ABERDEEN ASSET MANAGEMENT PLC v. THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS IN RESPECT OF A DECISION OF THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
| [2013] CSIH 84 |
Lord President Lord Drummond Young Lord Glennie | XA100/12 OPINION OF THE LORD PRESIDENT in the Appeal to the Court of Session under section13 of the Tribunals, Courts and Enforcement Act 2007 by ABERDEEN ASSET MANAGEMENT PLC Appellants; against THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS Respondents: In respect of a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 31 January 2012 _______________ |
Act: A Young, QC; Pinsent Masons LLP
Alt: Ghosh, QC; Artis; Solicitor to the Advocate General
23 October 2013
Introduction
[1] The tax-avoidance scheme which has given rise to these appeals is summarised by Lord Drummond Young. The scheme involved a series of linked transactions based on the appellants’ offshore Employee Benefits Trust. The object of the scheme was to pay to senior employees and directors of the appellants large sums of money tax free. The money passed from the appellants to the EBT and thence to a series of companies, aptly named money box companies, which were incorporated offshore for each of the beneficiaries. The benefits received by the employees were expressly provided to them as part of their overall remuneration. At the stage when the money was passed from the money box to the employee, the assets of the company were effectively at the disposal of the employee. The directors were mere ciphers.
[2] The First Tier Tribunal saw through the whole scheme as a tax avoidance device. The appellants now accept that that the sums paid to the employees were taxable under Schedule E (Income and Corporation Taxes Act 1988 (the 1988 Act), section 19) as emoluments.
[3] This appeal, and the cross-appeal by HMRC, concern the consequential question whether the liability to account to HMRC for the tax falls on the appellants under the PAYE regime or on the benefitted employees individually. The question is important for obvious reasons.
[4] There are two issues in the appeal and the cross-appeal. They both relate to the appellants’ contention that the cash box arrangement did not amount to a “payment” of income to the employee.
The Ramsay/cash box issue
[5] The appellants take their stand on the legal principle that the employees received only title to the shares in the company, and not cash; and that the cash held by the company was subject to the control of the directors.
[6] In a case of this kind, our concern is with the reality rather than with any simulation of reality that may be achieved by the interposition of a company, the issue of shares and the oversight of compliant directors. Looking at the matter in that way, I think that it is obvious that the employee had complete control of the company and had immediate access to its cash. The money box company was simply a conduit between the EBT and the employee. The directors’ purpose was that of compliance with the objective of the scheme.
[7] On the Ramsay principle (W T Ramsay Ltd v IRC [1982] AC 300), the transfer to the employee of shares in the company was a payment within the meaning of section 203(1) of the 1988 Act (cf Garforth v Newsmith Stainless Ltd (1978) 52 TC 522). The error of the Upper Tribunal in this case lies, in my opinion, in deciding the question on the basis of the formal legal rights that flowed from the interposition of the company. The Upper Tribunal should have looked at the obvious and inescapable reality.
[8] I would therefore allow the cross-appeal of HMRC.
The readily convertible assets issue
[9] If I am right in my conclusion on the Ramsay/cash box issue, that is sufficient to dispose of this case. However, if the present question had arisen I would have concluded for similar reasons that the effect of the scheme was to give the employee a readily convertible asset in terms of section 203F(2)(f). Lord Drummond Young has discussed this issue at length and has reached the same conclusion for more detailed reasons, with all of which I agree.
Disposal
[10] I propose to your Lordships that we should refuse the appellants’ appeal and sustain the cross-appeal by HMRC.
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
| | [2013] CSIH 84 |
Lord President Lord Drummond Young Lord Glennie | XA100/12 OPINION OF LORD DRUMMOND YOUNG in the Appeal to the Court of Session under section13 of the Tribunals, Courts and Enforcement Act 2007 by ABERDEEN ASSET MANAGEMENT PLC Appellants; against THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS Respondents: In respect of a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 31 January 2012 _______________ |
Act: A Young, QC; Pinsent Masons LLP
Alt: Ghosh, QC; Artis; Solicitor to the Advocate General
23 October 2013
[11] The appellants are the parent company of an investment management group. In the tax years 2000/2001, 2001/2002 and 2002/2003 they entered into a tax avoidance scheme known as the Discounted Options Scheme (hereinafter referred to as “the Scheme”) to provide additional remuneration to a number of their employees. The Scheme was intended to avoid liability to account for income tax under the PAYE system and corresponding national insurance contributions. On 16 January 2007 HMRC issued a number of Notices of Determination in respect of the Scheme. These determined the tax that was said to be payable by the appellants under regulation 80 of the Income Tax (Pay as You Earn) Regulations 2003. On the same date HMRC also issued a number of Notices of Decision under section 8 of the Social Security Contributions and Benefits Act 1992. These determined the amounts that the appellants were said to be liable to pay as primary and secondary Class 1 and Class 1A National Insurance Contributions in respect of the earnings of employees who received awards under the Scheme. The appellants appealed against those Notices of Determination and Notices of Decision. On 29 October 2010 the First-tier Tribunal rejected the appeal. The appellants then appealed to the Upper Tribunal in respect of certain parts of the decision of the First-Tier Tribunal. On 31 January 2012 the Upper Tribunal rejected that further appeal. The appellants have now appealed to the Court of Session in respect of part of the decision of the Upper Tribunal, and the respondents, HMRC, have cross-appealed against another part of that decision. The total amount of income tax claimed is in the order of £5.4 million. The amount of national insurance contributions claimed is in the order of £1.6 million. The appellants now accept that they are liable to pay that sum.
The Scheme
[12] The basic features of the Scheme are summarized in the decisions of the First-tier Tribunal and the Upper Tribunal. The appellants established an offshore Employee Benefits Trust (hereinafter referred to as the “EBT”) for certain of their employees. This was a discretionary trust with professional trustees set up in the Isle of Man. The beneficiaries of the trust were senior employees or directors of the appellants who were to be rewarded with additional remuneration for past performance. Substantial funds were transferred by the appellants into the EBT. An Isle of Man company, referred to by the First-tier Tribunal as a “money box company”, was incorporated for each employee who was to be benefited. Each such company had a share capital of £2. The directors of those companies were professional administrators from Jersey or the Isle of Man, taken from the same organization as the professional trustees. The EBT subscribed for the two shares issued in each of the Isle of Man companies. One share was paid for at par (£1); the other was paid for at a very substantial premium, which ranged from approximately £100,000 to nearly £2.9 million. Thus each of the companies received payment of large amounts of cash.
[13] At about the same time a Family Benefits Trust (hereinafter referred to as an “FBT”) was established by the trustees of the EBT for each of the benefited employees. The beneficiaries of each FBT were the employee in question and his immediate family, with a charity as a long stop beneficiary. The trustee of the FBT was a professional trustee drawn from the same organization as the trustees of the EBT. The trust fund of each FBT was a nominal £10, provided by the EBT. The authorized share capital of each of the money box companies was then increased by £10,000. Each company granted the FBT an option to subscribe for 10,000 ordinary shares in the company. The existence of that option was intended to dilute the value of the two original shares. One or both of the shares in each of the money box companies were then transferred to a nominee company for behoof of the favoured employee. The option granted in favour of the FBT subsisted usually for one year and then lapsed without exercise. In practice, none of the early options, exercisable for one year, was exercised. Later options were granted for 10 years; none of these has been exercised. The argument for the appellants was that the grant of the options had the effect of diluting the value of the two original shares at the time when they were transferred to the favoured employees through the insurance company. The First-tier Tribunal held, however, that they did not have this effect, and that the value of the shares at the time of transfer to the employees accordingly reflected the large amount of cash held in each company. The appellants now accept that this decision was correct. On that basis the Scheme fails as a tax avoidance device.
