Trustees of the Eyretel Unapproved Pension Scheme v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 12 November 2008 |
| Date | 12 November 2008 |
| Court | Special Commissioners |
special commissioners decision
Dr John F Avery Jones CBE
Kevin Prosser QC and James Rivett, counsel, for the Appellant
David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
Capital gains tax - tax avoidance scheme - whether subscription for shares followed by the return of the subscription money by way of dividend (by an unlimited company), followed by disposal of the shares for a nominal amount five months after the subscription was a self-cancelling composite transaction - yes - whether HMRC can tax the settlor on the trustees' gain under Taxation of Chargeable Gains Act 1992 section 77s. 77 TCGA 1992 when the did not open an enquiry into the trustees' return which claimed an offsetting loss - yes - whether (assuming that the dividend had not been ignored as part of the composite transaction) the settlor was taxable on the dividend under Income and Corporation Taxes Act 1988 section 660As. 660A Taxes Act 1988 - no - or whether the trustees were taxable on it under Income and Corporation Taxes Act 1988 section 686s. 686 - no
A special commissioner decided that a series of transactions carried out by the trustees of a pension scheme for tax avoidance purposes, including a subscription for shares, payment of a dividend, the sale of the shares for a nominal amount, and the related borrowing and repayment, were a single composite self-cancelling transaction, the individual steps of which were to be ignored for the purpose of computing the gain or loss incurred on the sale of the shares. Further, nothing in Taxation of Chargeable Gains Act 1992 section 77TCGA 1992, s. 77 prevented the Revenue from denying the loss in taxing the settlors of the trust even though they had not opened an enquiry into the trustees' return.
The directors of a company established a retirement benefit scheme for the benefit of its employees. The trustees of the unapproved pension scheme owned some 31,602,000 shares in the company. The trustees disposed of 6,320,000 of their shares. The net proceeds after disposal costs were £9,006,570.
The trustees subsequently entered into a series of transactions which were part of a tax avoidance scheme consisting of a number of pre-planned steps. The transactions had the sole purpose of creating a capital loss. They had no commercial purpose. If successful they had the effect of preserving the trustees of the pension scheme from a claim by the settlors for the tax on the gain under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 78s. 78. The transactions were also designed to leave the trustees in the position in which they started (apart from payment of costs and fees).
The tax avoidance scheme consisted of the trustees of the unapproved pension scheme borrowing money, subscribing for shares at a premium in a company, receiving a similar sum back as a dividend (the company then being an unlimited company that could pay a dividend out of share premium account), repaying the borrowing, and selling the shares for a small sum representing the assets left in the company less a turn for the purchaser. The trustees subsequently claimed that since the dividend was received as income, it could be ignored in computing the capital loss on the shares of the difference between the subscription price and the sale price. The issue also concerned a procedural question whether since the Revenue did not make an enquiry into the trustees' return they could disallow the loss shown in that return in taxing the settlors.
The Revenue refused the capital loss claim. The settlors of the scheme appealed against assessments made under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 77s. 77 for 2000-01 and 2001-02 to capital gains tax (1) in respect of chargeable gains accruing to the trustees of the scheme; (2) in respect of dividend income of the scheme, and (3) (alternatively to (2)) on the trustees of the scheme in respect of dividend income of the scheme. The assessments at (2) and (3) above related to the taxation of the dividend either under ICTA 1988, Income and Corporation Taxes Act 1988 section 660As. 660A as income of the settlors, or alternatively under Income and Corporation Taxes Act 1988 section 686s. 686 on the trustees to the trust rate of tax.
Whether the separate transactions together made up a self-cancelling composite transaction; whether the Revenue could tax the settlor on the trustees' gain without opening an enquiry into the trustees' return claiming the loss; and whether the settlor was taxable on the dividend.
The special commissioner (Dr John Avery Jones) (dismissing the appeal) said that the factors to be considered were that: a series or combination of transactions, intended to operate as such, might be regarded as a composite transaction; even though the separate transactions had a legal reality one could treat them as a composite transaction thus ignoring the separate steps; capital gains tax was created to operate in the real world, not that of make-believe; having found the facts, they had to be applied to the statutory provision in issue.
