UBS v Revenue and Customs Commissioners; Deutsche Bank Group Services (UK) Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 January 2011 |
| Neutral Citation | [2011] UKFTT 66 (TC) ,[2010] UKFTT 366 (TC) |
| Date | 19 January 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 66 (TC)
Dr David Williams (Chairman), Mr David Earle (Member)
David Goy QC and Nicola Shaw for the Appellant
Paul Lasok QC, Mario Angiolini and Anneliese Blackwood, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Regulation 80, PAYE Regulations - Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8section 8, Social Security Contributions (Transfer of Functions, etc) Act 1999 - whether sums paid into a share scheme were earnings of the staff for whom they were paid - whether the shares purchased as part of the scheme were restricted securities within the meaning of Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 2Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 - whether the share scheme was within the scope of that Chapter
1 The tribunal heard this appeal as one of a number of appeals that raised similar issues in respect of similar (but not identical) schemes and with reference to similar (but not identical) facts. By agreement between all concerned, the tribunal heard this appeal and another appeal concerning the same issues of law consecutively. Both cases called into question the interpretation and application of the same provisions in the Income Tax (Earnings and Pensions) Act 2003 part 7Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"), Part 7, in respect of the same tax year (2003-04). This case was heard first and the other was then heard following it.
2 The tribunal has decided the appeal in the other case, UBS AG v HMRC and this has been issued as under the reference [2010] UKFTT 366 (TC). As noted below, the tribunal dealt fully with the arguments of law common to both cases in its decision in that case ("the UBS case"), taking into account the submissions made to it by both parties in this case. It adopts the reasoning of that decision in this decision, without extensive repetition, in so far as it is relevant.
3 That decision is not, on its facts, decisive of this case. The tribunal concluded in that case that the Appellant had not established on the evidence that it was entitled to the income tax exemption it claimed. The approach taken by the Appellant in this case differed in important details to that in the UBS case and the tribunal must therefore consider those aspects of this appeal in full.
4 This decision directly concerns only the appeal of the Appellant against decisions of the Respondents ("HMRC" which includes the Commissioners of Inland Revenue as predecessors in title to the Respondents). The decisions in question were taken against the Appellant only. It is common ground that the Appellant was the main employer in the United Kingdom of staff working with the Deutsche Bank AG group of companies ("the DB Group") in the year in question. No point was taken by either party about the identity of the specific employer or of any individual employee working within the DB Group or of the status of any individual serving as an officer of a DB Group company in addition to or separately from any employment within the Group. For the purposes of this decision the tribunal assumes that all relevant employees of the Group are employees of the Appellant, and it refers to the Appellant as "DB" for brevity. Its references to DB employees includes where appropriate references to any officers of the DB Group receiving relevant earnings or benefits.
5 For convenience, this decision follows the same form as the UBS decision.
PART I: GENERAL ISSUES
6 This appeal concerns the extent to which, if at all, sums paid to DB employees under a scheme ("the Scheme") through shares in a company called Dark Blue Investment Limited ("DBI") create a liability on DB to pay to HMRC:
(a) income tax by reason of a decision made under regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003, reflecting a liability to income tax under Part 3 of ITEPA, and
(b) primary and secondary Class 1 National Insurance ("NI") contributions by reason of a decision made under Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8section 8 of the Social Security (Transfer of Functions, etc) Act 1999 ("the 1999 Act").
(The Scheme had various names, being first referred to as STEED with the full name of "Short Term Equity Deferral Plan". It then gained the mnemonic EDSA: "Employee Discretionary Share Award", and kept that for some purposes through the operation of the Scheme. Nothing turns on these labels.)
7 The decision made under section 8 of the 1999 Act sought to impose liability on DB in respect of both primary contributions and secondary contributions. There are therefore no other appellants against the section 8 decision.
8 The sums were awarded to individual DB employees by reference to bonuses related to the tax year 2003-04. It is common ground that the tribunal is not concerned in this decision with the precise amounts paid to, or individual liabilities of, specific individuals, but only the issues of principle that arise. As there is no contended liability save for that of DB, and no individual sums in question, the tribunal agreed with the parties that this decision did not require the identification of any specific individual serving as an officer or employee of the DB Group save where that individual gave direct evidence in the appeal. This decision has been written on that basis.
9 In outline, DB arranged for certain bonus sums that were to be payable to identified individual DB employees to be paid into the vehicle created for the Scheme and not directly to any employee. Those sums were used to purchase shares in DBI which were allocated to individual employees. DB employees were given rights to sell their shares and withdraw sums from the Scheme over a period, up to the amount of the individual bonus of the employee subject to any fluctuation in the value of the shares during the period. If this right was used the employee received a cash sum. The Scheme was wound up at the end of a specified period, and sums paid to employees who had not previously received sums from the Scheme. The appeal concerns the proper designation of the sums paid into and out of these arrangements for income tax and NI contribution purposes.
10 For DB it is contended that:
(a) Employees received nothing taxable when the sums were paid into the Scheme. This is because the sums paid in were not, and could not be regarded as, earnings of any individual employees at that stage;
(b) Employees received shares in respect of the sums paid in, but no income tax or NI contribution liability arose in respect of the receipt of those shares because they were "restricted securities" exempted from liability by section 425 of ITEPA;
(c) The restrictions were removed from the shares while held by or for the employees but there was no liability to income tax or NI contributions by reason of section 429 of ITEPA;
(d) Employees disposed of their shares by sale at various times, but there was no income tax liability or NI contribution liability by reason of the sale.
11 It may be that there was a liability on individuals to capital gains tax, and the individual liabilities of specific employees might be affected by the remittance basis of taxation or double taxation agreement provisions relevant to individuals. In particular, individuals could make use of the two year taper relief for capital gains tax to reduce individual liability. These were matters for those individuals alone and were not a liability of DB. While the Scheme was designed to allow individuals to use the capital gains tax relief if an individual wished to do so, and other relief might be available, that does not affect this appeal. Accordingly those issues are not explored further.
12 HMRC contends that:
(a) the sums were earnings received by employees for the purposes of section 62 of ITEPA and section 3 of the Social Security Contributions and Benefits Act 1998 ("the 1998 Act") before those sums were paid into the Scheme, and liability to income tax and NI contributions therefore arose at that stage;
(b) if that was not so, then the shares received by the employees were not restricted securities within section 425;
(c) if that was not so, then the values of individual shareholdings were not exempted from income tax or NI contributions by reason of any provision in ITEPA;
(d) if that were not so, then the Scheme is to be ignored as merely a preordained arrangement without real effect and the transactions are to be taxed as if there were cash payments directly to the employees.
13 Save for the allegations in the UBS case that certain aspects of the purported evidence should be found to be a sham, these issues are essentially the same issues as those considered in the UBS case. Aside from that point, HMRC took the same approach in both cases that it was for the Appellant to prove that the documentation represented actual events. While the parties in this appeal were able to agree some of the facts, the tribunal was therefore given considerable documentation about the Scheme by both parties.
14 The tribunal set out the factual pattern common to the UBS case and this case in paragraph [17] of the UBS case decision, and initially the same legal issues arise for decision (as stated in paragraphs [18] and [19] of that decision) namely:
(i) Were the bonus sums allocated for individual employees earnings for income tax and NI purposes at any stage, aside from any allocations into or from the Scheme?
(ii) How are the relevant provisions of Part 7 of ITEPA, and in particular sections 423 to 429 of that Act, to be interpreted and applied?
(iii) Can the tribunal ignore the details of the Scheme by reference to the facts as a whole, and treat the value received as earnings of individuals without regard to the Scheme?
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