[14] Each individual employee held the beneficial interest in the money box company set up for his benefit through his ownership of the shares in that company. In the cases where only one share was initially transferred to the employee, the second share was transferred to him at the end of the same financial year; this was designed to function as “golden handcuffs” to keep him with the appellants throughout the year. The employees benefited from the funds in the companies in a number of ways: these included receiving soft loans (loans at low interest rates or loans which would not require to be repaid) and obtaining the use of property from the company. In this way the employee received substantial financial benefits as a form of bonus. Each money box company would ultimately be deprived of its funds by one means or another. Certain tax consequences might ensue from that depending upon how the transaction was carried through. If the employee had simply been paid a cash bonus of identical amount to the sums paid into the money box company, the bonus would have fallen within the PAYE and National Insurance regimes.
[15] The detailed facts of the case are in large measure stated in an Agreed Statement of Facts which was before the First-tier Tribunal. Certain further findings of fact were made by the First-tier Tribunal. None of those findings of fact was challenged by the appellants. For the purposes of the appeal to the Court of Session it is not necessary to consider the facts in detail. A general description of the Scheme as given by the First-tier Tribunal and the Upper Tribunal is set out in paragraphs [12]-[14] above, and the features of the scheme that are critical for the purposes of the issues that remain live is given below at paragraphs [28]-[32] and [50] below.
The decisions of the First-tier Tribunal and the Upper Tribunal
[16] In the proceedings before the First-tier Tribunal the appellants accepted that the Scheme was a tax avoidance scheme and that the principal question was whether it was effective as such for the years of assessment to which it related. It was accepted that subsequent legislation had ensured that such schemes were no longer effective. If the Scheme was not effective, the further question arose as to which person or persons, the appellants or the benefited employees, was liable to account for PAYE and NICs. As has already been mentioned, the First-tier Tribunal held that the Scheme did not achieve its objective because the grant of the option in favour of the FBT did not dilute the value of the shares in the money box company. The shares fell to be valued on the assumption that the options granted in favour of the FBTs would not be exercised, and on that assumption the value of the shares was the same as the sum of money owned by the company in question, or half of that amount if only one share were transferred. Consequently income tax and NICs were payable and the appellants were liable to account for the NICs. In relation to the second question, the liability to account for PAYE, the First-tier Tribunal held that it was the appellants who were liable to account for PAYE on amounts received directly or indirectly by employees pursuant to the Scheme.
[17] When the appeal was heard by the Upper Tribunal, the appellants accepted that the Scheme had failed. Nevertheless, a dispute remained as to who was liable to pay the income tax. HMRC contended that the appellants were liable for payment in accordance with the PAYE system; the appellants, by contrast, contended that the benefited employees were liable. The appellants therefore appealed against the decision of the First-tier Tribunal so far as it related to PAYE, contending that the Tribunal had erred in law in two respects: first, they had erred in deciding that, when each employee received shares in a company which owned money, the employee had thereby received money for the purposes of PAYE; and secondly, they had erred in deciding in the alternative that the shares so received were “readily convertible assets” within the meaning of section 203F of the Income and Corporation Taxes Act 1988. I will deal with each of these arguments in turn. First, however, I will set out the material provisions of the Taxes Act.
The relevant legislation
[18] At the relevant time the charge to income tax was established by section 1 of the Income and Corporation Taxes Act 1988. Schedule E is set out in section 19, under which tax was charged
“in respect of any office or employment on emoluments therefrom”.
Section 131(1) of the Taxes Act provided that
“Tax under Case I, II or III of Schedule E shall, except as provided to the contrary by any provision of the Tax Acts, be chargeable on the full amount of the emoluments falling under that Case, subject to such deductions only as may be authorized by the Tax Acts, and the expression ‘emoluments’ shall include all salaries, fees, wages, perquisites and profits whatsoever”.
[19] Sections 202A and 202B of the 1988 Act established the receipts basis of assessment and set out the meaning of “receipt” in various circumstances. So far as material, they provided as follows:
202A Assessment on receipts basis
(1) As regards any particular year of assessment -
(a) income tax shall be charged under Cases I and II of Schedule E on the full amount of the emoluments received in the year in respect of the office or employment concerned;
(b) income tax shall be charged under Case III of Schedule E on the full amount of the emoluments received in the United Kingdom in the year in respect of the office or employment concerned.
(2) Subsection (1) above applies -
(a) whether the emoluments are for that year or for some other year of assessment;
(b) whether or not the office or employment concerned is held at the time the emoluments are received or (as the case may be) received in the United Kingdom.
…
(4) Section 202B shall have effect for the purposes of subsection (1)(a) above.
“202B Receipts basis: meaning of receipt
(1) For the purposes of section 202A(1)(a) emoluments shall be treated as received at the time found in accordance with the following rules (taking the earlier or earliest time in a case where more than one rule applies) –
(a) the time when payment is made of or on account of the emoluments;
(b) the time when a person becomes entitled to payment of or on account of the emoluments;
(c) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and sums on account of the emoluments are credited in the company’s accounts or records, the time when sums on account of the emoluments are so credited;
(d) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the emoluments for a period is determined before the period ends, the time when the period ends;
(e) in a case where the emoluments are from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the emoluments for a period is not known until the amount is determined after the period has ended, the time when the amount is determined.
…
(7) Subsections (1) to (6) above shall have effect subject to subsections (8) to (11) below.
(8) In a case where section 141(1)(a), 142(1)(a), or 143(1)(a) treats a person as receiving or being paid an emolument or emoluments at a particular time, for the purposes of section 202A(1)(a those bracket the emolument or emoluments shall be treated as received at that time; and in such a case subsections (1) to (6) above shall not apply.
(9) In a case where section 145(1) treats a person as receiving emoluments, for the purposes of section 202A(1)(a) the emoluments shall be treated as received in the period referred to in section 145(1); and in such a case subsections (1) to (6) shall not apply.
(10) In a case where section 154(1), 157(1), 158(1), 160(1), 160(2), 162(6) or 164(1) treats an amount as emoluments, for the purposes of section 202A(1)(a) the emoluments shall be treated as received in the year referred to in section 154(1) or the other provision concerned; and in such a case subsections (1) to (6) shall not apply.
(11) In a case where –
(a) the emoluments take the form of a benefit not consisting of money, and
(b) subsection (8), (9) or (10) above does not apply,
for the purposes of section 202A(1)(a) the emoluments shall be treated as received at the time when the benefit is provided; and in such a case subsections (1) to (6) above shall not apply”.
[20] Section 203 provided for the establishment of the PAYE system. Section 203(1) is in the following terms:
“203 Pay as you earn
(1) On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment, notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for some year of assessment other than the year during which the payment is made”.
