Tower Radio Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 July 2013 |
| Neutral Citation | [2013] UKFTT 387 (TC) |
| Date | 11 July 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 387 (TC)
Judge Peter Kempster, John Whiting OBE.
Giles Goodfellow QC and Oliver Connolly of counsel, instructed by Barnes Roffe LLP appeared for the Appellants
Timothy Brennan QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - pay as you earn ("PAYE") & National Insurance contributions ("NICs") - Rule 18 lead cases - tax avoidance scheme - bonuses - restricted securities - liquidation distribution - Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"),Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 2Pt. 7, Ch. 2 - the WT Ramsay Ltd v IR Commrs; Eilbeck (HMIT) v Rawling(1981) 54 TC 101 ("Ramsay") principle - appeals dismissed.
The First-tier Tribunal dismissed the taxpayers' appeals against HMRC's decision that the taxpayers gave money bonuses to their employees pursuant to a tax planning scheme so that income tax and NICs should apply in the normal way. None of the employees enjoyed a present right to present payment of a money bonus before the share awards were made since all the bonuses were discretionary. The forfeiture clause in the articles of association of the special purpose vehicle company ("SPV"), which was created for the purposes of the scheme, constituted an arrangement or condition which made provision for a forfeiture within ITEPA 2003,Income Tax (Earnings and Pensions) Act 2003 section 423 subsec-or-para 2s. 423(2), such that the market value of the shares was less than it would be but for that provision. Thus, the "A" shares in the SPV constituted "restricted securities" as defined in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 423s. 423. However, applying the Ramsay principle of construing the transactions purposively, all the elements of the transactions were components of a tax avoidance scheme that had no commercial purpose. In relation to the legislative purposes of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 7Pt. 7, none of the employees worked for the relevant SPV and no good for the economy came through their ownership of the "A" shares. There was no long-term incentive; the taxpayers' SPVs were either being wound up almost before they received the cash or were folded as soon as they were feared that the tax advantages of the scheme might be prejudiced by legislative amendment. The scheme was a clear example of "unacceptable" and "artificial" tax avoidance. Therefore, the elements of the transactions in respect of the securities were disregarded for purposes of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 2Pt. 7, Ch. 2. Consequently, the sums or benefits received by officers or employees pursuant to the scheme were chargeable to income tax as employment and PAYE incomes; they also constituted earnings liable for NICs.
The taxpayers entered into a scheme devised by a firm of accountants ("BR") which involved the payment of remuneration by way of bonuses. The scheme was done by making the employee an award of restricted shares in a special purpose vehicle company ("SPV"). The value of the SPV was eventually realised by liquidating the SPV and distributing its assets to the employee shareholder. The idea was to take advantage of the way ITEPA 2003,Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 2Pt. 7, Ch. 2 made no immediate charge to income tax or NICs for an award of "restricted securities". The value in the shares would then be realised in a way that fell outside the subsequent charging mechanism in the legislation. The shares in the SPV were made to be "restricted securities" by including a clause in its articles of association. The clause would require the employee who was awarded the shares to sell them to the employer were they to leave the employer within a given period. In such a case, they would receive 95 per cent of the market value of the shares.
The taxpayers contended that the "A" shares in the relevant SPV were "restricted securities" as they were subject to forfeiture for 95 per cent of their value. The acquisition of those restricted securities by the employee was "exempt income" under ITEPA 2003,Income Tax (Earnings and Pensions) Act 2003 section 8s. 8. It did not constitute "general earnings" under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 7 subsec-or-para 3s. 7(3), nor "PAYE income" under Income Tax (Earnings and Pensions) Act 2003 section 683s. 683, nor "taxable earnings" under Income Tax (Earnings and Pensions) Act 2003 section 683 subsec-or-para 2s. 683(2). There was no "chargeable event" under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 427s. 427 when the SPV was liquidated. The definition of chargeable events in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 427 subsec-or-para 3s. 427(3) did not include a liquidation of the company in which the restricted securities were held. In the absence of a chargeable event, there was no charge under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 426s. 426 and no "taxable amount" under Income Tax (Earnings and Pensions) Act 2003 section 428s. 428. There was no other charging provision in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 7Pt. 7 to impose an income tax charge on the employee shareholder of the SPV in relation to sums received from the liquidator of the SPV in respect of his or her shares on the liquidation. Thus, there was no PAYE income.
