Manduca
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 April 2013 |
| Neutral Citation | [2013] UKFTT 234 (TC) |
| Date | 17 April 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 234 (TC)
Judge Christopher Staker, Ms Sonia Gable
Ms J Ellis and Mrs Jassal appeared for the Appellant
Ms K Sukul and Mr J Hillier appeared for the Respondents
Income tax - Appeal against closure notice - "Investment bonus" to be paid to hedge fund managers in connection with the transfer of management of the hedge fund from one company to another - Whether payment a capital sum - In the circumstances, no - Appeal dismissed
The First-tier Tribunal decided that a settlement sum received by a taxpayer in respect of an investment bonus agreement with a company was not in the nature of a capital sum. His provision of personal services to such company did not amount to the sale of an asset. His experience and expertise were brought to bear in the provision of such personal services. The investment bonus was not intended to be the purchase price of a particular hedge fund vehicle model or any other identifiable competitive intangible. Instead, the bonus was a reward for the part he played in enabling the company to acquire a business from another company. Thus, it fell to be assessed under Income and Corporation Taxes Act 1988 section 18Sch. D, Case VI.
The taxpayer appealed against HMRC's closure notice in respect of his 2002-03 self-assessment. The notice concerned the tax treatment of a payment he received from a company ("DBIL") under the terms of an out of court settlement.
The taxpayer had considerable experience in investment banking and management. In 1999, he and Mr J ("the hedge fund managers", collectively) decided to set up a hedge fund ("OEF"). They needed to find a company to sponsor the fund, and it was agreed that OEF would operate under the umbrella of a UK company ("TIML"). In April 1999, the hedge fund managers joined TIML. In October 1999, OEF was launched through TIML's division ("TCM").
In January 2001, TIML decided to leave the hedge fund market. DBIL became OEF's new backer and duly took over OEF's management. Under the arrangement, the hedge fund managers left their employment with TIML and took up employment with DBIL. Within 30 days of their employment with DBIL, DBIL would invest a stipulated sum into OEF ("the first investment bonus"). That sum would be divided equally between and released to the hedge fund managers six months later. Additionally, one year after they joined DBIL, DIBL would invest a further stipulated sum into the OEF ("the second investment bonus").
In April 2001, the hedge fund managers commenced employment with DBIL. However, DBIL did not pay the first investment bonus into the fund until August 2001. In November 2001, OEF was liquidated and the amount which DBIL had paid as the first investment bonus was withdrawn. DBIL terminated the hedge fund managers' employment by reason of redundancy. They brought proceedings against DBIL in the High Court. The matter was settled out of court. Under the settlement, the taxpayer received a specified sum as compensation for DBIL's failure to pay the first investment bonus. During their enquiry into the taxpayer's self-assessment return, HMRC took the view that the settlement sum fell to be assessable to income tax under Income and Corporation Taxes Act 1988 section 18Sch. D, Case VI.
The taxpayer contended that the settlement sum was in the nature of a capital sum that was subject to capital gains tax and not income tax. It related to the disposal of intangible assets which the hedge fund managers owned. Those assets were their personal services, experience and expertise, an established hedge fund vehicle model, their personal customer relationships and the right to charge fees to OEF.
HMRC contended that the taxpayer never owned OEF or any of its assets. The investment bonus agreement anticipated payments being made, in recognition of the taxpayer's services provided to DBIL to secure the transfer of OEF. The settlement sum did not constitute a capital gain as no asset passed from the taxpayer to DBIL.
Whether the settlement sum in respect of the first investment bonus was in the nature of a capital sum.
Held, dismissing the taxpayer's appeal:
The Tribunal held that the taxpayer's provision of personal services did not amount to the sale of an asset, and remuneration for personal services was obviously not a capital sum. The experience and expertise of the taxpayer were brought to bear in the provision of his personal services to DBIL. The value of his experience and expertise was reflected in the amount that he was paid for those services, pursuant to his employment contract. It could not be said that his experience and expertise as an individual was sold to DBIL as a capital item that was separate from the personal services that he was providing.
The taxpayer failed to establish that the hedge fund vehicle model in this case was capable of being characterised as a legal intangible or competitive intangible. In any event, he also failed to establish that the first or second investment bonus were intended to be the purchase price of a particular hedge fund vehicle model or any other identifiable competitive intangible.
