PA Holdings Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lady Justice Arden,Lord Justice Maurice Kay |
| Judgment Date | 30 November 2011 |
| Neutral Citation | [2011] EWCA Civ 1414 |
| Docket Number | Case No: A3/2010/2695 AND A3/2010/2694 |
| Court | Court of Appeal (Civil Division) |
| Date | 30 November 2011 |
[2011] EWCA Civ 1414
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY)
Mr Justice Roth and Judge Charles Hellier
FTC/08/2009 AND FTC11/2009
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Maurice Kay
Lady Justice Arden
and
Lord Justice Moses
Case No: A3/2010/2695 AND A3/2010/2694
Mr Stephen Brandon QC and Mr Rory Mullan (instructed by Speechly Bircham LLp) for the Appellant
Mr Malcolm Gammie QC (instructed by HM Revenue & Customs) for the Respondent
Hearing dates: 10 th-11 th October 2011
Approved Judgment
PA Holdings Ltd (PA) wished to pay their employees discretionary annual bonuses. It adopted arrangements whereby the employees who would have been paid bonuses were awarded shares and received dividends. The effect, so PA contends, is that the cash the employees received as dividend income is subject to the Schedule F rates and not to the basic or higher rates. Additionally, it contends, there is no liability to make National Insurance contributions (NICs) in respect of these payments.
Both the First Tier Tribunal and the Upper Tribunal were agreed that the income the employees received was from their employment. But both also agreed that, because that income was received in the form of dividends, the provisions of Schedule F and Section 20(2) of the Income and Corporation Taxes Act 1988 ( ICTA) dictated the conclusion that the income had to be taxed as dividends or distributions under Schedule F and could not be charged as emoluments under Schedule E. Since there was no equivalent to Section 20(2) in the Social Security Contributions and Benefits Act 1992 ( SSCBA), the finding that the income was from employment meant that the payments were "earnings" for the purposes of the SSCBA and thus liable to NICs.
HMRC (the Revenue) appeal against the decision of the Upper Tribunal, contending that the dividends were in reality bonuses and liable to be taxed under Schedule E; Schedule F and Section 20(2) do not apply. PA contends, as an additional ground for upholding the decision, that the dividend income was not from employment. PA also appeals against the decision that the payments received in the form of dividends were "earnings" for the purposes of SSCBA on the same basis: that the income was not from employment.
The Facts
The facts found by the First Tier Tribunal are of crucial importance. These are the facts which must be subjected to what the courts have described as realistic appraisal (see e.g. Tower MCashback LLP1 v Revenue and Customs Comrs [2011] 2 WLR 1131, [2011] UKSC 19 [80]). They are set out between [13] and [41] of the First Tier Tribunal and summarised by the Upper Tribunal between [4] and [17].
PA was an international group company, resident in the United Kingdom, with subsidiaries and branches in over twenty countries; it offered consultancy services. It was an employee-owned service company with employees resident in many parts of the world.
PA had a well-publicised policy to pay its staff median salaries and then to award them generous bonuses from profits by individual annual awards. Each year it paid a substantial proportion of its profits into employee trusts out of which awards were made to employees under discretionary bonus schemes. Employees had no contractual entitlement to bonuses but, as the First Tier Tribunal noted, the 1999 Report and Accounts, the main audience for which was PA's employees/shareholders, included provisions for bonuses on the basis that the employees as employees had a valid expectation before the end of the relevant financial year that PA would meet its responsibility to pay bonuses (see paragraphs 35 and 36 of the First Tier Tribunal's decision). The bonuses were designed to reflect an employee's efforts, the achievements of the section of PA in which that employee worked and profitability as a whole.
An Employee Benefit Trust was established for PA in 1995. A share (described by the First Tier Tribunal at [38] as "the usual share") of PA's profits for 1998 and immediate previous years was paid into the 1995 ET. The trustees awarded benefits according to rules to employees working in all sectors of the company. Those awarded bonuses for 1998 received them in March 1999 and, where appropriate, those bonuses were subject to deduction of income tax under PAYE and to payments of NI contributions. This approach continued even after the establishment of different arrangements for the payment of bonuses after 1999.
