Manduca v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 May 2015 |
| Date | 26 May 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The President of the Upper Tribunal Tax, Chancery Chamber
Charles Bradley instructed by Graham Taylor appeared for the Appellant
Jonathan Bremner instructed by the General Counsel and Solicitor to HMRC, 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 within Income and Corporation Taxes Act 1988 (ICTA 1988), Sch. D, Case VI In the circumstances Yes Appeal dismissed.
The Upper Tribunal (UT) dismissed Mr Manduca's appeal against the decision of the First-tier Tribunal (FTT) in Manduca TAX[2013] TC 02648 finding that it would not be fair to HMRC to give Mr Manduca permission to raise his argument because he did not raise it before the FTT. However, without prejudice to the procedural point, the UT found that the appeal would also be dismissed on the substantive argument because Mr Manduca's bonus payment was a payment for services that fell firmly within the Income and Corporation Taxes Act 1988 (ICTA 1988), s. 18, Sch. D, Case VI.
The appeal before the UT was against the decision of the FTT in Manduca TAX[2013] TC 02648 in which the FTT had dismissed Mr Manduca's appeal against HMRC closure notices assessing a settlement payment of 310,000 to income tax under Sch. D, Case VI (pursuant to ICTA 1988, s. 18) instead of capital gains tax (as Mr Manduca had reported the payment on his self-assessment tax return). Mr Manduca was an investment banker who had received the settlement payment for his involvement in the transfer of the One Europe fund from one hedge fund management company (Tilney) to another (Dexia). The payment had been due to be paid in accordance with a bonus agreement that Mr Manduca had received on his becoming an employee of Dexia but before the bonus had been paid, Dexia had terminated Mr Manduca's employment and Mr Manduca had received the payment in settlement of proceedings that he had brought against Dexia in the High Court.
The FTT had made the decision to uphold the closure notices on the basis that they were faced with a binary choice that either the bonus was a capital payment or the closure notices should be upheld because the bonus fell within Case VI. Mr Manduca had been granted permission to appeal the decision on three grounds although in the event only two were argued before the UT as follows:
1) that the Tribunal gave no consideration to the actual terms of Sch. D, Case VI or to any relevant case law; and
2) had it done so, it would have been bound to hold that the bonus was not within Case VI because it was not a profit or gain falling within that Case.
Mr Manduca's argument that the bonus could not fall within Case VI was because it was not a payment of the same kind as those listed in other Case of Sch. D and relied upon Leeming v Jones (HMIT) TAX(1930) 15 TC 333. The UT noted Viscount Dunedin's summary of Case VI that whilst it was a sweep up of annual profits and gains not included in the other five heads, that did not mean that anything that was a profit or gain fell to be taxed and also his reference to earlier authority which established that the word annual did not mean something recurring every year but which had to be of the nature of income and to the statement by Lord Blackburn in Attorney-General v Black ELR(1871) LR 6 Ex 308 that profits or gains in Case VI must mean profits and gains ejusdem generis [of the same kind] with the profits and gains specified in the preceding five cases.
However, the UT concluded that the bonus was remuneration for services provided to Dexia by Mr Manduca which fell firmly within Case VI, accepting HMRC's submissions that Brocklesby v Merricks (HMIT) TAX(1934) 18 TC 576 and Bradbury (HMIT) v Arnold TAX(1957) 37 TC 665 showed that once it was established that the payment was an income receipt rather than a capital receipt and that it was paid pursuant to a binding contract in return for some kind of service there was no need to go further to enquire into the extent of the services in fact provided. It was also clear that the bonus was to pay for services that were akin to profits and gains falling within the other Cases.
During the crucial period of uncertainty shortly before the fund transfer, Dexia would have been concerned with the risk that staff and investors might drift away from the business, diminishing its value and Mr Manduca was a key person on whose reputation the continued confidence of employees and investors rested and whose role was to facilitate the transfer to ensure that staff and investors stayed on board. That was a service provided by Mr Manduca and a service ejusdem generis with the services listed in the other Cases in Sch. D.
Accordingly, on the substantive arguments, the appeal would be dismissed.
However, HMRC had also argued that Mr Manduca ought not to be allowed to raise the point now relied upon having not raised it before the FTT. On this issue, the UT confirmed that it was a new point not raised before the FTT and that it would not be fair to HMRC to allow Mr Manduca to raise it now and that was another ground on which the appeal was to be dismissed.
This case concerns an appeal by Mr Manduca against the FTT decision that a bonus received in connection with the successful transfer of an investment fund from one hedge fund management company to another was income chargeable under Sch. D, Case VI (of ICTA 1988, s. 18) rather than a payment subject to capital gains tax. Although the UT concluded that Mr Manduca ought not to be allowed to raise his argument (that the bonus did not actually fall within Case VI because it was not a payment of the same kind as those falling within the other cases of Sch. D) at all because he had not raised it before the FTT and dismissed the appeal on that basis, the UT nevertheless considered the issue and found that the bonus was a payment for services that fell firmly within Case VI. The modern day equivalent of Sch. D, Case VI is contained in ITTOIA 2005, Pt. 5.
[1] The Appellant appeals against the decision of the First-tier Tribunal (Judge Staker and Ms Gable) released on 17 April 2013 (the Decision) in which the tribunal upheld the closure notice issued by the Respondents (HMRC) in respect of the Appellant's 20022003 self-assessment. Permission to appeal was granted by the Upper Tribunal on 7 January 2014.
[2] The appeal relates to the tax treatment of a payment of 310,000 received by the Appellant from Dexia Banque Internationale a Luxembourg (Dexia) under the terms of an out of court settlement of High Court litigation brought against Dexia by the Appellant. The Appellant had returned this payment in his self-assessment as subject to capital gains tax. The closure notice gave effect to HMRC's decision that the settlement sum was assessable to income tax under Schedule D Case VI (pursuant to section 18 of the Income and Corporation Taxes Act 1988).
[3] The facts are not in dispute and were set out clearly in the Decision. The Appellant (Mr Manduca) has considerable experience in investment banking and fund management. He went into business with a colleague Mr Leon de Jerez. They decided to set up a new hedge fund called the One Europe Fund (One Europe).
[4] A hedge fund works in the following way. It is usually structured as an off-shore limited liability company in which the shares are owned by the investors in the fund. The shares are bought and sold as new investors join and existing investors leave. The limited liability company is assisted by (1) an independent board of directors; (2) an independent administrator; (3) a locally based management company set up by the fund manager and (4) the fund manager. The fund manager is the company that procures investors, provides investment advice and research and employs the individuals who provide those services. The fund manager must be appropriately regulated and provides the institutional envelope or regulatory umbrella for the fund.
[5] A fund manager is usually paid two fees: an annual fee which is a percentage of the value of the fund and a quarterly performance fee which is a percentage of the annual growth in the value of the fund. The performance fee is the main profit earned by the manager. This is used to pay the staff their bonuses and about half is kept by the fund manager for providing the regulatory and overhead support.
[6] The first company that Mr Manduca and Mr de Jerez found to act as sponsor and fund manager for their venture was Tilney Investment Management Ltd (Tilney) through its division Tilney Capital Management (TCM). Mr Manduca and Mr de Jerez raised all the initial...
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