UBS v Revenue and Customs Commissioners; Deutsche Bank Group Services (UK) Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 September 2012 |
| Neutral Citation | [2012] UKUT 320 (TCC) |
| Date | 17 September 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 320 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Henderson J, Judge Charles Hellier.
Kevin Prosser QC (instructed by Pinsent Masons LLP) for UBS AG.
David Goy QC and Nicola Shaw (instructed by Deloitte LLP) for DB Group Services (UK) Ltd.
Paul Lasok QC and Anneliese Blackwood (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the decision:
Abbott v PhilbinELRTAX [1961] AC 352; (1961) 39 TC 82
Antoniades v VilliersELR [1990] 1 AC 417
Astall v R & C CommrsUNKTAX [2009] EWCA Civ 1010; [2009] BTC 631
Attorney General v JamesonIR [1905] 2 IR 218
DTE Financial Services Ltd v Wilson (HMIT)UNKTAX [2001] EWCA Civ 455; [2001] BTC 159
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
Foulser v MacDougallUNKTAXSCD [2007] EWCA Civ 8; [2007] BTC 95; (2005) Sp C 462
Grays Timber Products Ltd v R & C CommrsTAXWLR [2010] UKSC 4; [2010] BTC 112; [2010] 1 WLR 497
IR Commrs v CrossmanELR [1937] AC 26
Kellogg Brown & Root Holdings (UK) Ltd v R & C CommrsUNKTAX [2010] EWCA Civ 118; [2010] BTC 250
Lynall v IR CommrsELRTAX [1972] AC 680; (1971) 47 TC 375
MacDonald v Dextra Accessories LtdUNKTAX [2005] UKHL 47; [2005] BTC 355
Mayes v R & C CommrsUNKTAXUNKTAX [2011] EWCA Civ 407; [2011] BTC 261; [2009] EWHC 2443 (Ch); [2009] BTC 617
NMB Holdings Ltd v Secretary of State for Social SecurityTAX (2000) 73 TC 85
Pardoe v Entergy Power Development CorpTAX [2000] BTC 87
R v IR Commrs, ex parte Newfields Developments LtdUNKTAXWLR [2001] UKHL 27; [2001] BTC 196; [2001] 1 WLR 1111
Salvesen's Trustees v IR Commrs 1930 SLT 387
Somma v HazelhurstWLR [1978] 1 WLR 1014
Steele v EVC International NV (formerly European Vinyls Corp (Holdings) BV)TAXTAX [1996] BTC 425 (CA); [1995] BTC 32
Street v MountfordELRTAX [1985] AC 809; [2008] BTC 7,094
Weight v SalmonTAX (1935) 19 TC 174
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300; (1981) 54 TC 101
Income tax - National Insurance contributions - Tax avoidance scheme - Banking bonuses - Earnings from employment - Share schemes - Restricted securities - Scheme to deliver bonuses in form of shares avoiding income tax and NICs - Award of redeemable shares in special purpose offshore company - Whether employee became "entitled to payment" when amount of bonus determined - Whether shares "restricted securities" - Associated companies - Control - Applicability of Ramsay principle - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 416s. 416; Income Tax (Earnings and Pensions) Act 2003, Income Tax (Earnings and Pensions) Act 2003 section 18 section 423 section 425 section 426 section 429ss. 18, 423, 425, 426, 429.
These were appeals by two taxpayers (UBS and DB) against decisions of the First-tier Tribunal ([2010] UKFTT 366 (TC); [2010] TC 00648 (UBS) and [2011] UKFTT 66 (TC); [2011] TC 00944 (DB)) that schemes designed to pay bonuses in the form of restricted securities had failed to achieve the taxpayers' objectives of avoiding income tax and National Insurance contributions (NICs).
UBS and DB were investment banks which utilised tax avoidance schemes designed to enable them to provide substantial bonuses to employees in the tax year 2003-04 in a way that would escape liability to both income tax and NICs. The mechanism chosen for that 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 to employees would be "restricted securities" subject to the special taxation regime contained in Ch. 2 of Pt. 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). If the plan worked, the shares would escape taxation under the detailed and prescriptive provisions of Ch. 2, and the only tax to which they would potentially be subject in the hands of the employees would be capital gains tax. In practice, however, such CGT 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 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 ten per cent, unless the employee had meanwhile left the bank's employment.
In outline the schemes involved the taxpayers deciding that they would give certain employees amounts by way of bonuses for the year. A company was then created in an offshore jurisdiction. A special class of shares was created in that company subject to non-permanent restrictions. The restricted shares were purchased by another company or special purpose vehicle which passed legal title to a nominee and allocated beneficial interests in the restricted shares to the relevant employees. Exemption from a charge to tax on the acquisition of the beneficial interests in the restricted shares by those employees was asserted under s. 425 of ITEPA 2003. A short while later, the restrictions were removed from the restricted shares. Exemption from a charge to tax on those employees on that event was asserted under s. 429 of ITEPA 2003. Thereafter the employees became entitled to redeem their beneficial interests in the restricted shares.
