OCO Ltd; Toughglaze (UK) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 July 2017 |
| Neutral Citation | [2017] UKFTT 589 (TC) |
| Date | 01 July 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Swami Raghavan
Michael Jones counsel, instructed by RPC appeared for the appellants
Philip Jones QC, Richard Vallat, and Charles Bradley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax and National Insurance contributions (NICs) – Employee benefit trusts (EBTs) – Sub-trusts for benefit of directors and families – Benefits received largely in the form of interest-free loans – Whether sums paid to EBT or allocated to sub-trusts or paid by way of loan earnings subject to PAYE and NICs redirection of earnings – No – Whether trust really a bare trust – No – Whether payments into sub-trusts payments of earnings applying Ramsay approach – Yes – Appeals dismissed.
In dismissing the taxpayer-companies' appeals against reg. 80 determinations and s. 9 notices in respect of unpaid PAYE tax and NICs, the First-tier Tribunal (FTT) found that, applying the Ramsay principle, the appointment of funds to the sub-trusts was in effect a payment to the relevant director of earnings for the purposes of PAYE and NICs. However, there had at no point been a redirection of earnings nor were the discretionary employee benefit trusts bare trusts, as HMRC had also alternatively contended.
In what was a lead appeal for several hundred appeals involving the same notifiable scheme under Disclosure of tax avoidance schemes (DOTAS), the two taxpayer companies (the appellants) had entered into an EBT scheme devised by the same promoter to avoid liabilities to income tax under PAYE and NICs. Funds were set aside by both appellants to be held under a discretionary employee-benefit trust for the benefit of its key employees, out of which sub-trusts were created for the benefit of each director and his family. The directors derived benefits on request from the sub-trusts largely in the form of interest-free loans. The loans were expressed to be repayable on demand at one month's notice.
In the case of OCO Ltd, the four directors and their wives held between them 83.33% of the shares, the remainder being held by the directors' pension scheme. In the case of Toughglaze, the three directors and their wives held 100% of the shares. In both companies, the only beneficiaries under the EBT were the directors.
On the basis that the amounts received by the directors were earnings subject to PAYE tax and NICs, HMRC issued determinations under the Income Tax (Pay as You Earn) Regulations (SI 2003/2682), reg. 80 and a decision under the Social Security (Transfer of Functions) Act (SSTFA) 1979, s. 8 to recover the unpaid tax and NICs.
On appeal, HMRC advanced three different grounds of argument:
1) the sums were earnings before they became subject to the trust and thus the appellants' contributions to the EBTs were simply a redirection of earnings;
2) following the approaches set out in Antoniades v Villiers ELR[1990] 1 AC 417 and Autoclenz v Belcher [2011] UKSC 41, the discretionary EBTs were in fact bare trusts;
3) even if neither (1) nor (2) was the case, under the Ramsay approach, the directors received earnings when amounts were paid into the sub-trusts.
Judgment was given before the decision of the Supreme Court in RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland TAX[2017] BTC 22 (the Rangers case) was released.
According to the tribunal judge, the principle to be drawn from the authorities (including the decision of the Court of Session in the Rangers case) was this: for a sum to be earnings, it was necessary but not sufficient that it was derived directly or indirectly from the employee's employment; where there is no physical receipt of money or money's worth, the employee must have some right or interest over the sum before he can redirect it; and all the facts and circumstances of what was agreed between the employee and employer must be taken into account – the fact that a sum would have been paid but for the alleged redirection did not determine whether it was earnings in the first place.
On the facts, there was no evidence that the directors were at any point legally entitled to a specific sum. It was the appellants' clear intention to settle an amount of money on the relevant EBT as a means of passing value to the directors. The appellants had not set aside sums for the directors who had then agreed that the sum that was theirs should be put into the EBT.
In Antoniades, the House of Lords had held that what purported to be a licence to occupy was in substance and reality a lease and had been framed in that way by the landlord in an attempt to evade the Rent Acts. In Autoclenz, the Supreme Court upheld car valeters' claim that they were workers under the minimum wage regulations as that was the true nature of their relationship to the employer notwithstanding that the written terms of their agreement suggested otherwise.
HMRC's contention in this case was that the trustees' meetings and minutes were all a pretence so that, on the basis of Antoniades and Autoclenz, the discretionary main trust and sub-trusts should be reclassified as bare trusts. The tribunal judge held, however, that the approach in these cases could not be applied to a unilateral document such as a trust; both of the cited cases involved bilateral agreements. Even if that were not so, and despite the directors' understanding and expectation that their requests for benefits from the sub-trusts would always be met, the trustees nevertheless had the real discretionary power not to accede to a request from a beneficiary.
Here, in the view of the tribunal judge, the background was a series of steps beginning with the declaration of trust by the employer and ending with the creation of sub-trusts for the benefit of, and under the control of, the directors, behind which there was no commercial driver other than tax avoidance. On a realistic appraisal of the facts, there was no practical likelihood, as opposed to the legal possibility, that the trustees would not accede to the directors' requests. Each sub-trust was in effect a money box that the named director could access as he wished. Viewed realistically, sums appointed to the sub-trusts derived from the directors' employment and were received by the director concerned as money or money's worth and therefore amounted to earnings chargeable to income tax, and hence also to NICs. When the funds were transferred to the sub-trusts, the directors had practical control over them and could use them as they liked. There was, therefore, a payment for PAYE purpose when the sums were appointed.
Although that was sufficient to dispose of the appeals (by dismissal), the judge proceeded to hold that, even if he were wrong on the Ramsay point as regarded the appointments to the sub-trusts, under the same principle, the loans were not true loans but earnings, as there was no realistic possibility that they would ever need to be repaid.
This tribunal case on the efficacy of pre-Part 7A employee-benefit trusts as successful tax-avoidance vehicles must now be of historical interest only, and, although it was the lead case for several hundred others, it is extremely unlikely that it will go any further. HMRC won on the Ramsay point. On the redirection issue, the Supreme Court's judgment in the Rangers case, released only four days thereafter, has effectively disposed of the redirection argument, which was decided here in the appellants' favour, except in the unlikely event that a persuasive argument could be mounted to distinguish Rangers on the grounds that two important factors in that case (the side-letter explaining the remuneration package and the appointment of the employees as protectors of their particular sub-trust) were absent here. Finally, of course, the disguised-remuneration rules of ITEPA 2003. Pt. 7A impose a charge to income tax and NICs on all loans made by trustees and other third parties to employees after 8 December 2010. Any employers with similar unresolved EBT issues would be well advised to reach a voluntary settlement with HMRC if that opportunity is still open.
Introduction............................................................................................................... |
4 |
Rule 18 – Conclusion on issue which binds related cases........................................... |
4 |
The Issues in Detail: .................................................................................................. |
5 |
Evidence................................................................................................................ |
6 |
Findings of Fact......................................................................................................... |
7 |
(A) The OCO Appeal ................................................................................................ |
7 |
Background: .......................................................................................................... |
7 |
(1) OCO: year ending 30 June 2005....................................................................... |
8 |
(2) OCO: year ending 30 June 2006..................................................................... |
14 |
(B) The Toughglaze Appeal................................................................................. |
15 |
Background ......................................................................................................... |
15 |
(1) Toughglaze: year ending 31 May 2004........................................................... |
15 |
(2) Toughglaze: year ending 31 May 2005........................................................... |
18 |
(3) Toughglaze: year ending 31 May 2006........................................................... |
19 |
Findings of fact from Evidence of Mark... |
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