D. T. E. Financial Services Ltd v Wilson (Inspector of Taxes)

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date28 October 1999
Date28 October 1999

Chancery Division.

Hart J.

DTE Financial Services Ltd
and
Wilson (HM Inspector of Taxes)

Andrew Thornhill QC and James Henderson (instructed by Eversheds) for the company.

Ian Glick QC and Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

Fitzwilliam v IR Commrs TAXWLR[1993] BTC 8003; [1993] 1 WLR 1189

Furniss (HMIT) v Dawson TAXELR[1984] BTC 71; [1984] AC 474

IR Commrs v McGuckian TAX[1997] BTC 346

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

This was an appeal from the decision of a special commissioner that a scheme designed to avoid payment of national insurance contributions by the directors of the company and deduction of tax by the company from bonuses provided to the directors was not effective.

On 19 April 1995 the company resolved to pay bonuses of £40,000 to three directors by way of a scheme involving payment of the bonuses in the form of contingent reversionary interests in offshore settlements. The position of all three directors was identical. The facts and contentions were considered in relation to one of the directors, M.

On 21 April 1995 Goodvale, a company resident in the Isle of Man, settled £40,300, borrowed from a bank, on a company resident in Nevis in the West Indies. Goodvale ("the settlor") was a beneficiary under the trust. On 24 April the Nevis company disposed of the entire trust fund by appointing the entire capital of the settlement to the settlor with effect from 28 April and the entire income to another beneficiary. On 25 April the company paid to the settlor the sum of £40,600, which was paid into a protected account in consideration for an assignment of its beneficial interest under the settlement to the company which took place simultaneously. On 26 April the company resolved to transfer its interest to M. On 28 April the settlor confirmed to M that the interest had fallen in and transferred £40,000 to his personal bank account. The settlor and the Nevis company each retained £300 in respect of their fees.

The company appealed against a determination by the inspector under reg. 49(2) of the Income Tax (Employments) Regulations 1993 (SI 1993/744) on the footing that PAYE should have been deducted in respect of the bonus. The company accepted that the £40,000 was an emolument of M's employment, but maintained that it was a taxable benefit under s. 154 of the 1988 Act in respect of which national insurance contributions were not due and no PAYE should be deducted.

A special commissioner dismissed the appeal, holding that the principle in WT Ramsay Ltd v IR Commrs should be applied to the transactions and on that basis the company should be regarded as having made payments of £40,000 to the directors under s. 203(1) from which PAYE should have been deducted.

The company did not seriously challenge the proposition that the essential conditions for the application of the Ramsay principle were satisfied. The transactions were pre-ordained; they were in fact followed as planned; and the elaborate form which the overall transaction took was tax avoidance, rather than business motivated. But the company contended that in order to apply the Ramsay principle to the scheme, the payment by the company to the settlor, which had been ignored, would then have to be reinstated and regarded as a payment to M, and that apart from Ramsay no liability to operate PAYE arose under s. 203, s. 203B or s. 203F.

The Revenue contended that the conditions for the application of the Ramsay principle were manifestly satisfied and that it was therefore permissible to strip out the inserted steps in analysing the transaction as a composite whole which was, in effect, an indirect "back to back" payment by the employer to M. The scheme was designed from beginning to end with a view to ensuring that M ended up with £40,000 (as he did) and that was the result of the employer having paid the sum of £40,000 to the settlor on 25 April 1995.

The Revenue contended further that, apart from the Ramsay principle, there was a payment by an intermediary within s. 203B and that the appointment made on 24 April 1995 constituted an arrangement within s. 203F, the purpose of which was to provide a tradeable asset enabling M to "obtain an amount similar to the expense incurred in the provision of the asset" in the words of s. 203K(2)(a). Moreover, s. 203K(3)(a)(ii) provided that a person was enabled to obtain an amount if he obtained it by "any means".

Held, dismissing the company's appeal:

1. If the conditions for the application of the Ramsay principle were present it had to be applied in the interpretation of the particular fiscal provisions under consideration, in the present case s. 203(1), s. 203B or s. 203F.

2. The Ramsay principle could not be applied in respect of s. 203(1). That would involve reviving one step in the scheme (the payment by the company to Goodvale on 28 April 1995) which had been ignored in regarding the series of transactions as a single composite transaction (Fitzwilliam v IR Commrs [1993] BTC 8003 applied).

3. The Ramsay principle applied in respect of s. 203B. There was a payment to M by an intermediary when the trustee deposited £40,000 in his bank account. The payment was made by "trustees holding property for any persons who include … the employee" within s. 203B(4)(b), and therefore a payment was made by the trustee as "an intermediary". The only question was whether the payment consisted of "assessable income" of the employee. Since the only motive for the payment was the company's desire to pay a bonus, the conclusion was inescapable that the payment was an emolument of M assessable under Sch. E (WT Ramsay Ltd v IR Commrs [1982] AC 300 followed).

