Trustees of the Morrison 2002 Maintenance Trust and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 April 2016 |
| Neutral Citation | [2016] UKFTT 250 (TC) |
| Date | 13 April 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge J Gordon Reid QC FCIArb, Ian Malcolm, BSc, BA, JP
Kevin Prosser QC and Charles Bradley instructed by Maclay Murray & Spens appeared for the appellant
Graham MacIver, advocate, instructed by the Office of the Advocate General for HM Revenue and Customs, appeared for the respondents.
Capital gains tax – Tax avoidance scheme – Trusts – Sale of shares – Put option – Effect of contingencies – Whether sale of trust assets to Irish trust under option agreement, subsequent sale for market value and “repatriation” of the trust to Scotland avoids liability to capital gains tax – Or whether there is a single composite transaction on which capital gains tax on market value is chargeable – TCGA 1992, s. 2, s. 17, s. 18, s. 86, s. 144, s. 144ZA.
The First-tier Tribunal found that there had been a single composite transaction that could be characterised as the sale of shares in the market by the trustees that was therefore subject to capital gains tax.
The trustees of three Scottish trusts of which the beneficiaries were the three children of Sir Fraser and Lady Morrison wished to sell their holdings of AWG shares in order to diversify their holdings as they were aware that a large proportion of the Morrison family wealth was concentrated in those shares. Following legal advice, a plan was formulated that involved the following steps:
1) The establishment of Irish trusts, under Scots law, on similar but not identical terms to the Scottish trusts.
2) The settlement of cash (by Lady Morrison) on the Irish trusts.
3) The grant by the Irish trustees of put options over the AWG shares to the Scottish trustees for a price equivalent to their CGT base cost.
4) Exercise of the option by the Scottish trustees (grant and exercise being treated by TCGA 1992, s. 144(2) as a single transaction and the market value rule in s. 17 being disapplied by s. 144ZA(3)). Note that the transactions were planned and carried out before enactment of s. 144ZB.
5) In the event that the Irish trustees made a substantial disposal of AWG shares, the Irish trustees were to be replaced by UK resident trustees before the end of the tax year, such that TCGA 1992, s. 86 and s. 87 were prevented from applying. (The Irish trust thereby became UK-resident but the terms of the UK/Ireland double tax treaty protected them from liability to UK CGT).
The plan was duly carried out, with the option being exercised on 25 November 2004 (when a DOTAS notification was made), the shares being sold to brokers on 1 December giving rise to a gain in the region of £9m and the Irish trustees resigning in favour of Scottish trustees on 11 March 2005.
The technical analysis of each individual step was accepted by all parties. However, the First-tier Tribunal (FTT) had to consider HMRC's argument that, on Ramsay principles, there was a single composite transaction, being the sale by the Scottish trustees of the AWG shares to the brokers and all intermediate steps could be disregarded. The FTT did not consider that any of the uncertainties identified by the appellants that might have caused the scheme not to proceed significantly affected the likelihood of it in fact proceeding as planned. (The uncertainties identified were:
• possible changes in the law, which the FTT considered to be a risk to which any tax avoidances scheme would be exposed;
• the possibility of a fall in the AWG share price making the scheme commercially unviable (the FTT found that the price would have to fall by over 50% and did not consider this to be a realistic possibility);
• the Scottish trustees deciding that exercise of the options was not in the beneficiaries' interests (again not a realistic risk as they were able to obtain indemnities)).
The FTT also considered there was no realistic possibility that the Irish trustees would not sell the shares, as this would be contrary to the clear wishes of the beneficiaries and the Scottish trustees. Nor could they identify any commercial purpose other than tax avoidance for any of the intermediate steps. Thus there was a pre-ordained series of transactions that should be regarded as a single composite transaction, being the disposal of AWG shares at market value.
The scheme in question was designed to exploit the market value rule in TCGA 1992, s. 144ZA that applies to the exercise price of an option – in fact within days of the scheme being implemented, anti-avoidance legislation was enacted in s. 144ZB that would have caused the scheme to fail. However, the FTT also considered the application of the Ramsay principle and its subsequent development in later cases, providing a useful insight into current thinking.
