Kerrison
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 April 2017 |
| Neutral Citation | [2017] UKFTT 322 (TC) |
| Date | 19 April 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Sarah Falk
David Ewart QC and Edward Waldegrave, instructed by Reynolds Porter Chamberlain LLP, appeared for the appellant
Julian Ghosh QC, Katherine Apps and Charles Bradley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax and capital gains tax – “Bed and breakfast” scheme to generate capital loss under Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), s. 106A – Claim to income tax relief for the loss under Income and Corporation Taxes Act 1988 (“ICTA 1988”), s. 574 – Whether “repo” rules in TCGA 1992, s. 263A, value shifting rules in TCGA 1992, s. 30 or WT Ramsay Ltd v IR Commrs; Eilbeck (HMIT) v Rawling (1981) 54 TC 101 principles applied to prevent loss arising – Whether waiver of loan to appellant gave rise to a receipt subject to income tax under Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”), s. 687 (income not otherwise charged) – Appeal allowed in part.
The First-tier Tribunal (FTT) has dismissed an appeal against HMRC's refusal of relief under the Income and Corporation Taxes Act 1988 (ICTA 1988), s. 574 (relief for losses on unquoted shares in trading companies) (now the Income Tax Act 2007 (ITA 2007), s. 131) finding that the capital loss created under a tax avoidance scheme (in respect of which income tax relief had been claimed) was reduced to nil under the value shifting provision in Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 30. The FTT further held that the company did not satisfy the “qualifying trading company” requirement (ICTA 1988, s. 293, now ITA 2007, s. 137) because it existed for the purposes of the scheme rather than “for the purpose of carrying on one or more qualifying trades”, which further precluded relief. The FTT has, however, allowed the appellant's appeal against HMRC's conclusion that a charge to income tax arose under the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 687(1) (charge on income not otherwise charged) on a loan which was waived in order to wind up the scheme and remove the residual liabilities.
The appellant was one of a number of participants in a tax avoidance scheme marketed by Premier Strategies Limited (PSL) and known as “Excalibur”. The scheme was designed to create a capital loss under TCGA 1992, s. 106A in respect of which income tax relief could be claimed under ICTA 1988, s. 574. The scheme comprised the following transactions:
• The appellant subscribed for 20 £1 shares at par in an Isle of Man trading company (Broadgate Trading Limited (Broadgate)), which was established for the purposes of the scheme. The appellant then sold the shares for the same amount to an unconnected company, Braye, and granted Braye an option to sell the shares back within 30 days at fair value plus 9.1%.
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• Braye then borrowed and subscribed for one share in Broadgate at a substantial premium, then exercised its option and sold the shares back to the appellant for £1.1m.
[This disposal and re-acquisition created the capital loss by matching the disposal for circa £20 with the shares re-purchased for £1.1m under the “next 30 day” (bed and breakfasting) rule in TCGA 1992, s. 106A(5)].
• The appellant borrowed to fund the re-purchase and Braye used the monies received to repay its borrowings (ie. the funds it had borrowed to finance the premium share subscription).
• With the proceeds (from Braye) from the issue of the one share at a significant premium, Broadgate capitalised a BVI company and the BVI company then made a loan back to the appellant which monies the appellant in turn used to repay his borrowings (borrowed to fund the share re-purchase above).
• This left a debt owed by the appellant to the BVI company, which was then written off and the appellant donated the shares in Broadgate to charity (which disposal was a no gain, no loss disposal).
HMRC challenged the efficacy of the scheme on five grounds:
HMRC argued that the sale and repurchase from Braye fell to be disregarded for capital gains tax purposes because TCGA 1992, s. 263A (agreement for sale and repurchase of securities) provides that in cases falling within ICTA 1988, s. 730A, any difference between the sale price and the repurchase price (i.e. gain or loss arising) is disregarded for capital gains tax purposes. The FTT rejected this argument. Although TCGA 1992, s. 263A provided a disregard of transactions within ICTA 1988, s. 730A involving a sale and repurchase of securities (a “repo”), TCGA 1992, s. 263A(3)(b) provided an exception where the interim holder of the securities was exposed to changes in value whilst holding the securities and that exception applied in this case because any increase or reduction in value would accrue to Braye. Accordingly, as the sale and repurchase fell within TCGA 1992, s. 263A(3)(b), it did not fall to be disregarded for capital gains tax purposes.
