Scotts Atlantic Management Ltd (in members' voluntary liquidation) and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 May 2013 |
| Neutral Citation | [2013] UKFTT 299 (TC) |
| Date | 13 May 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 299 (TC)
Judge Howard M. Nowlan, Gill Hunter
Andrew Thornhill QC and Edward Waldegrave, counsel appeared for the Appellants
James Sheehan, counsel, on behalf of Mr. Dryburgh's trustee in bankruptcy Richard Coleman QC, James McClelland and David Yates, counsel appeared for the Respondents
Corporation tax - whether value contributed to Employee Benefit Trusts was deductible for corporation tax purposes - whether director was chargeable to income tax on benefits made available to him - if there was a PAYE liability on the companies, whether that could be traced to the director under Income Tax (PAYE) Regulations 2003, reg. 72 - whether the corporation tax deduction (if allowable on general principles) was denied by FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1para. 1 Sch. 24 in the event that the benefits were not taxable as emoluments or earnings of the director - Corporation tax appeal dismissed - Income tax appeal allowed
The First-tier Tribunal decided that the taxpayer companies could not sustain their claims for corporation tax deductions for the cost of funding the Employee Benefit Trusts ("EBT"). The taxpayers' intentions were plainly to secure a far from ordinary tax deduction, one that would not ordinarily be expected, and was designed to achieve the very opposite of the result intended by Parliament. That constituted a "duality of purpose" in making the contributions via the contrived scheme, such that the entire corporation tax deduction should be disallowed to both taxpayers in respect of all the funding of the EBT.
The Tribunal further decided other grounds on which individual elements of the funding of the EBTs should be disallowed as corporation tax deductions. These included a finding that one of the taxpayer companies had some element of motivation to pass out every asset that it possibly could so as to leave it unable to meet tax claims from HMRC if the deductions were successfully challenged. A corporation tax deduction should, in this respect, be denied to the extent of the rate of corporation tax on the relevant contribution made, on the ground of a "duality of purpose" which included stripping the taxpayer company of assets.
However, the Tribunal decided that the taxpayer companies had no pay as you earn ("PAYE") liabilities in respect of the value contributed into the EBT structure. The directors did not at any time have control over the monies in the EBT (or in the Newco companies to which the taxpayer companies initially contributed value, which companies subsequently came to be held by the EBTs), and therefore they did not at any time have those funds "unreservedly at their disposal". Even if the Tribunal was wrong in that conclusion, there could be no recovery of PAYE tax from the director who had been issued a notice under regulation 72(5) of the PAYE Regulations, since there was not the requisite knowledge on the part of the director necessary under that regulation to fix him with liability.
The taxpayers appealed against HMRC's decision, disallowing the taxpayer companies' entire corporation tax deductions for the cost of funding the EBT and imposing PAYE liabilities in respect of benefits provided to the directors.
In 2000, an individual ("Mr D") set up various companies ("Scotts"). By 2003 to 2004, there were several active Scotts companies, including the two taxpayer companies ("SA" and "FM"). Mr D and another individual each owned 50 per cent of an LLP, which owned SA and FM.
The steps undertaken to avoid the application of the disallowance provided under FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1 were essentially as follows:
The employer company (SA or FM), intending to make contributions of, say, 1m into an EBT would first form a new UK company ("Newco").
The employer company would then form two EBTs ("EBT1" and "EBT2") with Guernsey trustees.
The employer company would then subscribe a few shares, say, 100 1p shares ("the trivial shares") in Newco for a premium of 999,999, such that those shares would be worth 1m.
Newco would then grant an option, exercisable within ten years, to EBT1 to subscribe 10,000 1p shares at par, i.e. for 100. The effect of the grant would be to procure that the value of the 100 shares in Newco held by the employer would drop to one per cent of 1m, i.e. 10,000, and the option would be worth 990,000.
The employer company would then sell the 100 shares to EBT2, at their heavily diminished, but now correct, value of 10,000.
EBT2 would countersign the option agreement, committing to ensure that no share issues or distributions would dilute the value of the option.
HMRC contended that SA and FM failed to sustain their deductions for corporation tax purposes even before FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1 was considered. Corporation tax deductions were only available for revenue expenses incurred "wholly and exclusively" for the purposes of the trade. That could not be established in the present case. The real purpose of making EBT contributions was just to avoid corporation tax, or to strip the companies of their assets. None of those purposes was wholly or even remotely a legitimate revenue expense of the trade. Since the vast majority of the benefits passed to the people who were the ultimate shareholders, an improper deduction was being claimed for payments that really ought to have been dividends. There was a distribution of profit, not an expense in earning profit, and worse still, a distribution of all the assets. That left both companies quite unable to pay any remaining liabilities, including corporation tax, should it emerge that the contributions were non-deductible such that the companies were left with corporation tax liabilities.