The relevant regulations were the Income Tax (Employments) Regulations 1993 (SI 1993/744). Section 203A set out the meaning of payment for the purposes of PAYE. It provided as follows:
“203A PAYE: meaning of payment
(1) For the purposes of section 203 and regulations under it a payment of, or on account of, any income assessable to income tax under Schedule E shall be treated as made at the time found in accordance with the following rules (taking the earlier or earliest time in a case where more than one rule applies) –
(a) the time when the payment is actually made;
(b) the time when a person becomes entitled to the payment;
(c) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and sums on account of the income are credited in the company’s accounts or records, the time when sums on account of the income are so credited;
(d) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the income for a period is determined before the period ends, the time when the period ends;
(e) in a case where the income is income from an office or employment with a company, the holder of the office or employment is a director of the company and the amount of the income for a period is not known until the amount is determined after the period has ended, the time when the amount is determined.
…”.
[21] Section 203F was in the following terms:
“203F PAYE: tradeable assets
(1) Where any assessable income of an employee is provided in the form of a readily convertible asset, the employer shall be treated, for the purposes of PAYE regulations, as making a payment of that income of an amount equal to the amount specified in subsection (3) below.
(2) In this section ‘readily convertible asset’ means -
(a) an asset capable of being sold or otherwise realized on a recognized investment exchange (within the meaning given by section 285(1)(a) of the Financial Services and Markets Act 2000) or on the London Bullion Market;
(b) an asset capable of being sold or otherwise realize on a market for the time being specified in PAYE regulations;
(c) an asset consisting in the rights of an assignee, or any other rights, in respect of a money debt that is or may become due to the employer or any other person;
(d) an asset consisting in, or in any right in respect of, any property that is subject to a fiscal warehousing regime;
(e) an asset consisting in anything that is likely (without anything being done by the employee) to give rise to, or become, a right enabling a person to obtain an amount or total amount of money which is likely to be similar to the expense incurred in the provision of the asset;
(f) an asset for which trading arrangements are in existence; or
(g) an asset for which trading arrangements are likely to come into existence in accordance with any arrangements of another description existing when the asset is provided or with any understanding existing at that time.
(3) The amount referred to is the amount which, on the basis of the best estimate that can reasonably be made, is the amount of income likely to be chargeable to tax under Schedule E in respect of the provision of the asset.
(3A) For the purposes of this section trading arrangements for any asset provided to any person exist whenever there exist any arrangements the effect of which in relation to that asset is to enable that person, or a member of his family or household, to obtain an amount or total amount of money that is, or is likely to be, similar to the expense incurred in the provision of that asset.
(3B) References in this section to enabling a person to obtain an amount of money shall be construed-
(a) as references to enabling an amount to be obtained by that person by any means at all, including, in particular –
(i) by using any asset or other property as security for a loan or advance, or
(ii) by using any rights comprised in or attached to any asset or other property to obtain any asset for which trading arrangements exist; and
(b) as including references to cases where a person is enabled to obtain an amount as a member of a class or description of persons, as well as where he is so enabled in his own right.
(3C) For the purposes of this section an amount is similar to the expense incurred in the provision of any asset if it is, or is an amount of money equivalent to-
(a) the amount of the expense so incurred, or
(b) a greater amount; or
(c) an amount that is less than that amount but not substantially so.
(4) For the purposes of this section, ‘asset’ does not include –
(a) any payment actually made of, or on account of, assessable income;
(b) any non-cash voucher, credit-token or cash voucher (as defined in sections 141 to 143); or
(c) any description of property for the time being excluded from the scope of this section by PAYE regulations.
(5) Subject to subsection (4) above, for the purposes of this section ‘asset’ includes any property…
(6) In this section-
…
‘Money debt’ means any obligation which is one to be, or may be, settled –
(a) by the payment of money, or
(b) by the transfer of a right to settlement under an obligation which is itself a money debt”.
[22] Section 203J was as follows:
“203J Sections 203 to 203I: accounting for tax
(1) Where an employer makes a notional payment of assessable income of an employee, the obligation to deduct income tax shall have effect as an obligation on the employer to deduct income tax at such time as may be prescribed by PAYE regulations from any payment or payments they actually makes of, or on account of, such income of that employee.
(2) For the purposes of this section –
(a) a notional payment is a payment treated as made by virtue of any of sections 203B, 203C and 203F to 203I, other than a payment whose amount is determined in accordance with section 203B(3)(a)…”.
Finally, the Income Tax (Employments) Regulations 1993 contained a number of material provisions. Regulation 2(1) provided that
“’emoluments’ means the full amount of any income to be taken into account in assessing liability under Schedule E after the deduction of –
(a) Allowable superannuation contributions and
(b) Any sum withheld from an employee in accordance with section 202 of the Taxes Act;
‘employee’ means any person in receipt of emoluments;
‘employer’ means any person paying emoluments…”.
Regulation 6(1) provided that
“… every employer, on making any payment of emoluments to any employee jury any year, shall deduct… Tax in accordance with these Regulations…”.
The issues that remain live
[23] Before the First-Tier Tribunal a number of distinct issues were debated, but only three of those remain live. On the critical issue of the valuation of the shares in the money box companies, the First-tier Tribunal found in favour of HMRC, and the appellants do not now challenge that part of the decision, and did not do so before the Upper Tribunal. Other issues were held not to have a bearing on the ultimate outcome of the case, and they too were not considered by the Upper Tribunal and are no longer live. The remaining dispute relates to whether it was the appellants or their employees who were liable to make payment of the Schedule E tax that was admittedly due. Three issues were accordingly debated before the Upper Tribunal:
(i) whether the employee in reality received a payment of money (referred to as the Ramsay issue);
(ii) whether the employee should be regarded as receiving money, being the money owned by the relevant company, when he acquired shares in the company on the basis that the money owned by the company was unreservedly at the disposal of the employee (referred to as the cash box issue); and
(iii) whether the shares were readily convertible assets as defined in the relevant legislation (referred to as the PAYE issue).
In the course of the appeal to the Upper Tribunal, and also in the arguments presented to the Court, the first two issues have been integrated into what became known as the Ramsay/cash box issue. Since all of the issues that are now live relate to the identity of the person who is liable for making payment of PAYE tax, it is also convenient to refer to the third issue as the readily convertible assets issue, to reflect the primary question that arises in that connection.
[24] The Upper Tribunal determined the Ramsay/cash box issue in favour of the appellants. It held that the transfer of shares to each of the employee-shareholders was not a “payment” within the meaning of section 203(1) of the Taxes Act and the PAYE regulations, either directly or as an event that was equivalent to the receipt of money because it was unreservedly at his disposal. HMRC have cross-appealed against that part of the Upper Tribunal’s decision. The Upper Tribunal nevertheless decided the readily convertible assets issue in favour of HMRC. It held that the shares held by the employees were “readily convertible assets” as defined in section 203F(2) of the Taxes Act because the shares, which formed an integral part of the Scheme, were assets “for which trading arrangements are in existence” as specified in section 203F(2)(f) of the Taxes Act. The result of that decision was that it was the appellants, not the employees, who were liable to make payment of the Schedule E tax. The appellants appeal against that aspect of the Upper Tribunal’s decision. I propose first to consider the cross-appeal on the Ramsay/cash box issue and thereafter to consider the appeal on the PAYE issue.
