R (Masters) v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 17 February 2009 |
| Date | 17 February 2009 |
| Court | Special Commissioners (UK) |
special commissioners decision
DR John F Avery Jones CBE
Mario Angiolini, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Applicant
Andy Wells, Mercury Tax Group Limited, for the Defendant
Notification of tax avoidance schemes - penalty - whether scheme notifiable - no
A special commissioner decided that, on the proper construction of the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 (SI 2004/1863), a tax avoidance scheme promoted by the taxpayer was not required to be notified to HMRC.
HMRC laid an information against the taxpayer company alleging that as promoter of a tax avoidance scheme it had failed to notify HMRC under FA 2004, Finance Act 2004 section 308s. 308 and the Tax Avoidance Schemes (Information) Regulations 2004.
The scheme consisted of high income individuals forming a Jersey limited partnership (Liberty 1) for carrying on a financial trade and contributing capital equal to the tax loss they wished to create. An offshore parent company (SPV1) had a subsidiary (SPV2). SPV2 declared a large dividend out of its share premium account. SPV1 sold the right to the dividend to Liberty 1 for an amount equal to the dividend, which was paid for by the partners' contributions, following which Liberty 1 received the dividend. The scheme was said to work because ICTA 1988, Income and Corporation Taxes Act 1988 section 730s. 730 provided that the seller of the right to the dividend (SPV1) was taxable on it and not the recipient (Liberty 1), while the cost of purchasing the dividend was deductible on general principles as being in expenditure incurred in the course of the financial trade of Liberty 1.
Whether the scheme was notifiable within the 2004 Prescribed Descriptions Regulations.
The special commissioner (Dr John Avery Jones) (dismissing the application) said that the 2004 Regulations were not easy to interpret. They contained the definition of arrangements that were prescribed. There were apparently two conditions: (1) that the arrangements included one or more of the financial products to which SI 2004/1863 part 2 schedule 1 subsec-or-para 7para. 7 of Pt. 2 of the Schedule to the 2004 Regulations applied; and (2) that the tax advantage expected to be obtained under the arrangements arose, to a significant degree, from the inclusion in those arrangements of the financial product (or any of the financial products) to which para. 7 applied.
It was difficult to see how, if (2) was satisfied, (1) could not be. However, (1) seemed to ask whether or not the arrangements included the financial product. On the other hand, (2) clearly contemplated that a financial product could be included in the arrangements without giving rise to the tax advantage, or not doing so to a significant degree. A distinction was made between the expected tax advantage obtained under the arrangements, and the inclusion of the financial product in the arrangements. It was only when the former arose (to a significant degree) from the latter that one had a prescribed arrangement. The "from" implied that the cause of the tax advantage was the inclusion of the financial product in the arrangements. It did not seem to be a test that 'but for' the inclusion of the financial product there would be no expected tax advantage.
The list of financial products was strange, comprising in (a) loans, in (f) contracts treated by generally accepted accounting practice as loans (not being something that had already been included), and in (e) a share; and then three items that might have loans or shares underlying them: in (b) derivative contracts, in (c) repos and in (d) stock lending arrangements. If therefore a share was a financial product why was it necessary to include derivatives, repos and stock lending where these related to shares, and the same with loans. Also SI 2004/1863 part 1 schedule 1 subsec-or-para 3para. 3, in the other part of the Schedule to the Regulations dealing with arrangements connected with employment, made a distinction between securities and "anything the right to which is derived from securities".
Applying that approach to the facts of the present case, condition (1) was satisfied. It could not be said that the arrangements did not include a share when one party to the arrangements, SPV1 held, and was required to continue to hold the shares of SPV2. Condition (2) was more difficult to apply. The proximate cause of the expected tax advantage was the purchase of the right to the dividend. The inclusion of the share in the arrangements was much more a 'but for' cause, that but for the inclusion of the share there would be no dividend and therefore no expected tax advantage. The regulation was looking at the proximate cause of the expected tax advantage, which was not therefore from the inclusion of a share in the arrangements. Accordingly, condition (2) was not satisfied and so the scheme was not notifiable and there could be no penalty.
