant's directors or associated trusts and 20 per cent by the company's employees and the trustee of an employee benefit trust (the Trust). In May 2006, the Appellant established an employee share scheme (the "EPS") to enable certain employees to buy shares in it. An employee who wanted to buy shares under the EPS entered into two agreements (the "EPS Agreements") with the Appellant. Under the EPS Agreements, the Appellant granted a facility to the employee up to an amount (the "Facility Amount") equal to the purchase price of the shares plus any stamp duty. The employee would pay the subscription price to the Appellant or the Trust and the Appellant would either issue shares to the employee or procure the transfer of shares from the Trust to the employee. The employee was required to repay the Facility Amount, or a lesser amount in certain circumstances, on the occurrence of one of several defined events which included the cessation of the employee's employment with the Appellant.
HMRC assessed the Appellant to tax under ICTA 1988, Income and Corporation Taxes Act 1988 section 419s. 419(1) (now CTA 2010, Corporation Tax Act 2010 section 455 subsec-or-para 1 section 455 subsec-or-para 2ss. 455(1) and (2)) on the basis that, in granting the facility to the employees, the Appellant had made a loan to 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 section 419s. 419(1) on the basis that it had made a loan to the employees and/or the employees had incurred a debt to the Appellant. The Appellant appealed to the Upper Tribunal, contending that the First-tier Tribunal had erred in law: firstly, in finding that the Appellant had made a loan to the employees and that the employees had incurred a debt to the Appellant; and secondly, in failing to conclude that, if the employees incurred a debt, the debt had no value until the occurrence of one of the defined events.
The Appellant would be liable to tax under Income and Corporation Taxes Act 1988 section 419s. 419(1) if any of the following applied:
(2) the Appellant had made a loan to the employees under the EPS Agreements;
(3) the Appellant had made an advance of money to the employees under the EPS Agreements; and
(4) the employees had incurred a debt to the Appellant under the EPS Agreements.
If a charge was to be imposed on the Appellant on the basis of (3) then a separate issue arose, namely could any value be ascribed to the debt before the occurrence of one of the defined events? The Upper Tribunal found that a charge under Income and Corporation Taxes Act 1988 section 419s. 419(1) could be imposed on the Appellant on the basis of (1) or (3) and, with regard to (3), that the debt was of an amount equal to the Facility Amount; although the date and amount of the repayment was uncertain, those uncertainties did not prevent the Facility Amount from being a loan/debt, nor did they reduce the amount of that loan/debt.
The Upper Tribunal upheld the decision of the First-tier Tribunal, dismissing the Appellant's appeal.
The taxpayer company had made funds available to certain employees to allow them to buy shares. In an attempt to avoid the loans to close companies rules, the arrangements were structured so as to give rise to a debtor-creditor relationship when, and only when, a defined event occurred. The First-tier Tribunal, and now the Upper Tribunal, rejected this analysis, finding that the company made loans to the employees when the facility amounts were made available.
[1]Aspect Capital Limited ("the Company") appeals against a decision of the First-tier Tribunal ("the FTT") released on 29 June 2012, [2012] TC 02112, ("the Decision"). The Company had appealed to the FTT against a decision by the Respondents ("HMRC") that the Company was liable to a charge to tax under Income and Corporation Taxes Act 1988 section 419section 419 of the Income and Corporation Taxes Act 1988 ("ICTA").
[2]During the period in issue, section 419 ICTA provided:
(1)Subject to the following provisions of this section and Income and Corporation Taxes Act 1988 section 420section 420, where a close company, otherwise than in the ordinary course of a business carried on by it which includes the lending of money, makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, there shall be due from the company, as if it were an amount of corporation tax chargeable on the company for the accounting period in which the loan or advance is made, an amount equal to 25 per cent of the amount of the loan or advance.
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(2)For the purposes of this section the cases in which a close company is to be regarded as making a loan to any person include a case where -
(a) that person incurs a debt to the close company; or
(b) a debt due from that person to a third party is assigned to the close company;
and then the close company shall be regarded as making a loan of an amount equal to the debt.
[3]Income and Corporation Taxes Act 1988 section 419Section 419(3) ICTA provided that any tax due under the section was payable nine months and one day after the end of the accounting period in which the loan or advance was made. Income and Corporation Taxes Act 1988 section 419Section 419(4) provided that a company that had incurred a charge to tax in relation to a loan or advance may claim relief from the tax where the loan or advance was repaid or the company had released or written off the debt. Before the FTT, HMRC relied on Income and Corporation Taxes Act 1988 section 419section 419(5). The FTT decided that the conditions in Income and Corporation Taxes Act 1988 section 419section 419(5) were not met and HMRC did not seek to challenge that conclusion before us. Income and Corporation Taxes Act 1988 section 419Section 419(5) and (6) are not relevant to this appeal.
[4]The facts, which were not disputed and are set out by the FTT at [8]-[40] and [48]-[77] of the Decision, may be stated quite briefly for the purposes of this decision. The Company is an investment manager based in London. At the time of the appeal, 77% of the Company's shares were held by the Company's directors or associated trusts and 20% were held by the Company's employees and the trustee of the Aspect Capital Limited Employee Benefit Trust Number 2 ("the Trust"). The Trust had acquired its shares from the founders of the Company and departing employees who had held shares.
[5]In May 2006, the Company established an employee share scheme called the Aspect Capital Equity Participation Scheme ("the EPS") to enable certain employees to buy shares in the Company. HMRC accepted that the EPS was a commercially motivated share incentive scheme and did not allege that its purpose was to avoid tax.
[6]An employee who wished to buy shares under the EPS entered into a Share Acquisition Agreement and a Facility Agreement ("the EPS Agreements") with the Company. The FTT found that the EPS Agreements were entered into simultaneously and were all part of a single contract. The relevant clauses of the EPS Agreements are set out below.
[7]In summary, the Share Acquisition Agreement provided that the employee would pay the subscription price to the Company, the Trust or such other person as the Company directed within three business days. In return, the Company undertook that it would either issue new fully paid shares to the employee or procure the transfer of shares from the Trust or another person to the employee. In fact, the Company never issued new fully paid shares. In every case but one, the Company arranged for the Trust to transfer shares to the employees. In the only other case, the shares were transferred from an employee who was leaving the Company to an employee who wished to buy shares under the EPS.
[8]The introduction to the Share Acquisition Agreement was as follows:
(A)In order to incentivise and retain selected key employees who are not directors of the Company, the board of directors of the Company has resolved to allow certain employees, including the Employee, the opportunity to acquire a certain number of ordinary shares in the capital of the Company under the Aspect Capital Equity Participation Scheme.
(B)The arrangement for the acquisition of the ordinary shares...
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