DB Group Services (UK) Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Kitchin,Lord Justice Christopher Clarke |
| Judgment Date | 16 April 2014 |
| Neutral Citation | [2014] EWCA Civ 452 |
| Docket Number | Case Nos: A3/2013/0207 & A3/2013/0231 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 April 2014 |
[2014] EWCA Civ 452
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Henderson and Mr Charles Hellier
Appeal Nos: FTC/15/2011 & FTC/46/2011
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rimer
Lord Justice Kitchin
and
Lord Justice Christopher Clarke
Case Nos: A3/2013/0207 & A3/2013/0231
Mr David Goy QC and Ms Nicola ShawQC (instructed by Slaughter and May) for DB Group Services (UK) Limited
Mr Paul Lasok QC, Mr Richard Vallat and Ms Anneliese Blackwood (instructed by HM Revenue and Customs Solicitor's Office) for the The Commissioners for Her Majesty's Revenue and Customs
Mr Kevin Prosser QC (instructed by Pinsent Masons LLP) for UBS AG
Hearing dates: 5, 6 and 7 November 2013
Introduction
Two appeals are before us. In one, the appellants are The Commissioners for Her Majesty's Revenue and Customs ('HMRC') and the respondent is UBS AG ('UBS') ('the UBS appeal'). In the other, the appellant is DB Group Services (UK) Limited ('DB') and the respondents are HMRC ('the DB appeal').
UBS is a well known bank. DB was at the material time the main employer in the group headed by Deutsche Bank AG, another well known bank. Both banks have traditionally rewarded employees with bonuses. The payment of bonuses by banks, particularly since the financial crisis of 2008, has given rise to considerable public comment, not all of it favourable. These cases relate to a prior period, when both banks adopted what the Upper Tribunal described as a 'carefully planned tax avoidance scheme which was designed to enable the [banks] to provide substantial bonuses to employees in the tax year 2003/04 in a way that would escape liability to both income tax and national insurance contributions.' The top rate of income tax was then 40% and the perceived beauty of the schemes was that, if they worked, both the banks and the employees derived considerable tax benefits from them. The intent of the schemes was that the employees would receive shares in the nature of 'restricted securities', which would in consequence escape income tax under the provisions of the tax regime in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA'); and the banks would pay the bonuses into the schemes without having to account to HMRC for income tax or for NICs for the relevant employees or their own liabilities on their earnings.
Both banks appealed to the First-tier Tribunal (Dr David Williams and Mr David Earle, 'the FTT') against HMRC's determinations that the sums allocated to the employees as bonuses at the start of each scheme were liable to income tax under Part 7 of ITEPA as earnings from their employment and to Class 1 NICs on the same basis. The determinations were against the banks rather than the employees since the banks were in each case liable to deduct and account for any liability to PAYE income tax and Class 1 NICs on behalf of their employees. The FTT heard the appeals successively in February 2010, each appeal occupying five days.
In the UBS case, the determinations were both dated 13 October 2008 and were: (a) for £36,863,600 for income tax in respect of bonus payments of around £92m made by UBS in early 2004 to employees; and (b) for £12,717,942 for Class 1 NICs in respect of the same payments. In the DB case, the determinations were both dated 29 April 2008 and were: (a) for £36,520,000 for income tax in respect of bonus payments of around £91m made by DB in early 2004 to employees; and (b) for £12,599,400 for Class 1 NICs in respect of the same payments. The FTT released their decision on the UBS appeal on 6 August 2010 (and then re-issued it with corrections on 15 September 2010); and they released their decision on the DB appeal on 19 January 2011. The FTT dismissed both appeals, although not for identical reasons as there were factual differences between the two schemes.
With the permission of the FTT, the banks appealed to the Upper Tribunal (Tax and Chancery Chamber) (Henderson J and Mr Charles Hellier, 'the UT'), which heard the appeals together over five days in February 2012. The outcome of the UT's 212-paragraph decision released on 17 September 2012 was that they allowed the UBS appeal and dismissed the DB appeal: UBS AG and DB Group Services (UK) Limited v. The Commissioners for Her Majesty's Revenue and Customs [2012] UKUT 320 (TCC); [2013] STC 68. So it is that HMRC are now appellants in the UBS case, seeking to overturn the UT's upholding of the UBS scheme; and DB is an appellant seeking to vindicate its own scheme. HMRC in turn seeks to uphold the UT's decision in the DB case for further reasons which differ from those given by the UT.
