Rialas
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 August 2019 |
| Neutral Citation | [2019] UKFTT 520 (TC) |
| Date | 07 August 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 520 (TC)
Judge Philip Gillett, Ian Abrams
Alastair Wilson and Menna Bowen, both of Gunnercooke LLP, appeared for the appellant
Sadiya Choudhury, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – ICTA 1988, s. 739 – Transfer of assets abroad – Whether taxpayer the transferor – Whether motive defence available – Whether infringement of right to free movement of capital.
The First-tier Tribunal allowed the taxpayer's appeal against assessments under ICTA 1988, s. 739 (the “transfer of assets abroad” legislation); the taxpayer was not a “transferor” for such purposes, and even if he had been, the provisions infringed his right to the free movement of capital and would fall to be disapplied.
The taxpayer (“R”) and Mr C (“C”) established Argo Capital Management Limited (“Argo”) in May 2000. Argo carried on an investment advisory business and was authorised and regulated by the Financial Services Authority. It was UK-incorporated. The shares in Argo were held equally by R and C, who both worked full time in the business.
The business was very successful, but around December 2004, relations between R and C deteriorated. In Spring 2005, R approached a third party, RAB, an unconnected fund management company, and discussed the possible purchase of Argo by RAB. After preliminary discussions, RAB said it would only purchase Argo if C was no longer involved.
In order to continue with his plans for selling Argo, therefore, R discussed with C the possible acquisition of C's shares. C said he would only be prepared to sell his shares if he received a cash price equivalent to the indicative price of US$15m which had been discussed with RAB. R decided the best arrangement would be for a new company to be formed to borrow the $15m, which would buy C's shares, and for that new company to be 100% owned by a trust for the benefit of his family.
In March and April 2005, R established a discretionary family trust (the beneficiaries being R, his wife and son), in Cyprus. The family trust acquired a shelf company (“F”) incorporated in the British Virgin Islands, and which at all relevant times was managed and controlled, and so resident, in Cyprus. R's brother, resident in Cyprus, was protector of the trust and became a director of F.
At the end of April 2005, F contracted to buy C's shares in Argo for US$15m. The purchase completed in May 2005, the purchase consideration being funded by way of loan from Magnetic, an unconnected third party investment company known to R. The loan was unsecured, for a term of three years with a facility for early repayment, and bearing interest at LIBOR plus 1.5%.
Following the sale of C's shares to F, Argo paid interim dividends in respect of the two years to 31 December 2005 and 2006. Subsequently, in January 2007, R and F sold Argo to a third party for a mix of shares and cash worth some US$50m. In March 2007, F repaid the balance of the loan to Magnetic (financed by way of new bank loan).
The dividend amounts received by F were some £2.73m in total, for which HMRC had, by way of closure notices issued in late 2007, assessed R to income tax for tax years 2005/06 and 2006/07, under ICTA 1988, s. 739. R appealed those closure notices.
The judge said that three contentions were put forward by R:
- R was not the transferor for the purposes of s. 739.
- Alternatively, if R was the transferor, he was exempt from liability to income tax by ICTA 1988, s. 741, the motive defence.
- Alternatively, again if R was the transferor, the imposition of an income tax liability under s. 739 would infringe R's right to free movement of capital under art. 56, TFEU (Treaty Establishing the European Union).
On the first question, “was R the transferor?”, it was established that an individual who “procures” a transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the United Kingdom, is chargeable to income tax under s. 739. There might also be cases where, as a matter of fact, one individual's influence over another was so strong that they were the “transferor” of the other's shares, but that would clearly be an exceptional case.
There was no doubt that if C wanted to sell his shares, and wanted to obtain the price of $15m which he had in mind, then the “only game in town” was R, but this did not mean R possessed the necessary influence to dictate whether or not C should sell his shares or to whom he should sell them. Accordingly, R was not the “transferor” (of C's shares) for the purposes of s. 739.
The judge did not consider that HMRC's alternative argument on “transferor” succeeded. This argument was that the transfer of 10 Cyprus pounds to establish the trust was itself a transfer of assets and that the other transactions were “associated operations” in relation to it. In the judge's view, those other transactions could not be said to be effected “in relation to” the 10 Cyprus pounds contributed to the trust; the objective of s. 739 was to deter a UK resident individual from transferring abroad income producing assets which he already owns or controls.
