Barnes
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 January 2011 |
| Neutral Citation | [2011] UKFTT 95 (TC) |
| Date | 31 January 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 95 (TC)
Judge Peter Kempster (Chairman), Mr John Agboola
Mr Rex Bretten QC (instructed by NT Advisers LLP) for the Appellant
Mr Malcom Gammie QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Income tax - tax avoidance scheme - chargeability of interest income under Income and Corporation Taxes Act 1988 section s18s 18 ICTA 1988 - relief under the accrued interest provisions of Income and Corporation Taxes Act 1988 part XVII chapter IIChapter II of Part XVII ICTA 1988 - deductibility of a payment under the manufactured interest provisions of Income and Corporation Taxes Act 1988 schedule 23ASchedule 23A ICTA 1988
1. This case involved a tax avoidance scheme designed to achieve an income tax saving by exploiting a perceived mismatch in the legislation governing two complicated matters: first, the accrued interest provisions of Income and Corporation Taxes Act 1988 part XVII chapter IIChapter II of Part XVII of the Income and Corporation Taxes Act 1988 ("TA 1988"); and secondly, the manufactured interest provisions of schedule Income and Corporation Taxes Act 1988 section 23A23A TA 1988. The Appellant ("Mr Barnes") is one of a number of taxpayers who have participated in the scheme, named "Project Corbiere" or "WhiteBox", and his appeal has (by Directions issued on 10 August 2009) been designated as a lead case under Tribunal Procedure Rule 18.
2. Mr Barnes submitted his self-assessment income tax return for the tax year 2004-05 on 17 September 2005. It included a claim for a deduction of £1.2 million in computing his income tax liability, giving rise to a tax repayment of £473,239.66. It made a full disclosure of his use of the tax avoidance scheme. On 30 November 2005 he wrote to the Respondents ("HMRC") with some amendments to his return.
3. On 20 January 2006 HMRC opened an enquiry into the return, pursuant to Taxes Management Act 1970 section 9As 9A Taxes Management Act 1970 ("TMA"). HMRC declined to make the repayment of tax until completion of their enquiry. HMRC made requests for extensive information in connection with their enquiry, all of which were met by Mr Barnes' advisers, Dominion Fiduciary Services Group ("Dominion") and NT Advisers LLP ("NT Advisers"). On 11 December 2008 HMRC issued a closure notice pursuant to s 28A TMA, amending the return so as to reduce the deduction (stated in the letter to be £12 million but the parties accepted this was a typographical error for £1.2 million) to Nil, resulting in a payment (rather than a repayment) due of £6,760.34. Mr Barnes appealed to the Tribunal against the closure notice on 21 April 2009 and HMRC accept that as a valid appeal.
4. The Tribunal took evidence from the following four witnesses for Mr Barnes. Mr Barnes himself adopted two witness statements dated 4 December 2009 and 27 May 2010, and gave sworn oral evidence. Mr Ben Cooke (at the relevant time managing director of Dominion in Jersey) adopted two witness statements dated 4 December 2009 and 27 May 2010, and gave sworn oral evidence. Mr Matthew Jenner (at the relevant time with NT Advisers) adopted three witness statements dated 4 December 2009 (two) and 27 May 2010, and gave sworn oral evidence. Mr Stuart Gower (at the relevant time an employee of SG Hambros Bank in Jersey) adopted three witness statements dated 4 December 2009 (two) and 7 June 2010, and gave sworn oral evidence.
5. In February 2005 Mr Barnes and some of his work colleagues met with Mr Jenner of NT Advisers who provided them with details of a tax loss plan called Project Corbiere ("the Scheme"). In outline, a taxpayer would borrow by way of stock loan a significant amount of gilts very shortly before the gilts went ex-div; the stock lender would require cash collateral as security for the stock loan but the funds would be made available to the taxpayer by a bank loan, secured against the borrowed gilts; the gilt coupon would be received by a custodian, who would remit those monies to the stock lender; finally, shortly after the dividend had been received, the borrowed gilts would be returned to the lender. The details of the Scheme are described later in this decision.
