D. T. E. Financial Services Ltd v Wilson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE JONATHAN PARKER,LORD JUSTICE SEDLEY,LORD JUSTICE POTTER |
| Judgment Date | 03 April 2001 |
| Neutral Citation | [2001] EWCA Civ 455 |
| Docket Number | Case No: A3 1999 1325 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 April 2001 |
[2001] EWCA Civ 455
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
(Mr Justice Hart)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Potter
Lord Justice Sedley and
Lord Justice Jonathan Parker
Case No: A3 1999 1325
Mr Andrew Thornhill QC and Mr James Henderson (instructed by Messrs Evershed for the Appellant)
Mr Ian Glick QC and Mr Timothy Brennan (instructed by Solicitor of Inland Revenue for the Respondent)
INTRODUCTION
This is an appeal by DTE Financial Services Ltd (DTE) against an Order of Hart J dated 28 October 1999. By his Order Hart J dismissed DTE's appeal against a decision of a single Special Commissioner, who had in turn dismissed DTE's appeal against a determination made by the respondent Inspector of Taxes under regulation 49(2) of the Income Tax (Employment) Regulations 1993. Hart J's judgment is reported at [1999] STC 1061.
The Inspector's determination, upheld by the Special Commissioner and by Hart J, was that DTE was accountable to the Revenue under the PAYE system in respect of income tax on bonuses which had been paid by DTE to its three directors, who were employees of DTE. The Inspector determined DTE's liability in the sum of £48,720, on the footing that the bonuses totalled £121,800. It is, however, common ground (as it was before the Special Commissioner and Hart J) that each of the three directors received a payment of £40,000, and accordingly that DTE's true liability, should the determination be correct in principle, is £48,000. It is also common ground that the transactions which took place resulting in the three payments were the same in the case of each director. Accordingly, for convenience the arguments both below and in this court have been confined to the payment to one of the three directors, Mr Mervyn MacDonald.
The case turns on the effectiveness or otherwise of a tax avoidance scheme designed to avoid liability for national insurance contributions and to enable an employer to make payments to employees in a manner which falls outside the PAYE system. No questions arise in this case in relation to national insurance contributions.
The scheme in question involves a number of distinct steps or transactions, the nature of which I shall explain in due course. DTE contends that on a true analysis the effect of the scheme was that DTE provided Mr MacDonald not with a cash payment of £40,000 but with a contingent reversionary interest under a settlement (albeit that the contingent reversionary interest shortly thereafter turned into cash, as both parties had throughout intended). On that basis, DTE contends that although the contingent reversionary interest was a taxable emolument of Mr MacDonald's employment, the provision of that emolument falls outside the PAYE system. The Revenue, however, while not attacking any of the transactions as shams, contends that, adopting the approach of the House of Lords in W.T. Ramsay Ltd v. IRC [1982] AC 300, the court should conclude that Mr MacDonald received a payment from DTE which was subject to deduction of tax under the PAYE system, and that DTE is accordingly accountable for the tax which should have been deducted. I will refer to this issue as "the Ramsay issue". In the alternative, the Revenue contends that if on a true analysis DTE provided Mr MacDonald not with cash but with a contingent reversionary interest, the transaction is nevertheless brought within the PAYE system by section 203F of the Income and Corporation Taxes Act 1988 (the Act). I will refer to this issue as "the section 203F issue".
DTE appears on this appeal by Mr Andrew Thornhill QC and Mr James Henderson; the Revenue by Mr Ian Glick QC and Mr Timothy Brennan.
THE RELEVANT TAX LEGISLATION
The relevant legislation is that which applied in the tax year 1995/6, and references to the legislation in this judgment are to the legislation in its then form.
The PAYE system is introduced by section 203 of the Act. Section 203(1) provides as follows:
"On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment, notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for some year of assessment other than the year during which the payment is made." (My emphasis.)