HMRC argued that under the value shifting provisions, specifically TCGA 1992, s. 30 (tax free benefits), the disposal (which created the loss) was as part of a scheme or arrangement under which the value of the asset had been materially increased and a benefit conferred on the taxpayer in the form of the making of and waiver of the loan to him. Accordingly, the loss was to be calculated as if the consideration for the disposal were increased by such amount as was just and reasonable taking into account the scheme and benefit in question, which HMRC argued resulted in the loss being reduced to nil.
In this context, the arguments revolved around the decision of the Upper Tribunal (UT) decision in Land Securities plc v R & C Commrs TAX[2013] BTC 1,773; a similar scheme but which the taxpayer sought to distinguish on the grounds the shares in that case had not been issued as part of the scheme but many years earlier. The FTT rejected this contention and followed the Land Securities decision. Whilst the UT in Land Securities had held that s. 30 was to be construed without reliance on TCGA 1992, s. 106, they did not disregard it but instead had regard to the intended effect of the scheme, which was to produce a capital loss as a result of the application of s. 106 by reference to an increase in value between the disposal and the second acquisition. Similarly in this case the undoubted aim of the scheme was to produce a capital loss by virtue of the operation of s. 106A and the “relevant acquisition” for the purposes of s. 30(9) (acquisitions following disposals) was the later acquisition (not the original acquisition), not because s. 30(9) applied to “any” later acquisition but because the question was what was the relevant acquisition in the context of the scheme that engaged s. 30(1) (ie. the s. 30(1) “scheme or arrangements”)?
The FTT further concluded that the loan and its subsequent waiver were part of the “scheme or arrangements” so there was the necessary “benefit” for s. 30 to apply (read with ICTA 1988, s. 576(2) which provided that the benefit need not be tax free) and although the exact mechanism (of the benefit) may not have been decided upon until after the sale and repurchase, it was always a part of the scheme that cash would be extracted and used to repay the appellants borrowings in a way that did not impact the tax loss nor create an exposure in respect of the cash extraction, which realistically meant they would receive a benefit. In conclusion, s. 30(1) read with s. 30(9) applied with the effect that the loss was reduced to nil.
This issue did not strictly need to be decided but for the purposes of any further appeal the FTT considered the points raised. There were three possible applications of Ramsay:
1) all the transactions should be ignored: the appellant started with nothing and ended with nothing;
2) either or both of the appellant's subscription for shares and his disposal of those shares to charity should be respected, but the other transactions should be ignored; or
3) the amount purportedly paid to reacquire the shares from Braye was not consideration given “wholly and exclusively” for the acquisition of the shares, and therefore did not constitute allowable expenditure under TCGA 1992, s. 38;
On the first two possible applications, the FTT concluded that the sale of 20 shares to Braye, Braye's capital contribution and subsequent repurchase of shares by the appellant under the put option were all preordained transactions undertaken solely for tax purposes, and that there was no practical likelihood that once the sale to Braye had occurred, the other steps would not follow. There was further no practical likelihood that the repurchase would not be followed by an extraction of cash from Broadgate to allow repayment of the appellant's borrowings and that this was most likely in the form of a loan from a newly established BVI subsidiary. However, the FTT was not persuaded that at the time of the subscription, all the remaining steps were preordained because at that point in time, full details of the scheme were not known to the participants and a number of participants did subsequently decide not to proceed. As far as the loan waiver and charity gift were concerned, at the time of the sale and repurchase, both were likely to occur albeit not finally settled.
On the consideration issue, HMRC argued that the amount paid by the appellant under the put option was in part, payment for a capital loss and for the means to access cash in Broadgate in order to repay his borrowings. It was conceded on behalf of the taxpayer and the FTT agreed that the 9.1% premium paid over and above fair value of the shares could not realistically be said to have been paid for the shares but the FTT accepted that the remainder did constitute consideration given wholly and exclusively for the shares.
Again, having concluded that no capital loss arose, it was not necessary to consider...
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