Finally, neither DBIL nor the taxpayer regarded the first and second investment bonuses as payment for purchase of the TCM Division. The first investment bonus was a reward for the part played by the taxpayer in enabling DBIL to acquire the OEF business from TIML. Thus, it was not a capital sum.
[1]This is an appeal against a closure notice issued in respect of the Appellant's 2002-03 self-assessment. That closure notice gave effect to two conclusions by HMRC, only one of which is subject to the present appeal. This conclusion concerned the tax treatment of a payment received by the Appellant from Dexia Banque Internationale à Luxembourg ("Dexia") under the terms of an out of court settlement of High Court litigation brought against Dexia by the Appellant (the "settlement sum"). The Appellant had in his self-assessment returned this payment as subject to capital gains tax. The closure notice gave effect to HMRC's conclusion that the settlement sum was assessable to income tax under Income and Corporation Taxes Act 1988 section 18Schedule D, Case VI. The Appellant maintains in this appeal that the payment was correctly returned as subject to capital gains tax.
[2]Essentially the relevant facts are not in dispute. The following facts have been accepted by HMRC.
[3]The Appellant has considerable experience in investment banking and management. In 1999, the Appellant and a Mr de Jerez decided to set up a new hedge fund to be known as the One Europe Fund ("OEF"). They needed to find a company to sponsor the fund, and it was agreed that OEF would "operate under the umbrella" of Tilney Investment Management Ltd ("Tilney"), a UK company. The Appellant and Mr Jerez joined Tilney in April 1999. OEF was launched in October 1999 through a division of Tilney called Tilney Capital Management ("TCM"). Although Tilney or an affiliate were originally supposed to provide some of the seed capital for the OEF, the Appellant and Mr de Jerez ultimately raised all of the initial funding themselves.
[4]In January 2001, Tilney decided to leave the hedge fund market. Tilney gave the Appellant and Mr de Jerez a time limit within which they could find a new backer for the OEF, failing which Tilney intended to close the OEF down. Eventually it was agreed that the new backer would be Dexia, an unrelated company, which duly took over management of the OEF. Under the arrangement, the Appellant and Mr de Jerez left their employment with Tilney and took up employment with Dexia.
[5]The Appellant's and Mr de Jerez's contracts of employment with Dexia dated 18 April 2001 (the "employment contracts") provided that they would be paid a salary and would be entitled to participate in the performance related bonus for each financial year.
[6]In addition to the employment contracts, there was a separate document also dated 18 April 2001 signed by two managing directors of Dexia and addressed to the Appellant and Mr de Jerez (the "Investment Bonus Document"). This document stated that it was "to set out the manner on which we intend to recognise your role in transferring to [Dexia] the business of the so-called TCM". The Investment Bonus Document relevantly provided as follows. Within 30 days of the Appellant and Mr de Jerez joining Dexia, Dexia would invest a stipulated sum into the OEF (the "First Investment Bonus"), and (subject to certain conditions) that sum plus or minus any return achieved within the OEF would be divided equally between and released to the Appellant and Mr de Jerez six months later. Additionally, subject to certain conditions, one year after the Appellant and Mr de Jerez joined Dexia, Dexia would invest a further stipulated sum into the OEF (the "Second Investment Bonus"), and (subject to certain conditions) that sum would be divided equally between and released to the Appellant and Mr de Jerez one year later.
[7]The Appellant and Mr de Jerez commenced employment with Dexia on 30 April 2001. However, thereafter matters did not proceed as planned. Dexia did not pay the First Investment Bonus into the fund until 2 August 2001, with the result that the date on which the sum was to be released to the Appellant and Mr de Jerez was delayed. Then, on 5 November 2001, the Appellant and Mr de Jerez were informed that Dexia was to retire as investment advisor to the OEF and that they were to be made redundant. The OEF was liquidated on 13 November 2001 and the amount which Dexia had paid as the First Investment Bonus was withdrawn.
[8]Dexia terminated the employment of the Appellant and Mr de Jerez by reason of redundancy on 19 April 2002. They each received redundancy payments, the tax treatment of which is not in issue in these proceedings.
[9]The Appellant and Mr de Jerez then brought proceedings against Dexia in the High Court, relating to Dexia's failure to pay...
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