Strategic Branding Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 December 2021 |
| Neutral Citation | [2021] UKFTT 474 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 474 (TC)
Judge Jeanette Zaman
Harriet Brown, counsel, instructed by Griffin Law, appeared for the appellant
Julian Ghosh QC, Barbara Belgrano, Quinlan Windle and Laura Ruxandu, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax, Income tax and NICs – Payments to a remuneration trust and loans to director – Whether contributions to trust made wholly and exclusively for the purposes of the trade – Whether HMRC made a discovery – Whether amounts lent to director were taxable under ITEPA 2003, Pt. 7A or as earnings – Held that discovery assessments were validly issued, contributions to trust were not deductible and amounts loaned were not earnings but were taxable under Pt. 7A – appeal dismissed.
The First-tier Tribunal (FTT) found that contributions to a remuneration trust were not deductible from profits for corporation tax, but amounts lent to a director were within the “disguised remuneration” provisions under Part 7A ITEPA 2003 for both PAYE and NICs.
Strategic Branding Ltd (SBL) made contributions to a marketed tax avoidance scheme which was intended, in return for a fee of 10%, to engineer a corporation tax deduction for the company and allow the extraction of those funds tax and NICs-free by the sole director and shareholder of the company.
The scheme was arranged such that Mr Wilson, as director of SBL, resolved that a contribution should be made to the remuneration trust and subsequently arranged for sums to be paid out to either the scheme designers or his advisers, who acted on behalf of the trustees. As director of SBL, he then submitted a “Letter of Wishes” asking the trustees to consider transferring funds to Strategic Management Europe Limited (SMEL), a company of which he was also the sole director shareholder and which had been incorporated to handle these transactions – it did not conduct any other business. The net amount (after deduction of the 10% fees) was invariably paid to SMEL. Mr Wilson, as director of SMEL, then decided to lend the money to himself and it was consequently lent out, allegedly under the terms of a loan agreement where interest would be charged but rolled up during its term and only payable on repayment of the loan itself.
HMRC raised assessments against the company in respect of unpaid PAYE, NICs and corporation tax totalling over £400,000 and the company appealed against each of those assessments.
To be deductible for corporation tax under s. 54, Corporation Tax Act 2009 (CTA 2009), amounts must be incurred “wholly and exclusively for the purposes of the trade”.
If this condition is met, there is then a further limitation on “employee benefit contributions” to the extent that no deduction is allowable unless “qualifying benefits” are provided out of the contributions (s. 1290, CTA 2009) within 9 months after the end of the period in which the contribution was made. A loan is not a qualifying benefit for this purpose (s. 1292, CTA 2009).
The FTT did not accept that contributions had been made wholly and exclusively for the purpose of the trade, but were made largely for the personal benefit of Mr Wilson and to gain a tax advantage.
At this point the appeal failed on the corporation tax issue, but the FTT went on to conclude that had it not, then the arrangements fell within the meaning of “employee benefit contributions” so the limitation imposed by s. 1290, CTA 2009 would have been relevant.
The FTT was satisfied that the payment of contributions to the remuneration trust was always intended to deliver payments to Mr Wilson in the form of loans via SMEL. In theory, there was an obligation to repay these loans, so they were not directly “earnings” within s. 62, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The FTT therefore went on to consider Part 7A ITEPA 2003, the “disguised remuneration” provisions.
Part 7A, s. 554A provides that where a “relevant step” is taken by a “relevant third person” in pursuance of a “relevant arrangement” involving a “relevant person” then the amount involved is treated as earnings and subject to both PAYE and NICs.
In this case the “relevant step” was the making of a loan and the “relevant third party” was SMEL. Mr Wilson was the “relevant person” so it remained to be determined whether there was a “relevant arrangement”, defined under s. 554A(1)(c) ITEPA 2003 as being one “in essence … concerned (wholly or partly) with the provision of rewards, recognition or loans in connection the employee's employment or former or prospective employment”.
There was considerable discussion over the meaning of “in essence” but the FTT found that it was sufficient that it was at least one of the important characteristics of the arrangement. Mr Wilson contended that the loans were not linked to his employment and were for the furtherance of SBL's trade, but the FTT was unsurprisingly not convinced.
