UBS AG v HMRC
| Jurisdiction | UK Non-devolved |
| Judge | MR JUSTICE HENDERSON |
| Judgment Date | 17 September 2012 |
| Neutral Citation | [2012] UKUT 320 (TCC) |
| Respondent | REVENUE AND CUSTOMS |
| Appellant | UBS AG and |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Appeal Number | FTC/46/2011 |
[2012] UKUT 320 (TCC)
Appeal numbers FTC/15/2011;
FTC/46/2011
Income Tax and NICs: scheme to deliver bonuses in form of shares
avoiding income tax and NIC. S18(1) ITEPA Rule 2– whether employee
became “entitled to payment” when amount of bonus determined. Ch 2 Part
7 ITEPA – whether shares were “restricted securities” within s 423(2)(c) – s
429 whether shares were in associated company: s416 control at general
meeting level – sham: whether exculpatory provision in Articles a sham.
Ramsay- whether on a broad Ramsay approach the scheme was outside Ch
2.
UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
UBS AG and Appellants
DB GROUP SERVICES (UK) LIMITED
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS Respondents
TRIBUNAL: MR JUSTICE HENDERSON
MR CHARLES HELLIER
(TRIBUNAL JUDGES)
2
Sitting in public at The Rolls Building, Fetter Lane, London EC4A 1NL on 22, 23, 24, 27
and 28 February 2012
Mr Kevin Prosser QC, instructed by Pinsent Masons LLP, for UBS AG
Mr David Goy QC and Ms Nicola Shaw, instructed by Deloitte LLP, for DB Group
Services (UK) Limited
Mr Paul Lasok QC and Ms Anneliese Blackwood, instructed by the General Counsel
and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2012
3
DECISION
Introduction
1. This is our decision on two appeals by the taxpayers from decisions of the
First-tier Tribunal (“the FTT”) (Dr David Williams and Mr David Earle) in 5 favour of the Commissioners for HM Revenue and Customs (“HMRC”) which
we heard consecutively over five days at the end of February 2012. The
appellant in the first case is UBS AG (“UBS”). The appellant in the second
case is DB Group Services (UK) Limited (“DB”). Each case involved the use
of a carefully planned tax avoidance scheme which was designed to enable the
10 appellant bank to provide substantial bonuses to employees in the tax year
2003/04 in a way that would escape liability to both income tax and national
insurance contributions (“NICs”). The mechanism chosen for this purpose
was an award of redeemable shares in a special purpose offshore company set
up to participate in the scheme. It was intended that the shares thus awarded
15 to employees would be “restricted securities” subject to the special taxation
regime contained in Chapter 2 of Part 7 of the Income Tax (Earnings and
Pensions) Act 2003 (“ITEPA”), as recently inserted by the Finance Act 2003,
Schedule 22 (“Chapter 2”). If the plan worked, the shares would escape
taxation under the detailed and prescriptive provisions of Chapter 2, and the 20 only tax to which they would potentially be subject in the hands of the
employees would be capital gains tax (“CGT”). In practice, however, such
liability was likely to be non-existent for non-UK domiciled employees, of
whom there were a large number, provided they took care not to remit the
proceeds of redemption of the shares to the UK; while for employees who 25 were UK-domiciled, the scheme was structured so as to enable redemption to
take place after the shares had been held by them for two years, by when (with
the benefit of business taper relief) the rate of CGT chargeable would be only
10%, unless the employee had meanwhile left the bank’s employment.
30
2. Since the top rate of income tax in 2003/04 was 40%, and since the shares, if
taxable as earnings, would also have been subject to both primary and
secondary Class 1 NICs (payable by the employee and the bank respectively),
the fiscal attractions of the schemes, if they worked, were all too obvious. In
broad terms, the position was succinctly summarised by the FTT in paragraph 35 134 of its decision in the UBS appeal:
“If the Scheme worked, both UBS and the individual employees
derived significant benefit from it. UBS would pay the relevant
bonuses into the Scheme without having to account to HMRC either
for income tax or [NICs] for the employees or its own liability for 40 [NICs] on earnings of employees. In global terms, it would need to put
100 into the Scheme and not 112, and the employees would receive
100 rather than 59”.
3. The cases came before the FTT as appeals from determinations made by
45 HMRC under the relevant PAYE and NIC regulations, on the footing that the
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