HMRC also contended that in respect of the PAYE liability, the point at which such liability arose was the point at which value was contributed by SA into its Newco ("SAIL"). At that point, because Mr D and another were the directors of SAIL, the value in it was "unreservedly at the disposal of the directors". Thus, PAYE tax should have been accounted for.
The taxpayers accepted that under the scheme, SA and FM acquired shares in the Newcos and contributed very substantial capital into the companies. Those Newcos ranked as capital assets. However, the only reason why SA and FM then suffered losses was that they quite deliberately diverted value into the options granted by the Newco companies themselves. That diversion was made entirely to meet bonus expectations of the directors, such that it was a revenue expense. The capital assets did not lose value in any respect, other than by the deliberate step designed to remunerate directors.
(2) Whether SA and FM could sustain their claims for corporation tax deductions for the cost of funding the EBTs.
(3) Whether SA and FM had PAYE liabilities in respect of benefits provided to their directors, which, in the case of Mr D, could be recovered from him personally pursuant to notice issued under regulation 72(5) of the PAYE Regulations.
Held, dismissing the taxpayers' corporation tax appeal and allowing the PAYE appeal:
In respect of the first issue, the Tribunal held that trading companies only secured trading deductions for expenses "wholly and exclusively incurred" for the trading purposes of the company. Expenses could be split if, for instance, expenditure was incurred on a property, half of which was used for trading purposes, and half of which was not held for any trading purpose. However, there could be no split where the entire expenditure was incurred for a "dual purpose", one element of which was simultaneously a trading purpose and a non-trading purpose.
An objective, on the part of a company, of seeking to eliminate its liability for corporation tax, could not be a legitimate ground for claiming a trading deduction. In the case of ordinary payments of salary and bonus, when a company ordinarily made such payments, the feature that it expected to secure a trading deduction for the payments did not occasion any "duality of purpose" concern. In the ordinary way, salary and bonuses were obviously tax deductible. They were meant to be tax deductible, and the expectation that that would be so was not an objective of making the payments.
However, the provisions of FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1, undermined that ordinary expectation. The reality became that if no steps were undertaken to oust the application of FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1, the corporation tax deductions would obviously be denied by that provision. Here, SA and FM's intentions were plainly to secure a far from ordinary tax deduction, one that would not ordinarily be expected, and certainly one that was designed to achieve the very opposite of the result intended by Parliament. On that ground, the resultant "duality of purpose" in making the contributions, via the value-draining scheme, was the very factor that occasioned the fatal duality of purpose that resulted in the denial of the entire deductions claimed by both companies. The curious position, thus, became that if no attempt was made to circumvent FA 2003, Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1, the deduction was denied. If a contrived scheme was effected to achieve the opposite result, it failed simply because that objective became the fatal purpose that created the duality of purpose that itself undermined the deduction. Thus, the entire corporation tax deduction should be disallowed to both taxpayers in respect of all the contributions.
As regards the application of Finance Act 2003 schedule 24 subsec-or-para 1Sch. 24, para. 1 itself to the facts (in case the Tribunal was wrong in its "duality of purpose"conclusion above), the Tribunal decided that...
To continue reading
Request your trial
-
Altus Group (UK) Ltd v Baker Tilly Tax and Advisory Services LLP and another
...relied on the decision of the First-tier Tribunal (Tax Chamber) in Scotts Atlantic Management Ltd v Revenue and Customs Commissioners [2013] UKFTT 299 (TC), [2014] SFTD 210. That decision is being considered on appeal by the Upper Tribunal, which has reserved judgment. In brief, the taxpaye......
-
OCO Ltd; Toughglaze (UK) Ltd
...HMRC invite the tribunal take the approach taken by the FTT in Scotts Atlantic Management Ltd (in members' voluntary liquidation) TAX[2013] TC 02704; there the artificial steps in first making a declaration of trust before appointing professional trustees then retiring as trustees were foun......
-
Weekly Tax Update - Monday 3 June 2013
...unreservedly available to the employees. If PAYE had been due this would have arisen at a later point. www.bailii.org/uk/cases/UKFTT/TC/2013/TC02704.html 6 VAT 6.1 Colaingrove Ltd and apportionment of consideration for VAT The cases of Colaingrove Ltd concerned (i) the apportionment of cons......