It appeared from the evidence that the trustees had delayed taking any steps to find a purchaser for the shares until after the payment of the dividend with the intention of preventing the application of the principles in WT Ramsay Ltd v IR CommrsELR[1982] AC 300; 54 TC 101. While in Ramsay the gain and loss were created as part of the composite transaction, there was no need for that to be the case and there was nothing to prevent the transaction creating the loss being treated as a composite transaction.
The question whether the dividend was taxable as income was a separate question to whether the facts should be analysed as a composite transaction in which the dividend was to be ignored, and therefore its potential liability to income tax had no relevance to capital gains tax. Even if ignored for capital gains tax the dividend still existed for income tax and so ICTA, 1988, Income and Corporation Taxes Act 1988 section 660s. 660 or Income and Corporation Taxes Act 1988 section 686686 could still apply to it. Each statutory provision should be looked at separately. Alternatively, if it was not ignored for capital gains tax it was still income.
In all the circumstances, the transactions formed a single composite transaction, which was self-cancelling (apart from the effect of the settlors' claim against the trustees under Taxation of Chargeable Gains Act 1992 section 78s. 78 which was created by statute). It was not a transaction in the real world, but one designed solely to create the capital loss. This case was distinguishable from the decision in Craven (HMIT) v WhiteTAX[1988] BTC 268, because that case involved the genuine sale of a trading company to a third party.
There was no problem in saying that the sale of the shares was a transaction to be taken into account for the purchaser but ignored so far as the seller was concerned because, from the point of view of the seller, the sale was part of a composite self-cancelling transaction. Applying that finding of fact to the capital gains tax legislation there was neither an acquisition of shares, nor a dividend, nor a disposal of shares. There was no difficulty in treating the dividend, which was outside the capital gains tax computation as effectively cancelling the acquisition cost of the shares. If as an appreciation of the facts there was no dividend or acquisition cost then the capital gains tax legislation was applied to that fact. Accordingly there was no capital loss.
The Taxes Management Act 1970, Taxes Management Act 1970 section 8As. 8A required a return by the trustees of certain information "for the purpose of establishing the amounts in which the relevant trustees of a settlement, and the settlors and beneficiaries, are chargeable". That was merely a means of the Revenue obtaining information. Taxes Management Act 1970 section 9Section 9 required a self-assessment of the "amounts in which … the person making the return is chargeable". The effect of Taxation of Chargeable Gains Act 1992 section 77s. 77 was that "the trustees shall not be chargeable to tax in respect of those [gains]". The trustees were therefore not obliged to return the gains and losses in their self-assessment return. Since the settlor was chargeable on the trustees' gains, Taxes Management Act 1970 section 9s. 9 would apply to the settlor, and the trustees would not make any self-assessment of the gains.
The procedures relating to self-assessment therefore applied to the settlor and not to the trustees. The trustees were merely providing information about the gains and in so far as they were being self-assessed the gains would not be included as they were not chargeable in respect of them. Therefore there was no reason why the Revenue needed to open an enquiry into the trustees' return when it would not enable them to collect any tax. Although the trustees were trying to fix the amount on which the settlor had a right of recovery, Taxation of Chargeable Gains Act 1992 section 78s. 78 gave them that entitlement "Where any tax becomes chargeable on and is paid by a person in respect of gains treated as accruing to him under section 77". Actions by the trustees did not affect the amount the settlor actually paid.
In the light of the decision that the dividend was to be ignored, the questions relating to Income and Corporation Taxes Act 1988 section 660G section 686s. 660G and s. 686 did not arise but, had it been necessary to decide the point, since the dividend was to be ignored as being part of the composite transaction the settlors would not be taxable under Income and Corporation Taxes Act 1988 section 660As. 660A on the dividend. But even if the dividend was not to be ignored...
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