Watts
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 November 2022 |
| Neutral Citation | [2022] UKFTT 408 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 408 (TC)
Judge Heidi Poon
First-Tier Tribunal (Tax Chamber)
Tax avoidance – Income tax – Loss determination on disposal of gilt strips – Grant of option to trustee followed by assignment of option to a third-party purchaser – Whether the concept of loss pursuant to FA 1996, Sch. 13, para 14A(1) is a commercial or legal concept – Whether the amount paid by the purchaser to the trustee as a person other than the transferor is an amount payable on the transfer under para. 14A(3)(b) – Ramsay application, MacNiven on the commercial/legal dichotomy, Campbell revisited, Berry considered – Quantum of loss claim reduced – Appeal allowed in part — FA 1996, Sch. 13, para 14A.
In Watts [2022] TC 08634, the First-tier Tribunal (FTT) substantially dismissed a taxpayer’s appeal against a closure notice disallowing a loss claim made as part of gilt strip planning scheme.
Mr Watts (the appellant) participated in a gilt strip planning scheme in 2003–04. In general terms, under the scheme: the appellant took out a loan; the appellant created an interest in possession trust with him as settlor and beneficiary; the loan provider purchased gilt strips on behalf of the appellant by drawing down the loan facility and held the gilt strips as nominee; the appellant granted an option over the gilt strips to the trust for a premium of 90% of the value of the strips; the trust assigned the option to a third-party purchaser; and on exercise of the option, the trustees acquired the strips for 10% of the value. The appellant’s 2003–04 tax return included an income tax loss claim on the disposal of the strips, where the loss was calculated as the purchase price of the strips less the amount paid on exercise. The claim was made on the basis that under (the now former) FA 1996, Sch. 13, para 14A, the loss was calculated as A-B where A was the amount paid for the strip and B was the “amount payable on the transfer”.
HMRC enquired into the loss claim and issued a closure notice disallowing the loss.
The appellant appealed against the closure notice on the basis that: (a) the arrangements were not a sham; and (b) the premium paid for the grant of the option was not an “amount payable on the transfer” of the gilt strips, and was therefore excluded from the “A-B” calculation of his loss.
Given that HMRC did not contend that the arrangements were a “sham”, it was not really an issue that required a judicial decision. Insofar as this was a stated ground of appeal, Judge Heidi Poon found that the arrangements were not a “sham” in the classic definition and therefore the transactions in the scheme were not intended to give the appearance of having a legal effect different from the actual legal effect intended by the parties.
Judge Poon considered that rather than consider the legislation in the abstract first and then the facts in this case, it was “more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute”. Judge Poon found that relevant question was, whether “the amount payable on the transfer” was a commercial concept, which she concluded it was. She also found that the term “transfer” was required to be given a wide practical meaning. By doing this the grant of the option to the trust, and the subsequent assignment of the option by the trust to the third-part purchaser were to be viewed as a series of transactions intended to operate as a commercial unity. The “amount payable on the transfer” therefore included both the payment on the grant of the option and on the exercise of the option.
The appeal was accordingly substantially dismissed, although a minimal loss was allowed in respect of additional costs.
Anti-avoidance legislation has for a long time prevented the use of the scheme used in this case, but the decision provides useful analysis of the Ramsay principle.
Comment by Meg Wilson, Lead Tax Writer, Croner-i Ltd.
Aparna Nathan KC and Colm Kelly, Counsel, instructed by Anthony Collins Solicitors appeared for the appellant
Jonathan Davey KC and Joshua Carey, Counsel, instructed by HM Revenue and Customs' Solicitor's Office appeared for the respondents
[1] Mr Timothy Watts (“the appellant”) appeals against the closure notice issued by the respondents (“HMRC”) on 3 August 2018, which amended his self-assessment return for the tax year ended 5 April 2004 (the “2004 Return”). The amendments disallowed the appellant's claim to income tax loss in the quantum of £1,349,600. The sum of tax at stake is £529,838.26.
[2] The loss claim arose in consequence of the appellant's participation in a gilt strip planning scheme (the “Scheme” or “Arrangements”) promoted by Grant Thornton. The claim is pursuant to paragraph 14A(1) of Schedule 13 to the Finance Act 1996 (“FA 1996”) as respects losses sustained from “Strips of government securities” (“para 14A relief”).
