The Commissioners For Her Majesty's Revenue and Customs v Mercury Tax Group Limited, SPC 00737

Spc00737

NOTIFICATION OF TAX AVOIDANCE SCHEMES – penalty –whether scheme notifiable – no

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MERCURY TAX GROUP LIMITED Defendant

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in public in London on 12 February 2009

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

© CROWN COPYRIGHT 2009

DECISION

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 s 308 of the Finance Act 2004 and the Tax Avoidance Schemes (Information) Regulations 2004 (“the Regulations”). 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 s 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 The issue in these proceedings is whether the scheme is notifiable within the Regulations (which have been superseded by 2006 regulations).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:

“730 Transfers of rights to receive distributions in respect of shares

(1) 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—

(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

(b)     shall be treated as]the income of the owner or beneficiary for that chargeable period, and

(c)     …

(2) 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:

“306 Meaning of “notifiable arrangements” and “notifiable proposal”

(1) In this Part “notifiable arrangements” means any arrangements which—

(a)     fall within any description prescribed by the Treasury by regulations,

(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

(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.

(2) 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 s 306(1)(b) and (c) are satisfied, and that Mercury is a promoter and is under an obligation to notify the arrangements under s 308 if s 306(1)(a) is satisfied. The penalty for not notifying the scheme is contained in s 98C of the Taxes Management Act 1970:

“98C Notification under Part 7 of Finance Act 2004

(1) A person who fails to comply with any of the provisions of Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) mentioned in subsection (2) below shall be liable—

(a)     to a penalty not exceeding £5,000, and

(b)     if the failure continues after a penalty is imposed under paragraph (a) above, to a further penalty or penalties not exceeding £600 for each day on which the failure continues after the day on which the penalty under paragraph (a) was imposed (but excluding any day for which a penalty under this paragraph has already been imposed).

(2) Those provisions are—

(a)     section 308(1) and (3) (duty of promoter in relation to notifiable proposals and notifiable arrangements)…”

The Regulations contain the following:

“2—(1) For the purposes of Part 7, the arrangements specified in the Schedule to these Regulations are prescribed in relation to income tax, corporation tax and capital gains tax.

(2) Part 1 of the Schedule specifies arrangements connected with employment.

(3) Part 2 of the Schedule specifies arrangements in relation to financial products.”

The following paragraph is contained in Part 1 of the Schedule

“3—(1) This paragraph applies to any arrangements under which—

 (a)     securities,

  (b)     interests in securities,

 (c)     securities options,

 (d)     anything the right to which is derived from securities, or

 (e)     anything the value or amount of which is calculated by reference to securities, interests in securities or securities options, or something the right to which is derived from securities,

are obtained by an employee or any other person, by reason of the employee's employment, but this is subject to sub-paragraphs (3), (5) and (6).”

The following paragraphs are contained in Part 2 of the Schedule

“6—(1) The arrangements specified in this Part are those...