A great deal of legal argument took place over the precise meaning of the legislation but ultimately the FTT took the view that it had been drafted using informal language using terms (such as “takes a step” and “earmarked”, “formally or informally”) deliberately to encourage a holistic and pragmatic approach to the arrangements.
Mr Wilson also contended that the loans were made in breach of the trust terms and therefore could not be relevant steps. However there was no evidence that there had been any attempt to have the loans unwound and it was not clear that any breach of trust had taken place in respect of either the contributions or the subsequent loans.
Having found that the provisions of Part 7A applied to the arrangements for income tax, it followed automatically that NICs would also be due by virtue of reg. 22B of the Social Security (Contributions) Regulations 2001.
The appeal was dismissed.
The appellant sought to test every aspect of HMRC's arguments and the precise meaning of the legislation, including an (unsuccessfully) appeal on the basis that discovery assessments issued by HMRC were invalid. In addition to lengthy arguments into the minutiae of the legislative wording, it supplied what the FTT considered to be sham evidence and its witness was held to be unreliable.
Although addressing each of the points raised, in making its analysis the FTT also took a step back and considered the practical reality of what had taken place – and on that view, it seemed plain to see.
[1] Strategic Branding Ltd (“Strategic Branding”) has appealed against various assessments, decisions and determinations issued by HMRC which relate to contributions made by Strategic Branding to a remuneration trust, the WUT No. 1 Ltd Remuneration Trust (the “RT”), in circumstances where the amounts contributed (after payment of fees) were then lent to Colin Wilson, the sole director of Strategic Branding. Strategic Branding made contributions to the RT in the accounting periods ending 28 September 2012 and 30 September 2012 to 30 September 2019. The accounting periods ending 30 September 2016 to 2019 are not covered by this appeal.
[2] HMRC submit that this was a marketed tax avoidance scheme which was intended to achieve two purposes by way of a series of artificial, contrived and pre-ordained steps, namely:
- to engineer a corporation tax deduction for Strategic Branding for payments made to a trust set up for the purposes of the scheme; and
- to engineer the extraction of substantially those same funds (by loan), tax free, in the hands of Mr Wilson for his work as sole director of Strategic Branding without incurring any liability for income tax or national insurance contributions (NICs).
[3] HMRC have issued closure notices and discovery assessments to Strategic Branding denying the deductions claimed. HMRC have also issued determinations under regulation 80 Income Tax (Pay As You Earn) Regulations 2003 (“Regulation 80 Determinations”/ “the PAYE Regulations”) and a decision under s8 Social Security (Transfer of Functions, etc.) Act 1999 (the “Section 8 Decision”), treating as employment income the amounts lent to Mr Wilson.
[4] Strategic Branding's position is that the contributions to the RT were made wholly and exclusively for the purposes of its trade, and that the amounts lent to Mr Wilson are not taxable as employment income.
[5] For the reasons explained further below, I have dismissed Strategic Branding's appeals.
[6] Ms Brown served her skeleton argument on 7 September 2021. In setting out Strategic Branding's position on Part 7A Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), Ms Brown submitted that the loans made by the RT to Mr Wilson were made in breach of trust and that in consequence of this they could not constitute “relevant steps” or, if they were, had nil value for the purposes of Part 7A.
[7] In his skeleton argument for HMRC Mr Ghosh submitted that:
- This was a new argument being put forward which was outside the Amended Grounds of Appeal dated 3 May 2019, had not been trailed in pre-litigation correspondence and HMRC objected to this argument being raised at a late stage where no explanation had been given as to why it was not raised earlier.
- If, despite HMRC's objection, the Tribunal allowed Strategic Branding to raise this new argument, HMRC applied for permission to argue that there had been a diversion of money paid in consideration of Mr Wilson's work as a director and/or employee (a matter on which they had reserved their position in the Statement of Case (SOC)).
[8] Ms Brown addressed this in a short supplemental skeleton, drawing attention to the Amended Grounds of Appeal, and submitted that Strategic Branding was entitled to express its grounds in broad terms (referring to Ecko Ltd (t/a Subway) [2019] TC 07487 at [18] and [19]), and that a party is not at the stage of...
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