[3] The provisions of Schedule 13 applicable in the tax year 2003–04 relevant to this appeal is set out in Annex 1. At the relevant time, para 14A, Sch 13 FA 1996 provides as follows.
(1) A person who sustains a loss in any year of assessment from the discount on a strip shall be entitled to relief from income tax on an amount of his income for that year equal to the amount of the loss.
(2) The relief is due only if the person makes a claim before the end of twelve months from the 31st January following that year.
(3) For the purposes of this paragraph a person sustains a loss from the discount on a strip where –
- he transfers the strip or becomes entitled, as the person holding it, to any payment on its redemption; and
- the amount paid by him for the strip exceeds the amount payable on the transfer or redemption (no account being taken of any costs incurred in connection with the transfer or redemption of the strip or its acquisition).
The loss shall be taken to be equal to the amount of the excess, and to be sustained in the year of assessment in which the transfer or redemption takes place.
(4) In sub-paragraph (3) above the reference to a transfer in paragraph (a) includes a reference to a deemed transfer under paragraph 14(4) above (and paragraph (b) shall be read accordingly.)
(5) This paragraph does not apply in the case of –
- any transfer of a strip for the time being held under a settlement the trustees which are not resident in the United Kingdom, or
- any redemption of a strip which is so held immediately before its redemption.
[4] The authorities lodged for the hearing, together with further documents referred to in this decision notice are set out in Annex 2.
[5] Three witnesses were called for the appellant, who appeared in the order of Mr Martin Green, Mr Clive Hamilton, and Mr Timothy Watts. Mr Green is the independent financial adviser who introduced the Scheme to Mr Watts. Mr Hamilton is a retired chartered accountant, and had worked formerly in various accounting roles in the appellant's business, including giving assistance to Mr Watt's tax agent in relation to the preparation of the 2004 Return.
[6] Each witness has lodged a statement, and their evidence was tested against documentary evidence during cross-examination. Whilst I have no issue with the general credibility of the witnesses, and accept their evidence as to matters of fact in relation to their understanding of the Scheme, I have a few qualifications to Mr Watt's evidence, as noted in my findings of fact.
[7] A transcriber was in attendance throughout the hearing and the daily transcript was made available to the parties and the Tribunal the following day. References to the PDF transcripts are in the format of “(Day, Page, Line numbers)”.
[8] At the material times in 2003, Mr Watts was (and still is) Chairman of Pertemps Network Group Limited, which is a group of 114 companies (“Pertemps”). Pertemps Group is one of the largest recruitment companies in the UK with 40,000 employees and a turnover of £1billion. Mr Watts' evidence is summarised as follows.
- Prior to 2003, Mr Watts' previous experience with government gilts was limited to purchasing for his parents and a small self-administered pension fund. He was aware that income from a gilt was taxable, but that the gain arising on disposal was not.
- Mr Green provided advice to Pertemps and its employees as a qualified independent financial adviser (IFA), and introduced Eric Williams, the regional senior partner of Grant Thornton to Mr Watts. According to Mr Watts, Mr Green had specifically been asked to identify people of significant wealth in the Midlands so that [Eric Williams] might be introduced to them.
- In October 2003, Mr Williams, accompanied by Mr Green, visited Mr Watts with Mr Hamilton in attendance. During the hour-long meeting, Mr Williams explained to Mr Watts that the government had difficulty selling sufficient gilts to cover the difference between public spending and revenues.
- Mr Watts said that he did not have sufficient liquid cash at the time, and Mr Williams explained that under the gilt strip scheme, Mr Watts would be lent cash to purchase gilt strips.
- Mr Watts said that he had previously been approached by Ernest & Young with similar arrangements but did not enter into them as he did not feel comfortable with those arrangements. He was comfortable entering into the arrangements marketed by Grant Thornton as they had been advised by the same counsel who, as understood by Mr Watts, had also advised the government to devise arrangements that would be more attractive to wealthy persons who wished to purchase gilts; and that the government had brought in legislation to allow the interest element on gilts to be split into different strips.
- Mr Watts said that he was sold these arrangements as a way of helping the government by purchasing gilts; and that to his mind, was a win-win scheme.
[9] In evidence, Mr Watts named “the...
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