UBS AG and Another v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Neuberger,Lord Mance,Lord Carnwath,Lord Hodge |
| Judgment Date | 09 March 2016 |
| Neutral Citation | [2016] UKSC 13 |
| Date | 09 March 2016 |
| Court | Supreme Court |
[2016] UKSC 13
Lord Neuberger, President
Lord Mance
Lord Reed
Lord Carnwath
Lord Hodge
Appellant
Paul Lasok QC Richard Vallat Anneliese Blackwood (Instructed by The General Counsel and Solicitor for HM Revenue and Customs)
Respondent (UBS AG)
Kevin Prosser QC (Instructed by Pinsent Masons LLP)
Respondent (DB Group Services (UK) Ltd)
David Goy QC Nicola Shaw QC (Instructed by Slaughter and May)
Heard on 3 December 2015
LORD REED: (with whom Lord Neuberger, Lord Mance, Lord Carnwath and Lord Hodge agree)
In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax (to borrow a phrase from the judgment of Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, 979) generally take the form described in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51; [2005] 1 AC 684, para 34:
"… structuring transactions in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute. It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge."
The present appeals are concerned with composite transactions of this nature, designed to avoid the payment of income tax on bankers' bonuses. They are among a number of cases concerning broadly similar schemes. In each case, the scheme was intended to take advantage of Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"), as amended by Schedule 22 to the Finance Act 2003 ("Chapter 2"). Although the schemes were also designed to avoid the payment of national insurance contributions, it is unnecessary to discuss that aspect, as it is common ground that the position in that regard is the same as in relation to income tax.
It may be helpful to begin by considering the relevant legislation. Chapter 2 is best understood against the background of the previous law, and in its context within Part 7 of ITEPA.
Under ordinary principles of tax law, where an employee receives shares as part of his remuneration, he is liable to income tax on the value of the shares, less any consideration which he may have given for them, in accordance with the decision of the House of Lords in Weight v Salmon (1935) 19 TC 174. That case concerned a situation where the managing director of a company had been allowed to subscribe for shares at par as a reward for successful performance. The position where an employee is granted a conditional share option was considered by the House of Lords in Abbott v Philbin [1961] AC 352. That was a case where a company's senior employees had been given an option to subscribe for its shares at the then current market price, the option being exercisable at any time within the next ten years. The employees were thus incentivised to increase the company's prosperity. The option was non-transferable and would expire on the employee's death or retirement. It was held that income tax was chargeable on the realisable monetary value of the option at the date of its acquisition, rather than on the value realised when it was subsequently exercised, as the Revenue had argued. Lord Reid said at p 376:
"I can sum up my view by saying that conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant on the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account."
The decision in Abbott v Philbin was reversed by section 25 of the Finance Act 1966 (later consolidated as section 186 of the Income and Corporation Taxes Act 1970), which removed any charge to income tax on the grant of employees' share options, and instead imposed a charge on the gain realised when the option was exercised, assigned or released. Section 78 of the Finance Act 1972 subsequently conferred an exemption from the charge in relation to approved share option schemes, on the view that such schemes could perform valuable social and economic functions.
Those provisions applied only to share option schemes. They did not apply to share incentive schemes under which an employee subscribed for, or was awarded, shares to which restrictions might be attached for a prescribed period, and which might become more valuable on the lifting of the restrictions. An employee might, for example, be awarded shares subject to the condition that they would be forfeited if performance targets were not met. Until 1998, the Revenue took the view that no charge to income tax arose when shares of that type were acquired. Nor, until the 1972 Act, was there any specific charge to income tax when the restrictions attached to the shares were lifted.
Section 79 of the 1972 Act, however, imposed a charge to income tax on the value of employment-related shares (less any consideration given) when the restrictions were lifted, or the employee ceased to have a beneficial interest in the shares, or a period of seven years elapsed from their acquisition, whichever was the earliest. The timing of the charge reflected the fact that it was at the point when the risk of forfeiture was lifted that the value of the shares could most easily be determined and realised. Approved share option schemes were excluded from the scope of the charge. Another exception related to shares which were not subject to any restrictions other than those applicable to all shares of the same class, where the majority of the shares of that class were acquired otherwise than in pursuance of offers to employees. The latter exception has a counterpart in the modern legislation, in section 429 of ITEPA, to which it will be necessary to refer later.
That remained the broad outline of the income tax regime applicable to share options and share incentive schemes until 199By then, the Revenue had received legal advice, in relation to remuneration provided in the form of shares subject to forfeiture, that the Abbott v Philbin principle applied, so that a charge to tax arose at the time when the shares were first awarded, on a value reduced by the risk of forfeiture.
It appears from contemporaneous documents (a Budget news release issued on 17 March 1998, and the explanatory notes which accompanied the subsequent Bill) that the advice gave rise to two problems. First, it was considered fairer to tax shares which were subject to the risk of forfeiture at the point when the risk was lifted or, if earlier, when the shares were sold, rather than when the shares were acquired. That was because it was at the point when the restriction was lifted that the value of the shares could most easily be determined, and that the employee was often able to realise their value. Secondly, it was considered necessary to prevent tax avoidance schemes involving remuneration in shares subject to forfeiture from being set up in order to exploit the new understanding of the legal position.
Parliament addressed those problems by enacting section 50 of the Finance Act 1998, which inserted sections 140A to 140C into the Income and Corporation Taxes Act 1988. The general effect of those provisions was to remove the charge to income tax when an employee received shares on terms which meant that they might later be forfeited, unless the shares could still be subject to the risk of forfeiture more than five years later. Instead, there was a charge to income tax on the market value of the shares when the risk of forfeiture was lifted or, if sooner, when the shares were sold.
Sections 140A to 140C of the 1988 Act were re-enacted as the original Chapter 2 of ITEPA, but a few months later a new and more complex Chapter 2 was substituted by the Finance Act 2003. The substituted Chapter 2 formed part of an amended Part 7 of ITEPA, introduced "to close loopholes, prevent avoidance and deal with other anomalies", according to the explanatory notes.
Part 7, as amended, was considered by this court in Grays Timber Products Ltd v Revenue and Customs Comrs [2010] UKSC 4; [2010] 1 WLR 497. That case concerned Chapter 3D of Part 7, but, in a judgment with which the other members of the court agreed, Lord Walker discussed the wider context. As he explained, the provisions of Part 7 reflect three different legislative purposes. Those purposes have already become clear from the discussion of the historical background:
"4. … First there is Parliament's recognition that it is good
for the economy, and for social cohesion, for employees to own shares in the company for which they work. Various forms of incentive schemes are therefore encouraged by favourable tax treatment …
5. Second, if arrangements of this sort are to act as effective long-term incentives, the benefits which they confer have to be made contingent, in one way or another, on satisfactory performance. This creates a problem because it runs counter to the general principle that employee benefits are taxable as emoluments only if they can be converted into money, but that if convertible they should be taxed when first acquired. That principle was stated by Lord Radcliffe in Abbott v Philbin [1961] AC 352, 379…
6. The principle of taxing an employee as soon as he received a right or opportunity which...
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