4. Unless the steps inserted by the scheme could be ignored following the Ramsay principle, it would be impossible to apply s. 203B. The emolument received by M was not a cash payment but the contingent reversionary interest assigned to him on 26 April.

5. The wording of s. 203F, either on a literal or a purposive construction, was capable of covering the case. The very wide definition of "arrangements" in s. 203K(2)(a) could include the trusts of the 24 April appointment. The purpose of the arrangements was to enable the owner of the asset represented by the contingent reversionary interest to obtain the relevant amount when that interest fell into possession. The arrangement in question included arrangements which enabled the reversionary interest to be regarded as a "tradeable asset".

APPEAL

By originating motion pursuant to the Taxes Management Act1970, s. 56A (as substituted by SI 1994/1813 with effect from 1 September 1994) the taxpayer, DTE Financial Services Ltd, appealed to the High Court against the following decision of a special commissioner (Mr Paul W de Voil), released on 31 March 1999.

DECISION
The appeal

1. DTE Financial Services Ltd ("the company") appeals against a notice of determination dated 30 January 1997 charging tax of £48,720. The notice was issued because the Revenue took the view the tax should have been accounted for under the PAYE system on bonuses totalling £120,000 which found their way into the hands of three directors of the company in April 1995.

2. There were three directors of the company who each received £40,000. The hearing concentrated on Mr Mervyn MacDonald, one of the three, who gave evidence (which I accepted) before me. It appears that the facts and the issues were for all practical purposes identical as regards the other two directors.

3. Mr MacDonald does not dispute that he has received emoluments which include the £40,000 and are taxable under Sch. E. The £40,000 (and its associated expenses) were declared on the company's forms P11D and on Mr MacDonald's own tax returns; he has offered to pay the tax under Sch. E but the Revenue have indicated that they would prefer to recover the tax from the company under the PAYE system.

Facts

4. The Revenue accept that the transactions were not shams; the taxpayer accepts that what took place was done in pursuance of a widely marketed pre-arranged scheme ("the scheme") designed to avoid national insurance contributions and (by deferral) PAYE. I take no account of the fact that in this particular case the Revenue might have achieved a financially slightly more favourable result, even taking interest into account, by going down the "benefits in kind" route, involving payment by Mr MacDonald under a Sch. E assessment, than by going down the PAYE route which they have chosen.

5. The three directors involved are also partners (with others) in the accountancy firm of Downham Train Epstein, whose financial services arm the company could be regarded as being. The firm and/or the company had interested between 30 and 60 clients in the scheme during the six months before the company took part in the scheme itself; the directors were well aware of how the scheme worked and what reliance could be placed on the various parties involved in the scheme.

6. The following events took place in accordance with the pre-arranged scheme:

[MJM

Mr MacDonald

DTE(FS)

the company

GV

Goodvale Ltd, a company resident in the Isle of Man

MTC

Moorgate Trustee Company Ltd, a company resident in Nevis, West Indies

IFM

International Financial Management Inc, a company resident in Monaco

BIL

Banque Internationale Luxembourg, a bank with a London office]

  1. (a) On or before Wednesday 19 April 1995 the three directors of DTE(FS), while carefully refraining from minuting the division of the sum as a board decision, contemplated that DTE(FS) would apply a sum of £120,000 (plus expenses) in providing a bonus of £40,000 for each of the directors.

  2. (b) On 19 April 1995 MJM faxed to IFM the details required for setting up the scheme, namely the identity of the employer, the identity of the individuals intended to receive the bonuses, the exact size of the bonuses to be paid, the exact amount to be...

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5 cases
  • D. T. E. Financial Services Ltd v Wilson (Inspector of Taxes)
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    ...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. 2 The Inspector's determination, upheld by the Special Commissioner and by Hart J, was that DTE was accountable to the Revenue under the PA......
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    ...a person in the position of OSL is not an “other payer”. 42 In the second case, Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455; [2001] STC 777, the employer company in effect paid £ 40000 for the creation of a trust fund in which directors were to have a reversiona......
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    ...happened here, the insertion of an artificial asset in the course of events. That did, however, occur in DTE Financial Services v Wilson [1999] STC 1061 a decision of Hart J which I understand is subject to appeal to the Court of Appeal. Hart J also applied Lord Keith's dictum. Mr Henderson......
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    ...its genuine character to something else. This was the view rightly taken of McGuckian by Hart J in DTE Financial Services Ltd v. Wilson [1999] STC 1061. 121. The re-constitution of the transfer is not the only problem in bringing the Hillview transaction within the grasp of the Ramsay princ......
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