Landid Property Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 September 2017 |
| Neutral Citation | [2017] UKFTT 692 (TC) |
| Date | 13 September 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0692 (TC)
Judge Sarah Falk, Ruth Watts Davies MIH FCIPD
David Ewart QC and Bibek Mukherjee, Counsel, instructed by EDF Tax Defence Limited, appeared for the appellants
Richard Vallat and Charles Bradley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax and corporation tax – Employee benefit trusts – Whether contributions to or loans from sub-funds constituted earnings – Whether corporation tax deductible.
The First-tier Tribunal held that amounts paid by the employer into sub-funds of an EBT (which were then loaned out to employees with no expectation of repayment) constituted earnings of the relevant employee for both income tax and NICs, and gave rise to an obligation to deduct under PAYE.
The appeals by three (unconnected) companies related to Employee Benefit Trust (“EBT”) arrangements established by each of them between 2007 and 2008. The basic transaction steps were common to all three companies, summarised as:
- The relevant company established an EBT, by Trust Deed, with an initial trust fund of £100. The EBT had a single Isle of Man based corporate trustee (the Trustee). At this stage, under the terms of the EBT, the funds would revert to the company unless a remote contingency occurred or the company agreed to pay £100 to a specified charity.
- The Trustee executed a supplemental Deed of Appointment establishing sub-funds within the EBT with an initial amount of £10 each. Each sub-fund related to a named employee and their family.
- The company and Trustee executed a further deed (described as a Deed of Addition and Contribution Agreement) by which the company contributed the desired amount to each sub-fund.
- The Board of the company resolved to pay £100 to a specified charity, and made that payment. Under the terms of the EBT the amounts added to the sub-funds ceased to be liable to revert to the company.
- One or more loans were made from the sub-funds to the relevant employees.
The loans in question were unsecured and interest free. The borrower could repay the Loan in whole or in part at any time, and the lender could require repayment on one month's notice to the borrower. The Loan agreement provided for insolvency related events of default (including the borrower suspending payment of debts, being unable to pay debts as they fall due, entering into an arrangement with creditors or being subject to bankruptcy proceedings), and provided that if an event of default occurred the lender may declare the Loan immediately due and payable.
The advice to the companies said that “broadly, the sub-fund is a discretionary fund within the EBT, which is reserved for the benefit of a particular employee's family and which will be de facto controlled by the adult beneficiaries of the sub-fund”.
As regards corporation tax, the advice referred to the restrictions under Finance Act 2003, designed to link deductibility to benefits being taxable on employees, and indicated the structure should not be caught by the rules by ensuring that the employer contributes funds to sub-trusts whilst retaining an interest in the funds. If the employer's interest was subsequently given up, the surrender would be a loss of value which must be charged to the profit and loss account under GAAP, and giving up an interest in this manner did not, it was suggested, fall within the rules restricting deductibility.
There was provision in the Trust Deed for the appointment of a protector. The advice explained that the protector's role was to oversee the actions of the trustees and provide them with an insight and understanding into the wishes of the settlor and, in some cases, the beneficiaries, and noted the protector's power to appoint and remove trustees and the requirement for protector consent to distribute trust capital. In each case, the appointed protector was one of the directors of the company.
There were, broadly, no contractual or discretionary bonus arrangements for employees in place for any of the companies. However, it was accepted that the EBT arrangements were intended to motivate and reward the employees concerned (though in the case of one company, it was also clear that the EBT arrangement was intended to provide funding for a rights issue that subsequently took place).
In the case of one of the other companies, one participant made partial repayments of loan; however, the Tribunal considered that the individual concerned clearly expected to be able to, and did, draw these funds out by further loans, when he wished. At the same time, it was understood that the Trustee would have legal control over the trust funds, and could require repayment of loans. The overall conclusion from the evidence in the case of this second company was that the EBT was set up to distribute the bulk of the receipts from a successful project in a tax efficient manner, as a reward to employees concerned for their contributions to the business.