In 1999 Ernst & Young proposed an arrangement to re-route bonuses so that they were paid as dividends from a United Kingdom resident company and were taxed as distributions. Ernst & Young's proposal was modified, so as to bring in an independent trustee, Mourant, of PA's own choosing. The overall effect of the scheme was that any employee who chose to do so received 99p in dividends and 1p in share redemption proceeds, rather than receiving a bonus of £1.
On 16 December 1999 PA, as settlor, and Mourant, executed a deed establishing the "PA Holdings Limited 1999 Employee Trust" (the 1999 ET). The Trust stated in the recitals that its purpose was "to motivate and encourage employees in the performance of their duties by the provision of bonus incentives and other awards at the discretion of the trustees". In December 1999 PA paid £24,600,050 to Mourant for payment into the 1999 ET from PA's income for 1999. This was described in the 1999 Report and Accounts as "staff costs".
On 27 January 2000 Mourant adopted the "restricted share plan" which empowered Mourant to grant awards to eligible employees over such number of shares in the capital of a Jersey company, Ellastone Limited, a company established by Mourant with its shares issued to nominees of Mourant. Under the rules of the plan, any eligible employee granted "an award" received a beneficial interest in shares and an award certificate indicating the number of shares he had been awarded. The rules required Mourant to pay all dividends or distribution accruing to those shares to the employee. The shares were to be transferred to the employee at the end of a defined, restricted period.
PA, at Mourant's request, calculated bonus awards for all employees for 1999 in early 2000 using a set formula in the same way as adopted in the previous year. Mourant was found to have questioned PA about the proposals and to have given separate and detailed consideration to them, changing some.
At the same time PA employees were notified about "exciting proposed changes to the delivery of current bonus awards". Those who were resident and ordinarily resident in the United Kingdom were invited to choose between receiving a bonus for 1999 from the 1995 ET or from the 1999 ET. The few who did not choose to use the 1999 ET remained entitled under the 1995 ET.
On 4 February 2000 Mourant transferred to Ellastone almost all of the funds paid by PA into the 1999 ET to Ellastone as a capital contribution. On 16 February 2000 Mourant subscribed for and were allotted 24 million 1p redeemable preference shares in Ellastone. Mourant established a nominee company, Juris Limited, resident and registered in Jersey, with the same postal and electronic addresses as Mourant. Mourant directed that the restricted preference shares be held by Juris as its nominee and they were registered to Juris on 16 February 2000.
On 13 March 2000 Mourant granted awards in accordance with the restricted share plan over restricted preference shares in Ellastone to a list of PA employees based largely, but not entirely, on PA's information. Not all employees received an award. The resolution granting the awards stated that it was done in order to "enhance and retain their goodwill as employees of PA".
On 23 March 2000, Mourant, as Trustee of the 1999 ET, directed Juris to hold the shares as nominee for the individuals who have beneficial ownership of the shares. The shares were to be held absolutely to the order of the Trustee and not of the individual.
On 24 March 2000 the Ellastone directors, all of whom were senior staff of PA, declared a 99p dividend for each 1p share funded from the capital contributed to Ellastone by the 1999 ET. The total dividend was paid to Juris as registered owner on 28 April 2000.
Employees were sent an award certificate on the same day if they had been awarded a beneficial interest in the shares. The recipients were asked to notify details of their bank accounts for direct payment of dividends.
On 25 April 2000 Mourant gave authority to authorised signatories of Juris to transfer the dividend payments to the award holders. The payments were subject to an agreed deduction of 25%. The gross amounts reflected the size of the awards of the beneficial interests in the shares. Juris paid payments to the employees directly to their bank accounts using details previously provided by the employees. Sometime later, on 19 November 2000, Ellastone redeemed the 1p shares and appointed Mourant as its agent for the purposes of the redemption. Mourant gave instructions to Juris which paid the redemption to the individuals identified for the purposes of the award of shares.
Under the terms of the restricted share plan, if an employee had left employment before the payment of the dividend or share redemption proceeds, he would have forfeit his right to the shares and therefore have no entitlement to the distributions.
These arrangements were repeated for 2000 and 2001, although a glitch required retrospective correction by action in the Royal Court of Jersey.
I should record that the First Tier Tribunal found that both Mourant and the directors of Ellastone had performed their fiduciary duties properly and had...
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