Although, having found for R on the first question, it was not strictly necessary to consider R's other contentions, the judge said he would do so.
On the second question, the motive defence, the judge said all the steps in the acquisition structure which R set up were commercial except for the interposition of the family trust, the only apparent explanation for which was the reduction of R's exposure to UK Inheritance Tax. In the judge's view, the interposition of a non-resident trust between R and UK property (the shares in Argo) did have a tax avoidance motive, and R would therefore be unable to take advantage of the motive defence.
On the third question, R's right to the free movement of capital, it was true that dividends from Argo which would not be taxed if F were UK resident (rather than resident in Cyprus, another EU Member State), were potentially subject to tax under s. 739 because they would be taxable directly on R. In the judge's view there was in principle an infringement of R's right to free movement of capital. The s. 739 provisions might be justifiable on the grounds of being targeted at tax avoidance (the recent ECJ case of X-GmbH v Finanzamt Stuttgart – Körperschaften (Case C-135/17) [2019] ECR 0000, released in February 2019, had suggested that domestic anti-avoidance transactions which targeted transactions other than “wholly artificial transactions” would still seem to be potentially justified in the context of free movement of capital). However, such provisions also had to be proportionate, and in the judge's view they were penal in nature and so not proportionate. The only appropriate response would be to disapply s. 739 in such a case.
For the reasons above, R's appeal fell to be allowed.
This decision arguably takes a narrow view in relation to “transferor”. On that basis, it would seem to be one HMRC might wish to appeal. In that event though, the decision on the motive defence – which seems not unfavourable from HMRC's perspective – would presumably be cross-appealed by the taxpayer.
[1] This is an appeal against two closure notices dated 7 November 2017, issued by the Respondents (“HMRC”) under s28A Taxes Management Act 1970. These closure notices assessed Mr Andreas Rialas to additional income tax of £430,774.40 in respect of 2005–06 and £663,292.00 in respect of 2006–07.
[2] These additional amounts of income tax are calculated as personal income tax on interim dividends paid by Argo Capital Management Limited (“Argo”) in 2005 and 2006, which HMRC consider are due under s739 Income and Corporation Taxes Act 1988 (“ICTA”), on the grounds that Mr Rialas is either the transferor, or has procured the transfer, of assets to a person abroad, as a consequence of which dividends on shares in Argo were received by a person abroad and that Mr Rialas had the power to enjoy that income.
[3] We received witness statements and oral evidence from Andreas Rialas (“Mr Rialas”) and Kyriacos Rialas (“Kyriacos”), his brother, both of whom we found to be credible and reliable witnesses, although their memory as to precise timings was sometimes uncertain as a result of the significant passage of time since the events in question. We also received witness statements from John Baxivanos, of Magnetic Corporation, a Greek company, and Constantinos Messios, Andreas's lawyer, based in Cyprus. Neither Mr Baxivanous nor Mr Messios gave oral evidence and their evidence could not therefore be properly tested under cross-examination. We could not therefore give substantial weight to their evidence.
[4] We find the following as matters of fact.
[5] During the years of assessment 2005–2006 and 2006–2007, Mr Rialas was resident and ordinarily resident, but not domiciled, in the UK. He has at all times been a national of Cyprus, and holds a Cypriot passport.
[6] Argo was incorporated in England and Wales on 18 May 2000. At the relevant times, its issued share capital consisted of 1,998 Ordinary Shares of £1.00 per share nominal value, with no special or preferred rights. By June 2002, Mr Rialas was the registered holder and full beneficial owner of 999 issued Ordinary Shares, and Mr Gary Cressman was the registered holder and full beneficial owner of the other 999 issued Ordinary Shares. Mr Rialas and Mr Cressman were the founders of Argo, which carried on business as an investment adviser, and was authorised and regulated by the UK Financial Services Authority, with registration number 195997. Since each of them owned 50% of the issued share capital, neither Mr Rialas nor Mr Cressman had control of Argo.
[7] Argo provided investment advice to Argo Capital Management (Cyprus) Limited (“Argo Cyprus”)...
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