Section 203A(1) provides (so far as material) that for the purposes of section 203 a payment shall be treated as made "at the time when payment is actually made", or (if earlier) "the time when a person becomes entitled to the payment".
Section 203B deals with payments of assessable income made by an intermediary of the employer. Although this section was the subject of argument before the judge, it has not been relied on by the Revenue on this appeal as a separate ground for contending that the PAYE system applies. Accordingly I need not make further reference to it.
Section 203F provides as follows (so far as material):
"(1) Where any assessable income of an employee is provided in the form of a tradeable asset, the employer shall be treated, for the purposes of PAYE regulations, as making a payment of that income of an amount specified in subsection (3) below.
a) For the purposes of subsection (1) above "tradeable asset" means –
b) any other asset for which, at the time the asset is provided, trading arrangements exist.
c) The amount referred to is –
d) in the case of an asset for which trading arrangements exist at the time when the asset is provided, the amount which is obtained under those arrangements.
e)for the purposes of subsection (2) above "asset" includes any property ."
The expression "trading arrangements" is defined in section 203K(2) as meaning, in relation to an asset:
" arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset".
Section 203K(3)(a)(ii) provides that for the purposes of section 203K(2):
" . any reference to enabling a person to obtain an amount includes . a reference to enabling an amount to be obtained by any means ."
Thus, the section 203F issue is whether (assuming that the Revenue fails on the Ramsay issue) the contingent reversionary interest provided by DTE to Mr MacDonald was a "tradeable asset" for the purposes of the section. If it was, then (as is accepted by DTE) section 203F brings the transaction within the PAYE system.
THE SCHEME
As already explained, it is essential to the success of the tax avoidance scheme (a) that the emolument received by the employee should consist not of cash but of the contingent reversionary interest (the Ramsay issue), and (b) that the contingent reversionary interest is not itself a tradeable asset (the section 203F issue). So the scheme has to steer clear of both Scylla and Charybdis. It seeks to do this by the creation of an offshore discretionary settlement of a sum of cash (borrowed by the settlor), under which the settlor becomes entitled (by virtue of an appointment made by the trustee) to a contingent reversionary interest in a sum equal to the intended bonus, plus a sum in respect of costs. The interest is "contingent" in a theoretical sense only; in reality there is no risk of the contingency not occurring. Thus, for all practical purposes the so-called contingent reversionary interest is no more nor less than a right to a specified sum of cash on a future date; the specified sum being the amount of the intended bonus and the specified date being the date on which the employer wishes the employee to receive the bonus. The circle is squared by the employer taking an assignment of the interest for a consideration equal to the amount of the intended bonus (plus an additional sum representing the fee for entering into the scheme) and then assigning it on to the employee. The settlement provides that the interest may only be assigned twice, so that (if that provision is valid) in the hands of the employee the interest is non-assignable. Result: on the specified date the employee receives a cash payment equal to the amount of his intended bonus.
THE FACTS
The facts in relation to Mr MacDonald's bonus are not in dispute and can be shortly stated.
According to a minute of a board meeting held on or before Wednesday 19 April 1995 (the precise date is not material) the three directors "contemplated" without, of course, deciding that DTE would pay them each a bonus of £40,000. On 19 April 1995 DTE provided the operator of the scheme with all the details necessary to set the scheme machinery in motion in relation to each of the three directors. On Monday 24 April 1995 the requisite contingent reversionary interest was created. The following day, Tuesday 25 April 1995, DTE took an assignment of the interest for a consideration of £40,600 (the additional £600 representing the fee payable by DTE for entering into the scheme). Next day, Wednesday 26 April 1995, DTE assigned the interest on to Mr MacDonald. On Friday 28 April 1995 the interest fell into possession and a sum of £40,000 was duly remitted to Mr MacDonald's bank account.
DTE's accounts for the year ended 30 April 1995 record, with admirable candour:
"Bonus payments were made in the form of assignments of interests in Offshore Trusts."
THE DECISION...
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