Recent court and tribunal decisions

16 December 2013

RECENT COURT AND TRIBUNAL DECISIONS

Acquisition of money box company shares was a payment for PAYE purposes

In Aberdeen Asset Management PLC v HMRC the Court of Session in Scotland has rejected an appeal by Aberdeen Asset, and upheld appeals by HMRC from the decision of the Upper Tier Tribunal. The appeals related to the question of whether the arrangements (whereby participants acquired shares in ‘cash-box’ companies) amounted to “payments” for PAYE purposes so that the obligation to account for income tax on the amounts concerned was primarily that of the employer company. The court held that, as the employee acquired control, “and in particular the ability to use the funds in the companies as a medium of exchange for the benefit of the employee”, the shares were simply a mechanism for the delivery of cash. The Upper Tier Tribunal was wrong to accept that the form of the assets acquired (shares) meant that the Ramsay principle could not apply to allow the court to consider the transaction “realistically”. The position was no different from an employee having funds paid into his bank account : he would have to instruct the bank to obtain use of the funds. The shares were simply a “means to an end”. The employees had funds placed at their unqualified disposal. On the separate question of whether the shares acquired were “readily convertible assets”, the Court upheld the decision of the Upper Tribunal that they were as a “trading arrangement” existed. Trading arrangements are not required to be extraneous to the asset in question and can arise from the articles of the company. The case of DTE v Wilson related to earlier legislation using different wording and the passages in that case cited no longer represented the law. The various paragraphs of s 203F(2)(f) ICTA 1988 (since superseded) were not mutually exclusive and it could not be inferred from the existence of the more specific provisions that the more general provisions must be restrictively construed. So, the arrangements amounted to payments being made for PAYE purposes or, if that is wrong, the acquisition of “readily convertible assets”. Either way the amounts were subject to PAYE.

And a postscript: a question for employees who have benefited from the arrangements is how to extract funds from the ‘money box’ companies ? It is understood that HMRC are of the opinion that any extraction of funds from such a company will itself trigger a charge to income tax and NICs under the ‘disguised remuneration’ rules on the basis that any such payment by a ‘relevant third person’ (the company) is in essence a step taken in connection with the tax avoidance arrangement first entered into by Aberdeen Asset.

Deeming provisions of section 421B(3) do not apply for the purposes of corporation tax relief

In Metso Paper Bender Forrest Ltd v HMRC [2013] UKFTT 674 (TC),the First Tier Tax Tribunal dismissed an attempt by the taxpayer companies to claim relief from corporation tax (“CT”), under provisions now found in Part 12 CTA 2009 on amounts equal to gains realised by a former director on the exercise of options to acquire shares in the company of which he had been a director. It was common ground that the options had not been granted ‘by reason of the individual’s employment’ or - in this case - office, but it was argued on behalf of the taxpayer companies that, as the options had been granted by those companies with which the optionholder held office, the deeming provision in s 471(3) ITEPA 2003 applied. It is a requirement of the CT relief that the share acquisition gives rise to a chargeable event for the purposes of s 476 ITEPA and so, argued the taxpayer companies, by implication the CT rules incorporates the broader definition of “by reason of employment”. The tribunal held that the CT rules and s 471 address two distinct regimes, and the deeming applies only for the purposes of s 471. Reading the CT rules literally, there was no ground for importing a wider meaning to the words “by reason of employment”.

Success for HMRC in challenge to tax avoidance scheme using forfeitable shares

HMRC has succeeded again before the First-Tier tribunal in establishing that value acquired through a scheme utilising forfeitable shares in a specially-formed company is taxable as a payment of money earnings and not under Part 7 ITEPA 2003. In LM Ferro Ltd v HMRC [2013] UKFTT 463(TC) a pharmacist in Cirencester was persuaded to utilise a scheme devised by Powrie Appleby for extracting funds from the business through the acquisition of forfeitable shares in a specially-formed company (“the SPV”) and reliance upon the (then) exemptions from income tax for certain chargeable events relating to those shares (per s 429(1) ITEPA 2003).

The change in legislation announced on 7 May 2004 withdrawing the exemptions if the actions taken were part of a tax avoidance scheme, led to the funds being extracted instead by a series of transactions involving a sale of the SPV to a subsidiary of the appellant, a distribution in specie by that subsidiary of the shares in the SPV, and a loan of funds, from the SPV to the appellant, used to discharge a guarantee by the appellant to the individual director/proprietor of the appellant in discharge of a guarantee of payment of the sale price. The value extracted was approximately £300,000.

The appellant argued that the bonus was paid in the form of shares and fell to be taxed under the rules relating to employment-related securities in Part 7 ITEPA. HMRC did not argue that that amount fell to be taxed as earnings at the time when sums on account of that amount were credited to the company’s accounts (Rule 3(a) in section 18 ITEPA), but that the scheme “amount[ed] to a bonus of money rather than shares” (so that the ‘money exception’ from Part 7 applied), the time of payment being when the amount was determined after the relevant period had ended (per Rule 3(c), s18). Accordingly, the Reg 80 assessments under appeal were upheld.

Reliance was put on the discerned purpose of Part 7 being to provide tax rules for awards of shares as a means of retaining and incentivising employees (per Grays Timber Products v HMRC [2010] UKSC4) and the acknowledgement in the UBS decision of the Upper Tier Tribunal that there may be “money-in money-out” schemes which fall within the exception, and that this is consistent with the “money exception” being applicable to a particular series of transactions or composite transactions. The receipt of the shares was but one of the steps in the scheme. In the UBS case, the money coming out on redemption of the shares months or years later was dependent upon the performance of the UBS shares that the special purpose vehicle was bound to invest in. By contrast, Mr Ferro held shares in a company he controlled holding cash and there was no real risk or uncertainty as to what he would get out of the scheme. When realistically appraised, the scheme was an artificial contrived scheme, whose essence was to pay money and which it was the intention of Parliament to exclude from Part 7 by operation of the ‘money exception’. Mr Powrie, a chartered accountant, is perhaps to be lauded for at least maintaining faith in his own ‘scheme’ (albeit ultimately misplaced) by representing the taxpayer company before the Tribunal.

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