The Ramsay/cash box issue
The Ramsay principle
[25] The critical question raised by the Ramsay/cash box issue is whether the transfer of shares to an employee was a “payment” within the meaning of section 203(1) of the Taxes Act and the PAYE Regulations. This question must be considered in the light of the line of authority that has followed the decision in WT Ramsay Ltd v IRC, [1982] AC 300; 54 TC 101; [1981] S TC 174. Two fundamental principles emerge from those cases. First, revenue statutes should be interpreted in accordance with the normal principles of statutory interpretation; the court is not confined to a literal interpretation, and the words used in the statute should be considered in the context of the relevant statutory provisions taken as a whole, including the purpose of those provisions. Secondly, the court must ascertain the legal nature of any transaction to which it is sought to attach tax consequences, and if that involves considering a series of transactions, it is the whole series that must be considered. Perhaps the most helpful statements of the law are now found in Barclays Mercantile Business Finance Ltd v Mawson, [2005] S TC 1; [2004] UK HL 51, where the effect of the previous case law is summarized. First, at paragraphs [32]-[33] Lord Nicholls stated:
“The essence of the new approach was to give the statutory provision purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found.…
The simplicity of this question, however difficult it might be to answer on the facts of a particular case, shows that the Ramsay case did not introduce a new doctrine operating within the special field of revenue statutes”.
Then, at paragraph [36], it is stated:
“[Previous cases] gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd, [2003] HKCFA 46 at [35]…:
‘[T]he driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinking approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically’”.
Emphasis was also placed on the need to focus carefully upon the particular statutory provision and to identify its requirements before one can decide whether circular payments or elements inserted for the purpose of tax avoidance should be disregarded or treated as irrelevant for the purposes of the statute: see paragraph [38].
The relevant legislation
[26] The relevant legislation is found in the provisions of the Taxes Act quoted above. The critical provisions are sections 131(1) and 203(1). Section 131(1), read along with section 19, imposes imposes tax under Schedule E on the full amount of the emoluments from any office or employment, and defines “emoluments” as including “all salaries, fees, wages, perquisites and profits whatsoever”. Thus it is clearly intended that Schedule E tax should be payable on the whole of the financial benefits earned by an employee as a result of his or her employment. Schedule E tax is normally levied on a receipts basis; that appears from the terms of section 202A. Section 203, which is critical to the resolution of the Ramsay/cash box issue, is the statutory basis for the Pay as you earn system. Subsection (1) provides that on the making of any payment of income assessable to income tax under Schedule E income tax shall, subject to regulations made under the section, be deducted by the person making the payment, notwithstanding the absence of an assessment. The PAYE Regulations, enacted under subsection (2), then make provision for the payment of such tax to HMRC. The basic scheme of this legislation is accordingly that the employer deducts income tax from emoluments paid to its employees and accounts for it to HMRC. Section 203A is essentially concerned with the time when a payment is made for the purposes of section 203 and the PAYE Regulations. While the definition has a number of complexities that are not relevant to the present case, the primary meaning is that an emolument is received when payment is made or a person becomes entitled to payment, whichever first occurs.
[27] It is clear in my opinion that the legislative intention underlying these provisions of the Taxes Act is that all emoluments paid to employees should be subject to Schedule E income tax; that such tax should be deductible by the employer in accordance with the PAYE system at latest at the time when payment is actually made to the employee; and that the employer should account for the tax deducted to HMRC, once again in accordance with the PAYE system. The definition of “emoluments” is significant, in that it is very wide and demonstrates a clear intention that every form of benefit received by an employee on account of his employment should fall within the ambit of Schedule E tax. It is also clearly intended that the PAYE system should be a comprehensive system for recovering Schedule E tax. That is apparent from the width of the wording of section 203(1), which refers to the making of “any payment of… any income assessable to income tax under Schedule E”. Consequently, in considering whether a particular receipt or benefit obtained by an employee falls within Schedule E income tax and within the PAYE system, the intention underlying the legislation that both of these should be comprehensive in nature is a consideration of the greatest importance. It is also important in my opinion to bear in mind the importance of PAYE in the tax system. PAYE secures, and is plainly designed to secure, the prompt and efficient collection of tax in respect of every sort of employment.
The relevant facts
[28] The general nature of the Scheme is set out at paragraphs [12]-[14] above. So far as material to the Ramsay/cash box issue, the following features are in my opinion of importance. These are taken from the findings of the First-tier Tribunal and where appropriate the findings of the Upper Tribunal. Those findings were not the subject of challenge. First, employees who were to benefit received letters about the Scheme in advance, and accepted shares on the basis that they formed part of their remuneration package. In due course the appellants’ Remuneration Committee sent letters of wishes to the EBT trustees asking them to provide benefits to specified employees in the form of shares in their respective companies. In some cases only a 50% holding was to be transferred immediately and the other 50% only if the individual employee remained in employment for a specified period. The participating employees were informed by letter that “the essence of the scheme is that your benefit from the EBT will be paid into an Isle of Man registered company, the shares in the company would then be gifted to you”. The directors of the money box companies did not communicate at all with the employees until after the transfer of shares to those employees. The directors were not bound to comply with the employees’ wishes. Nevertheless, where the employee had a 100% shareholding the directors could easily have been compelled to do so by virtue of the relevant company law procedures by having resistant directors removed and replaced with directors who would comply with the employee’s wishes. Even when only a 50% shareholding was held at first, the reality was that the directors would generally comply with the employees’ wishes as regards loans and investment.
[29] There was generally no discussion between the appellants and the employees regarding the benefits that might be provided by the offshore companies. There was no standard way in which the companies applied their respective funds: each company invested in different kinds of investment and/or made soft loans to the employee who held all or half of the issued shares. Employees obtained benefits from their individual company in a variety of ways. This included the making of loans by the company to the employee; the taking of assets of the company as a dividend; and the purchase of land by the money box company, where the company substituted itself as a party to land purchase agreements which an employee had concluded. The duration and value of loans granted by the offshore companies were agreed in a dialogue with the employee who had beneficial ownership of the shares. Loans were invariably granted. Such credit checks as were carried out were formal. With one exception, the loans were never repaid.
[30] As to the characterization of these transactions, the First-tier Tribunal stated (at paragraph 42 of its decision):
“Our assessment of the facts is that the structures put in place simply operated as a means of channelling the additional remuneration from employer to employee.… The assets of the company, namely cash, are effectively at the disposal of the employee. While the control of the assets of the company may be clothed in requests for loans etc and minutes of professional directors giving apparent due consideration to the requests, the facts, viewed realistically, show unequivocally that control is vested in the employee who has access to the pot of money contained within the corporate money box”.
The First-tier Tribunal further expressed the view (at paragraph 54 of its decision) that the cash in each company was to be regarded as unreservedly at the disposal of the employee as sole shareholder in the same way as if the sum had been credited to a director’s loan account. This accorded with a view of the Scheme that it was designed to deliver cash or its equivalent to certain employees. The fact that the employee might have to deploy various company law procedures in exercise of clear legal rights appeared no different from the situation (in Garforth v Newsmith Stainless Ltd, 1978 52 TC 522) where directors had to sue a company for payment, in exercise of a legal right, but it was concluded that they had received payment. The company was “a legal entity whose sole existence and purpose is to hold a pot of money, which, in reality, represents a bonus payment”. Although technically belonging to the company, the pot was at the disposal of the employee, and “the directors would distribute or deal with the pot in accordance with his wishes. The directors had no other agenda, and no other aims or intentions for the company’s prosperity, or trading”.
[31] In relation to the trusts, the First-tier Tribunal found that the edifice that had been constructed merely disguised the fact that none of the trustees exercised any real discretion but simply went through the motions to give the appearance of the application of thought leading to a reasoned decision; the reality was that each component of the structure played its part in giving effect to the decisions of the appellants’ Remuneration Committee. It was inconceivable that if the Remuneration Committee recommended that a particular employee receive a benefit or bonus, the trustees of the EBT, the FBT or the directors of the offshore company would do anything other than facilitate the benefit or bonus’s reaching the employee or being placed under his sole direction and control (paragraph 57). Moreover, the directors of the company did no more than go through the motions of checking the propriety of making loans to shareholder/employees (paragraph 59).
