Chappell
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 December 2012 |
| Neutral Citation | [2013] UKFTT 98 (TC) |
| Date | 21 December 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 098 (TC)
Judge John Walters QC, Tym Marsh
G R Bretten QC and Harriet Brown, Counsel, instructed by NT Advisors LLP, appeared for the Appellant
D Goy QC and Aparna Nathan, Counsel, instructed by the Solicitor for HMRC, appeared for the Respondents
Income tax - tax avoidance scheme designed to obtain a tax deduction in respect of a manufactured overseas dividend treated as an annual payment within ICTA 1988, Income and Corporation Taxes Act 1988 section 349s. 349 with no counteracting tax charge - ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1) and Income Tax (Manufactured Overseas Dividend) Regulations 1993 (SI 1993/2004), reg. 2B(3) - whether scheme defeated by the WT Ramsay Ltd v IR Commrs(1981) 54 TC 101 principle - held, yes - alternatively whether the annual payment deductible notwithstanding an express provision in reg. 2B(3) that no deduction of tax was required on making the payment - held, no - Right Honourable Richard George Penn Curzon-Howe (Earl Howe) v IR Commrs(1919) 7 TC 289 and succeeding cases applied - alternatively whether the charge to basic rate tax under ICTA 1988, Income and Corporation Taxes Act 1988 section 3s. 3 restricts relief for any deduction for such an annual payment to relief at the higher rate(s) of income tax - held, no - appeal dismissed
The First-tier Tribunal decided that the transactions involved in a scheme which were necessary to enable a taxpayer to claim deduction to his income were not transactions of the type that came within the meaning of the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 schedule 23ASch. 23A and the Income Tax (Manufactured Overseas Dividend) Regulations 1993 (SI 1993/2004) ("MOD Regulations 1993"), reg. 2B. Applying the Ramsay principle of viewing the transactions realistically and construing the relevant statutory provisions purposively, the Tribunal decided there was no transfer of overseas securities, since, among other things, the sale and purchase of the securities were both at wholly contrived prices sufficient to ensure that the arrangements fulfilled the purpose of the scheme. There was also no payment of manufactured overseas dividends ("MODs") since the movements of funds did not discharge a commercial obligation to pay the MODs. It was part and parcel of the self-cancelling scheme designed to create a tax deduction and no corresponding tax charge.
The taxpayer appealed against HMRC's amendment to his self-assessment in the tax year 2005-06. In the amendment, HMRC sought to cancel the effect of a charge on income which the taxpayer claimed as a deduction from his total income for that year.
The taxpayer was the managing director of an investment bank which traded exotic emerging market debt. He participated in a tax avoidance scheme where he was required to borrow foreign loan stock to a very substantial nominal value. He would then pay MODs corresponding to the amount of income which he wished to shelter from UK income tax.
On 29 July 2005, the taxpayer borrowed from a foreign company ("BL") £6,377,280 nominal value loan notes ("LNs") issued by another foreign company ("SCL"). The SCL LNs of £264,019,380 were constituted by an instrument dated 29 July 2005. The £6,377,280 LNs borrowed by the taxpayer from BL were issued on that date. The terms of the issue provided that such LNs were to be for a term of two years, the final redemption date being 28 July 2007. Interest was to accrue on the principal outstanding amount of LNs at a fixed rate and was to be payable on four different interest dates.
There was a very irregular pattern of interest payable on the LNs. The SCL LNs were transferred at the taxpayer's direction to a bank ("SGH") as custodian for him against a collateral, consisting of a letter of credit provided by another foreign company ("HL") to BL. The issue of that letter of credit was secured by the taxpayer in favour of HL by a security assignment of his rights in the custodian agreement.
On 1 August 2005, the taxpayer sold the SCL LNs to another foreign company ("BLL") for a cash consideration of £6,373,804. The next day was the first interest date when the interest was payable on the LNs. On that day, the taxpayer made a payment of £4,164 to BL as a manufactured payment due under clause 6.1 of the Global Master Securities Lending Agreement ("GMSLA").
On 2 August 2005, a sum equal to the balance of the cash consideration received by the taxpayer on the sale of the LNs to another company ("BLL"), less the manufactured payment made to BL, was transferred from the taxpayer's SGH call deposit account to his SGH custody account.
On 4 August 2005, the second interest date occurred. The taxpayer paid £298,959 to BL as a manufactured payment due under clause 6.1 of the GMSL, which was also debited to his SGH call deposit account. On 5 August 2005, the taxpayer purchased £6,377,280 SCL LNs from another foreign company ("QL") for a cash consideration of £6,073,588. Again, the amount was debited in his SGH call deposit account. Those LNs were credited to the taxpayer's SGH custody account and were used by him to repay to BL the loan of LNs borrowed on 29 July 2005.