We heard the appeals together over three days. Mr Lasok QC (leading Mr Vallat and Ms Blackwood) opened HMRC's appeal in the UBS case, following which Mr Prosser QC presented UBS's responsive case. Mr Goy QC (leading Ms Shaw QC) for DB then also responded to HMRC's case and opened the DB appeal. Mr Lasok replied generally and Mr Goy had the last word in reply on the DB appeal. I shall deal first with the UBS appeal and then the DB appeal.
The UBS appeal
Permission for HMRC to appeal in the UBS case was given by the UT on four grounds. HMRC renewed before us their permission application on two further grounds.
The facts: an overview
UBS does not argue that its scheme was other than a pre-conceived one directed at avoiding income tax and NICs. I need say no more about NICs, upon which we had no separate argument: it is agreed that the position in relation to NICs is the same as in relation to income tax. UBS's position is simple. It says the bonuses are not taxable because the scheme brought them within the highly prescriptive provisions of Chapter 2 of Part 7 of ITEPA, inserted by the Finance Act 2003, being provisions that enabled the bonuses to enjoy the tax exemptions conferred by sections 425 and 429 of ITEPA. HMRC's stance is that the sole reason for the scheme was tax avoidance, and the only reason why an employee would participate in it would be to avoid tax. Mr Lasok described it as a 'cash in, cash out' scheme: UBS would decide upon the intended bonus, which it would pay into the scheme and which the employee could take out a few weeks later. I shall later explain why I regard that as a misdescription of the scheme.
The scheme involved UBS subscribing for shares in a company and then awarding the shares to the participating employees. Normally, the award to an employee of shares in a company by reason of his employment would give rise to a charge to income tax in respect of the acquisition on an amount equal to the market value of the shares at the time. But there was no such charge if the shares were 'restricted securities' within the meaning of section 423(2), in which event section 425 conferred a qualified tax exemption. In principle, section 426 would, however, charge income tax on the full value of the shares on a 'chargeable event', which would include when the shares ceased to be 'restricted', as happened in these cases. But Parliament also chose to permit an escape from such charge by section 429, which provided for an exemption from it if the shares were in a company which (amongst other conditions) had not in the previous 12 months been under the employer's 'control' as defined by section 416 of the Income and Corporation Taxes Act 1988 (' ICTA'). Provided the shares fell within these exemptive provisions, there would therefore be no section 426 liability to income tax, although there would be a potential charge to capital gains tax ('CGT') on the disposal of the shares. For those employees who were non-UK domiciled, there would, however, be no charge to CGT unless gains were remitted to the UK. For those employees who were UK-domiciled, any charge to CGT could be reduced to 10% by business taper relief if the shares were held for two years and the employees continued to be employed by UBS.
The UBS Scheme
UBS operated performance incentive schemes whereby, in or around February in each year, it made bonus awards to selected employees. The schemes were limited to employees still in UBS's employment at the time of the award and who had not given or received notice of termination. UBS's Executive Share Investment Plan that is now in question ('the scheme') was one such scheme and it was designed to enjoy the tax benefits just summarised. UBS invited selected senior employees to indicate by 12 December 2003 whether they wished to participate in it, and thus to receive a proportion of their bonus award, if any, in shares instead of cash. 426 employees agreed to participate, ten of whom had a contractual right to be paid a minimum cash bonus, whilst for the remaining 416 any bonus was discretionary.
UBS engaged Mourant & Co Trustees Limited ('Mourant'), for a fee, to set up a special purpose vehicle for the purposes of the scheme. On 19 January 2004, an offshore special purpose vehicle company called ESIP Limited ('ESIP') was incorporated. Its sole function was to implement the scheme. On the same day, Mourant, in its capacity as the trustee of a pre-existing, unrelated charitable trust, the Sidemore Charitable Trust ('Sidemore'), resolved to subscribe for 200 ordinary £0.01 shares in ESIP for £2.
On 23 January 2004, a UBS remuneration committee finalised a...
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