[32] The Upper Tribunal stated that it was clear from the decision of the First-tier Tribunal, read as a whole, that the exit strategy was really a matter for the decision of the employee. Subject to the lawfulness of any request, the directors would comply with the employee’s wishes. Control was vested in the employee who had access to the pot of money contained within the corporate money box. It was preordained that the employee would receive 100% of the shares in a cash-rich company. It was not preordained that he would use his control of the company in any particular way, but how he would do so was his own choice, a choice which would in practice be observed and implemented by the directors (paragraph 10). Furthermore, it was significant that the First-tier Tribunal had found that there was a composite transaction consisting of a series of steps which began with the establishment of a transfer of money into the EBT and ended with the transfer of the shares to the employees, and that thereafter a variety of financial arrangements and transactions could and indeed did take place. On the facts, the First-tier Tribunal had concluded that the money held by each company had, by that composite transaction, been placed unreservedly at the disposal of the relevant employee.
Analysis
[33] Against the foregoing factual background, I am clearly of opinion that the transfer of shares in a money box company to an employee was a “payment” within the meaning of section 203(1) of the Taxes Act. The word “payment” is not defined for the purposes of section 203. It seems clear that the word has no single settled meaning but takes its colour from the context in which it is found: Garforth v Newsmith Stainless Ltd, 1978, 52 TC 522, at 528 per Walton J, following Jenkins LJ in Re Vestey’s Settlement, [1951] Ch 209, at 222. In the construction of tax legislation, in particular, it has been emphasized that payment is a practical commercial concept: DTE Financial Services Ltd v Wilson, [2001] EWCA Civ 455, at paragraph 42 per Jonathan Parker LJ. In the latter case it was further pointed out that for the purposes of the PAYE system payment ordinarily means actual payment, in the form of a transfer of cash or its equivalent. For this purpose, the notion of an equivalent of cash may be important. In Garforth, bonuses payable to directors of the taxpayer company had been credited to their current accounts with the company but not fully drawn out. Walton J held that the bonuses had been paid for the purposes of the PAYE legislation; he stated (at 529):
“I therefore come back to the question whether, on the facts of the present case, there was ‘payment’ to the directors. The argument really is, on the one hand, that all that happened was that the balances in the directors’ loan accounts with the Company were increased without them getting anything out of it unless and until they withdrew their money from the Company and, on the other hand, that the money was placed unreservedly at their disposal, they could have had it at any moment they chose, and that amounts to payment. As between those two contrasting views, I have no hesitation at all in saying that, in my judgment, when money is placed unreservedly at the disposal of directors by a company that is equivalent to payment”.
The views of Rowlatt J in IRC v Doncaster, 8 TC 623, were cited in support.
[34] In considering what amounts to payment for the purposes of the PAYE legislation, it is important in my opinion to bear in mind that money is a medium of exchange. In practical terms, therefore, the crucial question is whether funds have been placed in a position where as a practical matter they may be spent by the employee as he wishes; it is at that point that the employee can be said to obtain the benefit of those funds. If the PAYE legislation is construed purposively it is in my view obvious that it is such a benefit that is to be taxed. For this purpose it is not appropriate to deconstruct the precise legal nature of the employee’s rights, drawing fine distinctions according to the methods that he must adopt in order to use the funds for his benefit. The fact that the employee has practical control over the disposal of the funds is sufficient to constitute a payment for the purposes of the legislation.
[35] In the present case the unchallenged findings in fact made by the First-tier Tribunal included the following. The employees who were to be benefited under the Scheme accepted shares in the money box companies on the basis that they formed part of their remuneration package. The employees had control over those companies, if necessary by using their powers and shareholdings to replace any director who might resist their wishes. In practice, however, the directors did exactly what the relevant employee wanted with the funds held by the company, and the funds were actually used to benefit the employee-shareholders in a number of different ways, in each case determined by the employee concerned. The First-tier Tribunal expressly found that the structures put in place operated simply as a means of channelling remuneration from employer to employee, that the assets of the companies, in the form of cash, were “effectively at the disposal of the employee”, and that the facts showed “unequivocally” that control was vested in the employee who had “access to the pot of money contained within the corporate money box” (see paragraph [29] above). Likewise, in relation to the trusts that formed part of the Scheme, the First-tier Tribunal held that the trustees did not exercise any real discretion, but merely give effect to the decisions made by the appellants’ Remuneration Committee (see paragraph [30] above). Those findings were effectively endorsed by the Upper Tribunal (see paragraph [31] above), who stated that control was vested in the employee who had access to the money contained within the corporate money box.
[36] In the light of those findings it is very clear in my opinion that the employees had total practical control over the disposal of the funds that had been paid into the money box companies. That by itself satisfies the requirements of a payment for the purposes of PAYE legislation, and in particular for the purposes of section 203(1) of the Taxes Act. Consequently the cross-appeal by HMRC must succeed.
[37] The argument for the appellants was that the funds transferred to the companies were not placed unreservedly at the disposal of the employees. The only right that an employee had was ownership of the shares, and he had no clear legal right to the cash. The Scheme came to an end when the shares were issued to the employee, and did not involve transferring any right to the cash to him. In this connection reliance was placed in particular on the statement in DTE Financial Services Ltd v Wilson, supra, at paragraph 42, that for the purposes of the PAYE system payment “ordinarily means actual payment: i.e. a transfer of cash or its equivalent”. This involves focusing on the legal right enjoyed by the employee; what was required was a right to payment of cash. It was submitted that that followed from a proper analysis of the PAYE legislative code.
[38] In my opinion this opinion reads the word “payment” too narrowly in the context of the PAYE legislation. It amounts in effect to saying that for payment to occur an employee must have a direct legal “right”, in a very strict sense, to the funds that are paid, and it is not enough that the employee can, by exercising a power that has been conferred upon him, obtain the beneficial use of those funds. That involves a concentration on strict legal form rather than the substance of the transaction, and treats the form as critical. Perhaps more importantly, it takes one aspect of the complex transaction contained in the Scheme, namely whether an employee has a direct right to payment of the funds paid into the Scheme by the employer, and treats that as determinative of whether there is a “payment” to the employee. Under the Ramsay approach, however, the transaction under consideration must be viewed “realistically” (Ribeiro PJ in the Arrowtown Assets case, cited above at paragraph [25]). That clearly requires the transaction to be looked at as a commercial whole. In the present case the First-tier Tribunal expressly found that the Scheme was conceived as a whole, to channel money from the appellants to the favoured employees. When such a transaction is viewed realistically, as the unity that it was intended to be, it is apparent that the employee-shareholders had ample power to ensure the beneficial use of the funds that had been transferred by the appellants into the money box companies. The fact that powers conferred by company law might have to be exercised to achieve that purpose if the directors are not compliant does not matter; it is the substance of control, and in particular the ability to use the funds in the companies as a medium of exchange for the benefit of the employee, that is important. In this connection it should be noted that, even if funds are paid into the employee’s bank account, the employee will require to exercise a legal power in order to make beneficial use of them, namely the power to direct the bank how the funds due to him are to be applied, as by writing a cheque or directing a credit transfer. In my opinion there is no material difference between that power and the powers that the employee-shareholders in the present case had to determine the beneficial use of the funds provided by the appellants as employer. This accords with the test applied in Garforth, where Walton J held that payment occurred “when money is placed unreservedly at the disposal of directors by a company” (52 TC 529). Nothing is said there about any need for a “clear” or “direct” legal right to payment; Walton J rather considered that it was the practical ability to make use of the funds that was important.