[1] These appeals all raise the same issue, namely whether a tax avoidance scheme to sell certain Scottish trust shareholdings in AWG plc involving the setting up of Irish trusts, the exercise of put options, the purchase and sale of the shareholdings by the Irish trusts, the replacement of these trustees with the original trustees under the Scottish trusts and the consequent repatriation of these trusts, has worked and the disposal of these trust assets incurs no or minimal liability to capital gains tax, or whether the scheme, or part of it, falls to be treated as a single composite transaction, namely the disposal, in the market, of Scottish trust shareholdings at market value on which substantial capital gains tax is chargeable.
[2] We bear in mind throughout that the mere fact that parties intend to obtain a tax advantage is not, in itself, enough to make a statutory relief inapplicable or impose a fiscal liability. Rather, we assess the scheme by reference to its reality, its substance rather than its form, in order to determine whether the facts here, viewed realistically, satisfy the statutory conditions (construed purposively) which impose the fiscal liability in issue.1
[3] A Hearing took place at the Royal Courts of Justice, London on 21, 22 and 23 September 2015, and at George House, Edinburgh on 2 November 2015. The appellants were represented by Kevin Prosser QC and Charles Bradley, barrister, on the instructions of Maclay, Murray & Spens LLP, solicitors, Glasgow (MMS). Graham MacIver, advocate, appeared on behalf of the respondents (HMRC) on the instructions of Eric Brown, principal solicitor of the Office of the Advocate General.
[4] Mr Prosser led the evidence of Lady Morrison, Andrew Biggart, solicitor and partner of MMS; he was also a director of two MMS trustee companies, Vindex Trustees Ltd and Defensor Ltd, Paraic Madigan, solicitor and a partner of Matheson Ormsby Prentice, solicitors, Dublin; he was also a director of the trust company Matsack Trust Ltd; and Ms Gwen Soutar, an accountant also of MMS. All spoke to signed witness statements which they supplemented in evidence. All four witnesses were cross-examined. Mr MacIver led no evidence.
[5] The usual bundles of correspondence, documents, witness statements, and authorities were lodged, along with a Statement of Agreed Facts and Skeleton Arguments. Much of this material was eventually made available in electronic form for which the tribunal is grateful. On the last day of the Hearing, parties produced a Note on the Evidence and proposed findings of fact.
[6] The first three days of proceedings were recorded using Live Transcript facilities in real time. Daily transcripts were produced and distributed in hard copy and in electronic form.
[7] These appeals involve three Scottish and three Irish trusts all governed by Scots law. The principal solicitor for HMRC, Eric Brown, is based in Edinburgh. He instructed Scottish Counsel. The appellants were represented by MMS, a large, well known and well respected firm of Solicitors based principally in Edinburgh and Glasgow. The appeals have been handled by their Glasgow office. It is therefore surprising that HMRC's request, by email dated 19 September 2014, to transfer the proceedings to Edinburgh from London, where curiously, they began, was refused (by a differently constituted tribunal) because the appellants apparently wished the appeals to be heard in London. Neither party has been disadvantaged by such refusal.
[8] However, at the conclusion of the hearing on 23 September 2015, all evidence having been led and submissions partly completed, it was agreed that as the majority of the remaining participants were based in Scotland, concluding submissions should be heard at George House, Edinburgh. The (Scottish) tribunal is grateful to parties for doing so.
[9] We should also record that we were persuaded at the outset of the hearing in London, to proceed throughout in accordance with generally accepted English procedure. Mr Prosser made a lengthy but thorough and excellent opening statement. Thereafter, his witnesses gave evidence. Mr McIver then opened his case with detailed submissions which he completed when we resumed in Edinburgh. Mr Prosser then addressed us on factual findings he wished us to make as did Mr MacIver.
[10] We accept that we sat as an English tribunal. We accept any consequences relating to precedent and subsequent appeals, flowing from that. At the end of the day, however, there was no issue of precedent by which we may have been bound as an English tribunal, but not as a Scottish tribunal, that has affected our decision or the reasons for it. Neither party has said that there are any particular points of Scots law involved, which would or might affect our decision.2 The composition of the Upper Tribunal, should there be further appeals, and whether any appeal from the Upper Tribunal should lie to the Court of Session or the Court of Appeal are matters outwith our province. We simply record that the parties are alive to these issues.
[11] Following the opening of enquiries into the tax returns of the appellants for the tax year ended 5 April 2005, HMRC issued three closure notices3 dated 30...
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Trustees of the Morrison 2002 Maintenance Trust and Others v Revenue and Customs Commissioners
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