However, if that was wrong, an issue arose as to the penalty to be applied if the scheme was in fact notifiable. The tax advantage arose by virtue of the clear wording of ICTA 1988, Income and Corporation Taxes Act 1988 section 730s. 730 which provided that in certain circumstances, within which the Liberty arrangement fell, the receipt of a distribution was not charged to tax in the hands of the recipient. Further a payment for such a dividend right, under general tax principles was deductible. It was the mismatch between the tax-free receipt and the tax deductible payment which produced a loss which might be accessed to the individual members pursuant to ICTA 1988, Income and Corporation Taxes Act 1988 section 380 section 381ss. 380 and 381: no financial product produced the advantage per se.
The taxpayer acted properly in relying on counsel's opinion and arguing the case as a matter of principle rather than taking a view themselves and paying the penalty if they were found to be wrong, which might well have been cheaper. If, therefore, the scheme was notifiable and a penalty was payable, the amount should be fixed at nil.
1. An officer of the Applicant ("HMRC") laid an information against Mercury Tax Group ("Mercury") alleging that as promoter of a tax avoidance scheme Mercury had failed to notify it under Finance Act 2004 section 308s. 308 of the Finance Act 2004 and the Tax Avoidance Schemes (Information) Regulations 2004. The Applicant was represented by Mr Mario Angiolini, and Mercury by Mr Andy Wells.
2. The scheme in outline consists of high income individuals forming a Jersey limited partnership (Liberty 1) for carrying on a financial trade and contributing capital equal to the tax loss they wish to create. An offshore parent company (SPV1) has a subsidiary (SPV2). SPV2 declares a large dividend out of its share premium account. SPV1 sells the right to the dividend to Liberty 1 for an amount equal to the dividend, which is paid for by the partners' contributions, following which Liberty 1 receives the dividend. The scheme is said to work (it is no part of these proceedings to decide whether it does work) because Income and Corporation Taxes Act 1988 section 730s. 730 of the Taxes Act 1988 provides that the seller of the right to the dividend (SPV1) is taxable on it and not the recipient (Liberty 1), while the cost of purchasing the dividend is deductible on general principles as being in expenditure incurred in the course of the financial trade of Liberty 1. The issue in these proceedings is whether the scheme is notifiable within the Regulations (which have been superseded by 2006 regulations).
3. Section 730 of the Taxes Act 1988 provides:
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730 Transfers of rights to receive distributions in respect of shares
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(2) Where in any chargeable period the owner of any shares ("the owner") sells or transfers the right to receive any distribution payable (whether before or after the sale or transfer) in respect of the shares without selling or transferring the shares, then, for all the purposes of the Tax Acts, that distribution, whether it would or would not be chargeable to tax apart from the provisions of this section:
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(a) shall be treated as the income of the owner or, in a case where the owner is not the beneficial owner of the shares and some other person ("a beneficiary") is beneficially entitled to the income arising from the shares, the income of the beneficiary, and
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(b) shall be treated as]the income of the owner or beneficiary for that chargeable period, and
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(c) …
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(3) This section does not have effect in relation to a sale or transfer if the proceeds of the sale or transfer are chargeable to tax…
4. Finance Act 2004 provides:
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306 Meaning of "notifiable arrangements" and "notifiable proposal"
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(2) In this Part "notifiable arrangements" means any arrangements which:
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(a) fall within any description prescribed by the Treasury by regulations,
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(b) enable, or might be expected to enable, any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description, and
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(c) are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.
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(3) In this Part "notifiable proposal" means a proposal for arrangements which, if entered into, would be notifiable arrangements (whether the proposal relates to a particular person or to any person who may seek to take advantage of it).
It is common ground that Finance Act 2004 section 306 subsec-or-para 1ss. 306(1)(b) and (c) are satisfied, and that Mercury is a promoter and is under an obligation to notify the arrangements under Finance Act 2004 section 308s. 308 if s. 306(1)(a) is satisfied. The penalty for not notifying the scheme is contained in ...
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