[39] Reference was also made to Spectrum Computer Supplies Ltd v Revenue and Customs Commissioners, [2006] STC (SCD) 668, a case where a director was paid a bonus by the assignment of trade debts due to his employer. The Special Commissioners applied the Ramsay principle and held that the assignments were payments and consequently subject to the PAYE regime. It was pointed out (at paragraph 18) that where a debt is payable on demand, as is the case with a cheque, it is traditionally treated as cash even though conceptually it is a debt due from the bank, a situation that was not unlike the book debts that had been assigned in that case. Nevertheless, the Special Commissioners analyzed the transaction as amounting, realistically, to a mechanism to deliver cash rather than to give the employee an asset that could be enjoyed in kind. In effect, it was held that some assets are as good as cash and should be treated as such for the purposes of the PAYE legislation. I agree entirely with such an approach, which seems to me inconsistent with the argument for the appellants.
[40] Counsel for the appellants also sought to draw a distinction between actual and notional payments for the purposes of the PAYE legislation. He submitted that the PAYE code made special provision for notional payments in sections such as sections 202B(11), 203F and 203J. The distinction, it was said, appeared clearly from the wording of section 202B, which dealt with the timing of receipts when payment was made in cash but did not apply to emoluments that took the form of benefits not consisting of money (the expression used in section 202B(11)). Section 203(1), like section 202 B, was concerned with actual rather than notional payments, and that meant payment in the form of money or in cash. In the present case, there was no cash payment, and consequently section 203(1) could not apply. In my opinion this argument must be rejected. It is based on the view that a hard and fast distinction is drawn in the legislation between actual and notional payments, but that is not justified by the terms of the legislation. Section 203F deals with the provision of assessable income “in the form of a readily convertible asset”; in such a case the employer is treated for the purpose of the PAYE regulations as making a payment of income of an amount calculated in accordance with the provisions of the section. Subsection (4) indicates that, for the purposes of that section, “asset” does not include “any payment actually made of, or on account of, assessable income”. That makes it clear that if an employee receives cash or something that is as good as cash, such as the trade debts assigned in Spectrum, it is section 203(1) that applies and not the special provisions in section 203F; the latter provisions do not apply to anything that is otherwise to be considered as a payment. The same point can be made about section 202B; that section is concerned with the timing of receipts, and contains a number of rules applying in different circumstances, but these do not have any bearing on whether a particular receipt is properly to be considered a “payment” for the purposes of section 203(1).
[41] A further argument presented on behalf of the appellants was that the requirement under the PAYE legislation that Schedule E tax should be deducted from emoluments paid to employees could not be operated in the present case. Deductibility was central to the PAYE system, and thus the PAYE legislation simply had no application to the present circumstances. It had been suggested by HMRC that that deduction of tax could be achieved through the declaration of a dividend by the directors of the money box company before they paid funds to the employee-shareholder, so that they might have the funds to pay the Schedule E tax to HMRC. This construction was described as “strained”. The answer to this point is in my opinion that it was clear from the outset that the Scheme involved the making of a payment to the employees concerned that was assessable to Schedule E tax. Consequently the appellants ought to have deducted tax at the time when they transferred funds to the EBT with a view to funding the scheme and thus paying benefits to their employees. That would have been a simple and straightforward procedure. For this reason I consider that there is no force in this argument for the appellants.
[42] The Upper Tribunal decided the Ramsay/cash box issue in favour of the appellants. It held (at paragraphs 81-83) that the Scheme itself ended with the transfer of shares to the employee-shareholder, and did not provide the employee with cash or money in his own bank account. The employee could in practice extract the cash from the company whenever he wished, but he had no present right to receipt of the cash from the company when its shares were transferred to him. The judge of the Upper Tribunal stated (at paragraph 82):
“There is a difference, in my view, between an immediate right to obtain money (e.g. by drawing on a bank account to which salary has been credited by direct debit or cheque) and obtaining money only after the implementation of a procedure required by company law. This is not a case where it is possible to lift the corporate veil so as to treat the company’s money as that of the Employee. Nor, on the findings of fact, is this a case where the composite transaction ends up with money (in the conventional sense) in the hands of the Employee (e.g. in his bank account). Indeed, it needs always to be remembered that the emolument in question is the shares and not the money in the company”.
This reasoning is similar to the primary argument presented for the appellants as set out at paragraph [37] above, and in my opinion it falls to be rejected for the reasons already discussed in relation to that argument.
[43] In particular, this reasoning appears contrary to the formulation adopted in Garforth, where Walton J held (at 529) that there is an equivalent to payment when money is “placed unreservedly at the disposal” of employees by an employer. In that test, the focus is on the power that the employee has to make use of the money as a medium of exchange; that is the clear implication of the word “disposal”, which points towards the practical use of the funds. Moreover, the Upper Tribunal’s reasoning appears contrary to the Ramsay principle, which requires the court to consider the transaction “realistically”. The First-tier Tribunal held that the Scheme was conceived as a whole, to transfer money to employees. They further held that the funds that were paid into the money box companies under the Scheme were in practice used in the manner that the employee-shareholders requested, without the need to use any company law powers. The latter powers were there as an ultimate means of enforcement. Nevertheless, their existence is important because that indicates very clearly that the funds in the companies were at the disposal of the employees in a way that could if necessary be enforced by law.
[44] In that respect the position of the employees was not in my view significantly different from the case of an employee who has funds paid into his bank account, where as a matter of strict law he must exercise the power to give instructions to the bank in order to obtain the use of the funds. Likewise it is not different from the situation in Spectrum, where the directors were assigned trade debts. It was found in that case that it was overwhelmingly likely that the debts would be paid, just as it was found in the present case that the directors of the money box companies would in reality distribute or deal with the pot of money in accordance with the employee-shareholder’s wishes (First-tier Tribunal, paragraph 54). In both cases powers are available to enforce the obligation, by raising a court action against the trade debtors or by using company law procedures to ensure compliant directors. Nevertheless, in both cases funds provided by an employer, directly or indirectly, were placed at the unreserved disposal of employees, to use for such purposes as they wished. That in my opinion is the essential criterion, not the incidental issue of whether there is something that can be described as a “direct legal right” to payment of the funds. Adopting the notion of a “direct legal right” as a criterion would in my opinion fail to construe section 203(1) in a purposive manner, and would fail to have regard to a realistic appraisal of the transaction considered as a whole.
[45] The Upper Tribunal referred to the fact that the emolument in question was the shares and not the money in the company (paragraph 82). Nevertheless, it was through those shares that the funds in the company were placed at the unqualified disposal of the employees. The shares were merely a means to an end; the end was providing the employees with the funds, and that was in my view a “payment” for the purposes of section 203(1). To hold otherwise would fail to give effect to the clear purpose of that statutory provision. Reference was also made by the Upper Tribunal to the fact that this was not a case where the corporate veil could be lifted. Counsel for HMRC made it clear that he did not advance any argument based on lifting the corporate veil; his position was rather based on the proposition that because of their position as, ultimately, 100% shareholders the employees had funds placed at their unqualified disposal. I agree with that analysis.