In the case of the third company, again evidence was accepted that the assets would be under the control of the Trustee and that they had discretion.
The Tribunal further found, in relation to all three companies:
- None of the employees had any contractual entitlement to any of the amounts contributed to the EBTs. Although the amounts to be allocated to each employee were clearly determined in advance of the contributions to the sub-funds this determination did not give rise to any contractual entitlement;
- All the amounts paid into the sub-funds were derived from the employment of the individuals concerned. More specifically the arrangements were intended to motivate and reward the employees concerned, or reward their contributions to the business;
- The Trustee had full discretion as a matter of law, and that loans made could be required to be repaid. There was however a clear expectation that loans would be available to the employees as and when requested (with no security being required), and that the Trustee would be amenable to other suggestions, for example (and within reason) in relation to the choice of bank account. There was also no expectation that the loans would be called in during the life of the employee in the absence of something unexpected.
In connection with the accounting treatment (relevant to corporation tax deductibility), the consensus recorded in UITF32 was that where an entity transfers funds to an intermediary (here an EBT) there is a rebuttable presumption that the entity has exchanged one asset for another asset in accounting terms, in the sense that it will obtain future economic benefits and has control of the rights or other access to those benefits. Where this presumption applies no immediate expense arises. In order to rebut the presumption it was necessary to demonstrate that future economic benefits will not be obtained or that there is no control, for example because the asset vests unconditionally in identified beneficiaries. The Tribunal said the expert accounting evidence considered that the “constructive obligation” to reward employees, which arose at the relevant board meetings, was settled by the EBT asset ceasing to be recognised by the company; this was consistent, the Tribunal thought, with the view that the substance of the profit and loss charge was precisely that reward to employees.
The judge said the parties had agreed the issues for determination (so far as relating to income tax and NICs) were:
- whether the payment made by the company into each sub-fund was earnings of the relevant employee for the purposes of income tax and NICs, in the form of a bonus which had been redirected to the sub-fund;
- whether it was the intention of the relevant parties that the amount contributed to the sub-fund should be at the absolute disposal of the employee, such that what purported to be a discretionary trust was in reality a bare trust, and the sum paid into the sub-fund was earnings on that basis;
- whether the amount contributed was earnings on a realistic view of the facts and a purposive approach to construction of the relevant statutory provisions, under Ramsay principles;
- whether the loan agreement with the employee was never intended to operate as such, the payments made under it being unconditional payments rather than amounts that could be required to be repaid, and earnings on that basis;
- whether the funds advanced under the loan agreement with the employee were earnings on a realistic view of the facts and a purposive approach to construction (Ramsay).
The Tribunal's conclusion on Issue 1 was that the payments to the sub-funds constituted earnings for the purposes of both income tax and NICs, and gave rise to an obligation to deduct under PAYE. The payments in this case were rewards for service; such payments to each of the sub-funds were made with the acquiescence or in most cases, agreement, of the employees; and the employees effectively had vested – and not contingent – interests in the sub-fund monies (as in the Rangers case (RFC 2012 plc (in liquidation) v R & C Commrs [2017] BTC 22), the way the scheme was intended to operate, and did in fact operate, was to allow the employees to access the entire amount of the sub-funds by way of loan: there was no expectation that repayment of the loans would be required during the employees' lifetime).
Given the conclusion on issue 1, it was not strictly necessary to consider any of the remaining issues. Nevertheless, in relation to issues 2 and 4 (the “bare trust” and “true agreement” issues), in the Tribunal's view the Trust Deeds created discretionary trusts, and the loan agreement documented loans, in accordance with their express terms. HMRC did not succeed on these issues. The Tribunal did not comment on the Ramsay arguments (issues 3 and 5).
Neither was it strictly necessary to consider any of the arguments on the corporation tax aspects. HMRC accepted that if they succeeded on issue 1 the...
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