6. The Scheme had been devised in 2004 by Mr Jenner and colleagues. It was originally used by a particular individual client, but then broadened to be used by a number of taxpayers. Mr Jenner put it to Dominion, whose London office shared premises with NT Advisers. Dominion, working with Mr Jenner, put together a packaged arrangement, collaborating with persons they had worked with on other transactions. The banking and other financial resources necessary for the Scheme would be provided by the Société Générale Group, in particular SG Hambros Bank & Trust Limited in Jersey ("Hambros") and Société Générale Bank & Trust in Luxembourg ("SocGen"). A suite of proforma documentation was drafted, in conjunction with Hambros' and SocGen's legal advisers, and leading counsel's opinion obtained concerning the technical effect of the Scheme. Dominion put the Scheme to a number of clients and contacts. Mr Cooke described Dominion's role as being the project manager. There were several rounds of implementation of the Scheme each with a number of participants; they took place between July 2004 and February 2005, with Mr Barnes participating in the February 2005 round. The February 2005 round consisted of 39 participants. In all there were around 100 participants.
7. On 8 February 2005 Mr Barnes signed an engagement letter with Dominion whereby Dominion would provide to Mr Barnes tax consulting services in connection with the Scheme. Mr Barnes, via Mr Jenner, informed Dominion that he wished to shelter income of £1.2 million in the tax year 2004-05. As will be seen, the essence of the Scheme is that the participant should obtain a tax deduction for a sum equal to the amount of the coupon payment on the borrowed gilts. There was in the market an issue of gilts (UK Treasury Gilts 8.75% 2017) with an ex-div date of 16 February 2005. Grossing-up the (biannual) coupon on those gilts, Mr Jenner calculated that in order to generate £1.2 million of tax shelter Mr Barnes would need to borrow gilts with a nominal value of £27,428,571; those gilts would have a market value of over £38 million.
8. The stock lending market in gilts is effectively an institutional market and a deal size of £27 million nominal would not be available. Instead, a larger stock loan was put together and then subdivided among the various participants in the February 2005 round of the Scheme, including Mr Barnes. We now describe the structure and documentation employed in the February 2005 round of the Scheme.
9. In April 2004 Hambros had acquired or established a British Virgin Islands company called Clement View Limited ("CVL"). The directors were Hambros staff based in Jersey including Mr Gower. In July 2004 the shareholder and directors authorised CVL to enter into stock loans or repos. The purpose of CVL was to stand between the stock lender and the participants in the Scheme, so that a large amount of gilts borrowed by CVL could then be subdivided between the participants.
10. In July 2004 CVL had entered into an agreement ("the Global Securities Lending Agreement") with Cantor Fitzgerald Limited providing for the parties to enter into repurchase transactions and buy-and-sell-back transactions in securities and financial instruments. This was in a market standard TBMA/ISMA form.
11. On 8 February 2005 Mr Barnes had signed in escrow a set of the suite of Scheme documentation (described below) and signed a letter of authority to Dominion to put dates, amounts and "any other issues" into the documents; to change dates already typed in the documents; and "in [Dominion's] absolute and sole discretion" release the documents from escrow. This escrow letter contained a paragraph relating to the repayment of the gilt borrowing:
I note that I can repay any stock loan of securities with other securities issued by the same issuer. I further note that the some [sic] documents assume that I will repay such a stock loan with the same type of gilts. At this time, I believe I will repay such a stock loan in that manner but I note that there is no requirement for me to do so and as such I reserve the right for me to make a final decision on how I repay the stock loan at the relevant time. I, therefore, hereby make all my relevant instructions in this letter subject to my right to decide at the relevant time how such a stock loan is repaid. For the avoidance of doubt I shall inform you if I change my mind and if you do not hear from me to the contrary before the repayment of such a stock loan is due you may act on my current wishes.
12. On 16 February 2005 the latest round of the Scheme swung into action - as Mr Bretten put it, the starting pistol was fired. Mr Jenner in his evidence explained that because potential participants had signed documents in advance, it was necessary to confirm with them that they still wished to participate; some individuals did change their minds and dropped out; also, a person who had failed to deposit funds for the fees would not be a participant; only on the evening of 15 February was the final list known. Mr Gower in his evidence explained that the staff at Hambros were well versed in what paperwork needed to be executed; they were in constant telephone contact with Dominion on the relevant days. Mr Jenner in his evidence explained that as there had been six previous rounds everyone knew what they were doing, even with 39 separate sets of transaction documentation. The escrow documents signed by Mr Barnes (paragraph 11 above) were released.
13. Cantor Fitzgerald (by this time called BGC International), CVL and Hambros entered into a letter agreement pursuant to the Global Securities...
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