The readily convertible assets issue
[46] If the employees’ control of the cash in the money box companies rendered the transaction a “payment” for the purposes of section 203(1), that is sufficient to hold that the PAYE system applies to those payments and on that ground to allow HMRC’s cross-appeal and uphold the decision of the First-tier Tribunal. Indeed, if the transfer of funds under the Scheme amounted to a “payment” in terms of section 203(1), the provisions of section 203F dealing with tradeable assets are not relevant; generally speaking, the provisions dealing with “payment” in the ordinary sense and those dealing with readily convertible assets (which involve a deemed payment) are mutually exclusive. Nevertheless, a full argument was presented on the other question in dispute, the readily convertible assets issue, on which both the First-tier Tribunal and the Upper Tribunal found in favour of HMRC. Consequently I propose to deal with that issue in addition. In my opinion the First-tier Tribunal and Upper Tribunal reached the correct conclusion on the readily convertible assets issue. Consequently, even if I am wrong on the Ramsay/cash box issue, the PAYE regime is still applicable on this alternative ground.
The relevant legislation and its interpretation
[47] The relevant legislation is found in section 203F of the Taxes Act 1988. Section 203F(1) provides that, where any assessable income of an employee is provided in the form of a readily convertible asset, the employer is to be treated for the purposes of PAYE regulations as making a payment of that income of an amount equal to the amount specified in subsection (3). That amount is the best estimate that can reasonably be made of the amount of income likely to be chargeable to Schedule E tax in respect of the provision of the asset. “Readily convertible asset” is defined in subsection (2). For present purposes the critical paragraph of that subsection is paragraph (f), which refers to “an asset for which trading arrangements are in existence”. “Trading arrangements” are defined in subsection (3A); they exist for any asset provided to a person “whenever there exist any arrangements the effect of which in relation to that asset to enable that person… to obtain an amount or total amount of money that is, or is likely to be, similar to the expense incurred in the provision of that asset”. The word “arrangements” is not defined. Subsection (3B)(a) provides that references to enabling a person to obtain an amount of money shall be construed as references to enabling an amount so to be obtained “by any means at all”, including the use of any rights comprised in or attached to any asset or other property to obtain an asset for which trading arrangements exist.
[48] The Ramsay principle is potentially relevant to the construction of all tax legislation, and it is as relevant to the construction of section 203F as it is to the other provisions governing Schedule E tax and PAYE liability. Thus that section must be construed purposively and applied to a realistic assessment of the facts of the case. The purpose underlying section 203F is clearly to bring certain transfers of assets made by employers to employees by way of remuneration for services into the PAYE system. The criterion that has applied for determining whether remuneration should be brought within the PAYE system is that it should be in the form of a “readily convertible asset”, which indicates that the asset must be capable of fairly straightforward conversion into cash, and thereby valued. That is clear from the various examples given in subsection (2). The first two of these, found in paragraphs (a) and (b), relate to assets that can be sold or otherwise realized on certain recognized exchanges or markets. In these cases the ability to convert the asset into cash in a straightforward manner is very clear. Paragraph (c) relates to an asset which consists of rights in a money debt that is or may become due to the employer or any other person. This is obviously designed to cover the type of situation that was considered in Spectrum. A money debt will be payable at the due date, and thus it will automatically convert itself into cash. Paragraph (d) relates to property subject to a fiscal warehousing regime. This is a more unusual situation, but in such cases the convertibility of the asset is likely to be clear.
[49] Paragraph (e) relates to an asset “consisting in anything that is likely (without anything being done by the employee) to give rise to, or to become, a right enabling a person to obtain an amount or total amount of money which is likely to be similar to the expense incurred in the provision of the asset”. This relates to an asset that may change in form but is ultimately likely, without any action on the part of the employee, to provide him with a sum of money similar to the amount that providing that asset cost the employer. This would cover a wide range of rights that pass through different legal forms before finally yielding a financial benefit. In each case it is essential that the employee should not be required to do anything in order to obtain the ultimate sum of money. Paragraphs (f) and (g) relate to trading arrangements; the former covers assets for which trading arrangements are already in existence and the latter assets for which trading arrangements are likely to come into existence in certain circumstances. It is paragraph (f) that is relied on by HMRC in the present case. Subsection (3A), quoted above, defines trading arrangements in a manner that relates to the ultimate result of the arrangements, namely to realize a sum of money similar to the expense incurred in providing the asset. The criterion running through the various paragraphs of subsection (2) is that the assets should be convertible into cash with reasonable ease, and that is clearly what underlies subsection (3A). Nothing more is said, either in that subsection or elsewhere, as to the criteria that are required for “trading arrangements”. Subsection (3B), however, indicates that for the purposes of the section there is no limitation on the means whereby cash may be obtained from an asset. Subsection (5) states that “asset” includes any property. In these circumstances I am of opinion that the words “trading arrangements” must be given their ordinary meaning, in such a way as to facilitate the essential purpose of section 203F, namely that assets that can readily be converted into money should be brought within the PAYE system.
The relevant facts
[50] The readily convertible assets issue proceeds on the hypothesis that what the benefited employees received was shares in the money box companies rather than a payment equivalent to cash. The facts that are relevant are essentially the same as those set out at paragraphs [28]-[32] above. It is of particular importance, however, that the First-tier Tribunal found that the assets of the money box companies consisted of cash and that the employee-shareholders were capable of obtaining benefits from that cash in a range of different ways, including the making of loans, the payment of a dividend, and the purchase of land. The assets of the company, in the form of cash, were effectively at the disposal of the employee, and could be realized accordingly. The critical point is that the employee-shareholders were able to convert their shares into cash and that cash was, ultimately, equivalent to the sums of money that the appellants had paid through the Scheme into the money box companies. The Upper Tribunal made similar points, indicating that the employees had access to the pot of money contained within the corporate money box. In this way they were obviously able to realize the value of their shares in a relatively straightforward manner.
The reasoning of the First-tier Tribunal and Upper Tribunal
[51] For the appellants it was contended that on a proper construction of the legislation a “trading arrangement” in relation to an asset must be an agreement, plan or understanding which has an existence distinct from the asset itself. It could not be wholly intrinsic to the asset. Support for such a view was said to come from DTE Financial Services Ltd v Wilson, supra, at paragraph [47]; I discuss this case below. The First-tier Tribunal distinguished that case and held (paragraph 104) that the shares issued to each of the benefited employees fell within section 203F by virtue of subsection (5). The offshore companies had been primed with money equal to the amount of additional remuneration or benefit which the Remuneration Committee recommended the employee should receive, and the “effect” (the word used in section 203F(3A)) of the arrangements was that the employee was able to obtain an amount of money by, for example, a loan. While the Scheme was exhausted once the shares were transferred to the employee, the underlying arrangements created by it remained in existence, and the money box company remained in existence. The pot of money remained in the company, which had no real function other than to serve the wishes of the employee. It followed (paragraph 105) that section 203F(2)(f) was applicable. The arrangements enabled the employee to use the asset to obtain money equal to the amount subscribed for shares. The bundle of rights inherent in the shares enabled him to use company law procedures to secure the granting of funds. It was, however, the pre-existing arrangements, in the form of the Scheme which created the money box company, that enabled the employee to obtain the amount in question. But for these arrangements, the shares themselves would have no significant value. The provision of valuable shares was the culmination or result of the underlying arrangements. Whether or not that was described as an arrangement extraneous to the asset, the ingredients of section 203F(3A) were all present; arrangements existed whereby employees could obtain an amount of money that was similar to the expense incurred in the provision of the funds in the money box companies.