On January 2007, the taxpayer claimed relief in his self-assessment for the relevant tax year in respect of the MODs paid by him under the transactions involved in the scheme.
Relying on Westmoreland Investments Ltd v MacNiven (HMIT)TAX[2001] BTC 44 ("MacNiven"), the taxpayer contended that the movements of funds were not sham movements and met his obligations imposed by the GMSLA. Thus, they should be recognised as constituting payments of the MODs for relevant purposes.
HMRC contended that the tax avoidance scheme representing a pre-ordained series of transactions, in reality, amounted to nothing. In particular, the transactions did not involve any transfer of overseas securities within ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1). They also did not involve any payment of MODs for the purposes of ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1) or MOD Regulations 1993, reg. 2B(3). Relying on the Ramsay principle, HMRC contended that in viewing the transactions involved in the scheme realistically and construing the relevant statutory provisions purposively, they were not transactions of the type that came within the meaning of the relevant statutory language.
Whether, applying the Ramsay principle, there was a transfer of overseas securities (LNs) by BL to the taxpayer, and whether the taxpayer made payments (MODs) to BL in the context of ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1A) and MOD Regulations 1993, reg. 2B(3).
Held, dismissing the taxpayer's appeal:
The Tribunal held that ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23ASch. 23A and MOD Regulations 1993, reg. 2B were intended to apply to MODs which were compensatory payments for income receipts which the borrower received or to which the borrower became entitled, and, importantly, on which the borrower might expect to be taxed. That statutory purpose was indicated by ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1A) which provided for the MOD paid to be treated as a trading expense where it was paid by a company carrying on a trade to which the MOD related, and as an expense of management where it was paid by company having an investment business to which the MOD related. The purpose of those provisions was to provide for cumulatively one effective charge to tax in respect of an overseas dividend in circumstances where the relevant overseas security had been lent and borrowed. Representative payments were required to be made under the terms of the lending and borrowing.
Here, the Tribunal found that the arrangements involving the taxpayer's participation in the scheme represented a pre-planned series of transactions which took place over eight days. The arrangements had no commercial purpose and their only objective was to obtain a tax advantage. The loan stock and the obligations under the GMSLA were created solely for the purposes of the scheme and there was no other reason for their existence. The quantum of the loan stock issued was dictated by the tax relief desired. The sale to BLL and the purchase from QL were both at wholly contrived prices, sufficient to ensure that the arrangements fulfilled their purpose. The difference between the price at which the LNs were sold by the taxpayer to BLL and the price at which he bought the LNs from QL was crucial to the scheme and was determined by the quantum of the MOD paid. In turn, the MOD was dictated by the amount of income sought to be sheltered. The taxpayer ran no risk apart from paying the fee for participation in the scheme. The movements of moneys involved, if real, would have been quite staggering, but in reality, the money went round in a circle from start to finish. The entities involved in the scheme were simply there to participate in the scheme. Therefore, there was no transfer of overseas securities within ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1). There was also no payment of MODs for the purposes of ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 4Sch. 23A, para. 4(1) or MOD Regulations 1993, reg. 2B(3).
In MacNiven, the payment of interest discharged a commercial obligation to pay interest. That obligation was a substantial accrued interest liability. It was a movement of funds within the commercial concept of payment of a debt. It was a movement of funds within a series of transactions containing "no step that fell to be ignored because it was artificial" and of which, it could not be said that...
To continue reading
Request your trial
-
Andrew Chappell v The Commissioners for HM Revenue and Customs
...apart from the avoidance of tax. [4] The Commissioners succeeded on both these arguments before the First-tier Tribunal (‘the FtT’) (see [2013] TC 02516) and on appeal before the Upper Tribunal (‘the UT’) (Simon J and Judge Greg Sinfield) (see [2014] BTC 523). But as I shall explain HMRC's ......
-
Atherton
...another NTA client who had utilised an unrelated box to claim a loss had not been criticised for this by HMRC or the Tribunal: Chappell [2013] TC 02516 (albeit we note that in that case there was specific disclosure around the use of the unrelated box). [173] At the same time, however, his ......
-
TC03314: Eoghan Flanagan and related appeals
...purpose of the legislation is not to relieve artificial payments of this kind. That was also the conclusion of this tribunal in Chappell[2013] TC 02516in which, at [179]-[180], it described a true, representative, manufactured payment as "compensatory". It follows that if a payment cannot p......
-
Weekly Tax Update - Monday 25 February 2013
...and annual payments not so payable (previously s 349) the Tribunal did not agree with this contention. www.bailii.org/uk/cases/UKFTT/TC/2013/TC02516.html 3 PAYE AND EMPLOYMENT MATTERS 3.1 HMRC Spotlights - Employment Benefit Schemes using fettered payments HMRC has published a new Tax Avoid......