HMRC contended that there was a tax avoidance scheme, as admitted by the taxpayers. The taxpayers wanted to pay money bonuses, and dressed up that decision so as to take advantage of the employment-related securities legislation. The money was put into a money box company and then taken out again. ITEPA 2003,Income Tax (Earnings and Pensions) Act 2003 part 7Pt. 7 was irrelevant because there was an award of money, and the award of shares was merely a means of delivering the money. The taxpayers and their advisers had confused an award of earnings with the mechanism for its delivery. The insertion of the steps that created the form of distributions in liquidations did not deprive the payments of their character of emoluments. Relying on R & C Commrs v PA Holdings LtdTAX[2011] BTC 705 ("PA Holdings"), HMRC contended that the provision of the "A" shares in the SPVs was nothing more than the mechanism for delivery of bonuses as rewards from employment. Applying the Ramsay principle, the realistic appraisal of the facts required rejection of any suggestion that the "award" of shares was anything other than a wrapper for the value of the bonuses.
The Tribunal held that none of the employees had any contractual right to a bonus; all the bonuses were discretionary. There was no evidence that there were any contractual bonus rights and there were no written contracts of employment. The letters of engagement between BR and the taxpayers both referred to "discretionary bonuses", as did BR's advice letters. Thus, none of the employees enjoyed a present right to present payment of a money bonus before the share awards were made.
The point for decision inPA Holdings was whether the dividends paid by the SPV to the employees were remuneration from their employments. That was not the issue in the current case. HMRC did not contend that the distributions paid by the liquidators of the SPVs to the "A" shareholders were remuneration. Instead, the contention was that the award of the "A" shares by the employer to the employee was a money bonus. Thus, the point addressed by PA Holdings was distinct from that point addressed in the present case.
The Tribunal also held that the only purpose of the inclusion of the forfeiture provisions in the articles of the SPV was to ensure that the "A" shares qualified as restricted securities for the purposes of ITEPA 2003,Income Tax (Earnings and Pensions) Act 2003 section 423s. 423. The provision in the SPV articles that an employee could be required to dispose of his or her shares at 95 per cent of their value, had no commercial purpose. An effect of the forfeiture provisions was to reduce slightly the value of the "A" shares in certain circumstances connected with the employee leaving. However, employee retention was not a purpose of those provisions; the provisions were included solely to ensure that the "A" shares constituted restricted securities under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 7Pt. 7. The discount of only five per cent would be an ineffective deterrent. The employees in both appeals were effectively the long-term owner-manager or owner-managers of the respective taxpayer companies and so very unlikely even to consider leaving. BR's advice letters were transparent that the provision was driven by the requirements of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 423s. 423. Furthermore, the forfeiture clause constituted an arrangement or condition which made provision for a forfeiture within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 423 subsec-or-para 2s. 423(2), such that the market value of the shares was less than it would be but for that provision. HMRC made no argument to the contrary. Thus, the "A" shares in the SPV constituted "restricted securities" as defined in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 423s. 423.
Finally, the Tribunal held that on the realistic view, all the elements of the transaction were components of a tax avoidance scheme that had no commercial purpose. The forfeiture provision in the SPV articles had no commercial purpose and was inserted solely for tax avoidance reasons. From inception, it was intended that all the "A" shares in the SPV would be awarded to the pre-designated employee. From inception, it was intended that the money box SPV would be liquidated, and the cash distributed to the pre-designated employee, at the...
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