In the UBS case the articles of association of the offshore company contained two important provisions: art. 2(14) contained a "forced sale provision" in relation to the shares, to the effect that if the closing value of an index to be specified by the directors in the restricted period was greater than a trigger level then the shares were to be sold immediately and automatically to the trustees of a discretionary trust for UBS employees, for a consideration equal to 90 per cent of their market value, defined as the price estimated in good faith by the directors to be obtainable on a sale in the open market between a willing seller and a willing buyer, if no restrictions applied to the shares; and art. 2(15) provided that at any time when the holder or beneficial owner of any share was UBS or any of its subsidiaries the share would carry no right to dividends or other distributions, would only be entitled to receive par on a winding-up, and would not be redeemable.
The taxpayers appealed to the FTT from determinations made by HMRC under the relevant PAYE and NIC regulations on the footing that the sums allocated to the employees as bonuses at the start of the scheme were liable to income tax under Pt. 7 of ITEPA 2003 as earnings from their employment and to Class 1 NICs on the same basis.
The issues for the FTT were (1) whether the employees became entitled to be paid their bonuses in money before the sums allocated to them were applied in acquiring scheme shares; (2) if not, whether the scheme shares were "restricted securities" within s. 423 of ITEPA and whether the employees were entitled to exemption under s. 429 for the charge to tax that would otherwise admittedly have arisen under s. 426 on the happening of a chargeable event when the shares ceased to be subject to the relevant restriction; (3) whether, by application of the Ramsay principle, the scheme fell outside the scope of Ch. 2 altogether.
In the UBS appeal, the FTT held ([2010] UKFTT 366 (TC); [2010] TC 00648) that, with the exception of a small group of employees, no entitlement to payment of cash bonuses had crystallised before the scheme was set in motion. On the second issue, the FTT held that the scheme shares were not restricted securities, with the result that the scheme failed, but (if that conclusion was wrong) that the exemption under s. 429 was available (so that, subject to the Ramsay argument, the scheme would have succeeded if the shares were restricted securities). On appeal the application of the s. 425 exemption turned on the condition in s. 423(2)(c) which required that on a forced sale (as under art. 2(14)) the holder would not receive at least the market value of the shares (determined as if there were no provision for transfer). The crucial issue in relation to s. 429 was whether UBS and the offshore company were associated at the relevant time within s. 416 of the Income and Corporation Taxes Act 1988. On the third issue, the FTT held that HMRC succeeded on the Ramsay argument, so the scheme failed for that reason also.
In the DB appeal, the FTT held ([2011] UKFTT 66 (TC); [2011] TC 00944) that no entitlement to payment of bonuses had crystallised for any of the employees before the transfer of funds into the scheme. It further held, on materially different facts from those in UBS, that the shares were restricted securities, and that the s. 429 exemption was available, so on a technical analysis the scheme succeeded. However, the FTT again held under the third head that the Ramsay argument succeeded, so the overall result was that the scheme failed.
Held, allowing the UBS appeal and dismissing the DB appeal:
1.The words "entitled to payment" in rule 2 in s. 18(1) of ITEPA 2003 denoted only a present right to present payment, and did not include a right to payment in the future. It could not be said that any of the relevant employees in the UBS case, including those with guaranteed minimum bonuses, became entitled to payment of the sums which UBS decided to award to them before the sums which had been allocated to them within UBS were applied in the acquisition of, and the grant to them of beneficial interests in, the shares. The shares were admittedly earnings from the employees' employment with UBS, but they were non-monetary earnings, and by virtue of ITEPA 2003, s. 19(4) they were treated as received at the time when the benefit was provided. In relation to the employees who had no...
To continue reading
Request your trial
-
The Advocate General For Scotland Against A Decision Of The Upper Tribunal In Relation To Assessments To Tax Made On (1) Murray Group Holdings Limited; (2) Murray Group Management Limited; (3) The Premier Property Group Limited; (4) Gm Mining Limited; And (5) Rfc 2012 Plc (in Liquidation) (formerly The Rangers Football Club Plc)
...reason we consider that we should not follow the decision in Sempra Metals. [76] Finally, in UBS AG v Revenue and Customs Commissioners, [2013] STC 68 (UT); [2014] STC 2278 (CA), two banks provided bonuses for employees by funding an offshore company which was not controlled by the bank. Sh......
-
Tower Radio Ltd and Another
...by the liquidator. The scheme followed by the taxpayers was a blatant example of what the Upper Tribunal inUBS AG v R & C CommrsTAX[2013] BTC 1525 called a "money in, money out" arrangement. The fact that the "process for delivery" of the cash, or the "mechanism by which the benefit of a su......
-
UBS AG and Another v Revenue and Customs Commissioners
... ... Customs (Appellant) and DB Group Services (UK) Ltd (Respondent) v Commissioners for Her ... The modus operandi can be summarised as follows. The bank decided to award discretionary bonuses to certain of its ... ("DB"), the main employer in the group headed by Deutsche Bank AG, another well-known bank, decided to pay ... ...
-
Hossein Mehjoo v Harben Barker (A Firm)and Another
...from any of these statements or from the statements also relied upon by Mr Goodfellow made by the Upper Tribunal in UBS AG v HMRC [2012] UKUT 320 TCC) paras 11–19 anything which shows that Part 7 is not part of the "benefits in kind" legislation. Indeed the statements of Lord Walker are all......