[52] The Upper Tribunal held that section 203F(2)(f) was applicable (paragraphs 94-98). It held that, even if “arrangements” must involve an agreement or plan or understanding, there was no reason why such an agreement, plan or understanding should not involve factors that are not extraneous to the asset concerned. On the facts of the present case, if the winding up of the money box company was necessary to realize its assets, whether cash or anything else, there was no reason why that should not form part of the “arrangements” contemplated by subsection (3A); those “arrangements” would be the arrangement to enable the shareholder to realize the company’s assets. If it were necessary to identify an agreement, plan or understanding, that could be found in the company’s own constitution, which governed the relationship between the company itself as a separate entity and the shareholders. The articles of association are regarded as a contract in the United Kingdom. While the money box companies were incorporated in the Isle of Man, it has been assumed throughout the case that the law of the Isle of Man is the same as the lex fori, Scots law. Such a structure was capable of amounting to “arrangements” in relation to the company. In any event, it was not necessary to demonstrate the existence of an agreement, plan or understanding before there could be “arrangements” within subsection (3A); the very presence of powers which can be exercised unilaterally by the shareholder in such a way as to enable the shareholder to obtain money was of itself sufficient to amount to “arrangements”. In that way the shareholder was able to obtain cash which was of an amount similar to the expense incurred in providing the shares.
Analysis
[53] In my opinion the conclusions reached by the First-tier Tribunal and the Upper Tribunal on the readily convertible assets issue were correct. In particular, they were correct in holding that for a “trading arrangement” to exist in relation to an asset for the purposes of section 203F(2)(f) it is not necessary to have an agreement, plan or understanding which has an existence distinct from the asset so that it can be considered extraneous to the asset. I reach this conclusion for two reasons. In the first place, the wording of section 203F does not at any point indicate a requirement that the trading arrangements should be extraneous to the asset. Nor in my view can any such requirement be implied. Subsection (3A) requires the existence of arrangements “the effect of which in relation to that asset” is to enable the benefited employee to obtain a sum of money similar to the expense incurred in providing the asset. That definition operates by reference to the effect of the arrangements rather than their underlying nature or their source. That leaves the general notion of “arrangements”. That word, however, is one of very wide import; it will usually refer to a contract or series of contracts, but the word is clearly chosen to take in more than a mere contract, and trusts and companies, with their attendant legal relationships, can readily be covered by it. Where the arrangements originate is not touched upon, and in my view it cannot matter that they are created, in whole or in part, by the asset to which they relate. Indeed, where that asset is a share or shares in a company, the arrangements to deal with the asset and thus realize its value in monetary terms will almost inevitably arise in part from the terms of the share: the ability to deal with the share arises out of the contract between the shareholder and the company and the memorandum and articles of association of the company, which are, in Scots and English law at least, a contract among the shareholders. Indeed, a company may now have power to buy its own shares, and in such a case the share can be realized by selling it to the company. If the company regularly buys its own shares, as occurs with open-ended investment companies, there is a ready market for the shares, but it is entirely internal to the company. In such a case, however, it is difficult to say that there are no “trading arrangements” for the shares.
[54] In the second place, a purposive construction of section 203F(2)(f), in the context of the code dealing with Schedule E and PAYE, makes it clear that that paragraph should apply to any case where arrangements have been set up which enable an asset to be readily converted into cash. On that view, there is no basis for implying a condition that the arrangements must in some way originate extraneously to the asset. In the present case, where an employee obtains the whole shareholding in a cash-rich company and can use that shareholding to obtain the use of the cash in the company for his own benefit, it would be quite extraordinary if the paragraph did not apply: arrangements exist which can be used by the employee to turn his interest in the company into cash. Thus a purposive construction strongly supports the application of section 203F(2)(f).
[55] In advancing their argument on section 203F(2)f), the appellants relied strongly on certain remarks made in the Court of Appeal in DTE v Wilson, supra. That case involved a tax avoidance scheme designed to avoid liability for NICs and to make payments to employees in a manner that fell outside the PAYE system. The relevant legislation was that for the tax year 1995/1996; in relation to section 203F, this differs in certain important respects from the legislation applicable to the present case, which relates to the tax years 2000/2001, 2001/2002 and 2002/2003. In DTE it was held that the scheme failed because the sums obtained by the employee were a “payment” within the meaning of section 203(1); the Ramsay principle was invoked in reaching that conclusion. A second issue was argued in the case, however, namely the construction of section 203F in the form which then existed. On this, Jonathan Parker LJ, who delivered the principal opinion in the Court of Appeal, referred (at paragraph 46) to a submission that one could not find the existence of “trading arrangements” relating to an asset by analyzing the incidents of the asset itself. That submission was accepted (paragraph 47). Jonathan Parker LJ stated:
“As I read it, section 203F contemplates trading arrangements which are extraneous to the asset itself: see in particular the definition of ‘tradeable asset’ in section 203F(2)(c) as including ‘any other asset for which, at the time the asset is provided, trading arrangements exist’. The definition of ‘trading arrangements’ in section 203K(2)(a) as meaning, in relation to an asset, ‘arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset’ seems to me to provide further support for this interpretation”.
[56] As I have mentioned, the wording of the legislation has now been altered. The current version of section 203F, at subsection (2)(f), does not have the words “for which, at the time the asset is provided”. Thus the statutory wording has been widened by taking out any reference to the time of provision. Furthermore, the definition of “trading arrangements” that is relevant to the present case, that in section 203F(3A), is significantly different from the former section 203K(2). Section 203F(3A) refers to arrangements “the effect of which… is to enable that person… to obtain an amount or total amount of money that is, or is likely to be, similar to the expense incurred in the provision of that asset”. Section 203K(2), by contrast, referred to arrangements “for the purpose” of enabling a person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset. Once again, the wording applicable to the present case is wider, in that it no longer requires the purpose of enabling the person concerned to obtain an amount of money; such an effect is sufficient by itself. These changes in the legislation make important changes to the wording that was considered in DTE, widening it substantially and altering its time focus. In my opinion the wording that is now used must be interpreted as suggested in paragraphs [53] and [54] above. Consequently the passage in DTE quoted above, which is technically obiter, cannot in my view be regarded as any longer representing the law.
[57] Furthermore, even if there exists a requirement under section 203F(2)(f) that the trading arrangements must be found in an agreement plan or understanding which has an existence distinct from the asset itself, I am of opinion that such a requirement is satisfied in the present case. The asset takes the form of shares in one of the money box companies. The arrangements for the realization of that asset, however, are dependent not only on the contracts between the shareholder and the company which give rise to the shares but also on the contract constituted by the company’s articles of association (a contract among the company and the shareholders, on which the company is based). Furthermore, the practice whereby the directors of the company give effect to the wishes of the shareholder must also in my view form part of those arrangements. The ability of the employee-shareholder to extract money from the company is entirely dependent on both of those features. Normally, as long as the directors are compliant, the second feature is sufficient. If, however, the defenders should become reluctant to implement the wishes of the shareholder, the former feature would be important in that it is the articles together with the relevant provisions of the companies legislation that give the shareholder the power to remove the directors. Consequently it cannot be said that the trading arrangements consist only of the relevant asset, the share; they are much wider than that.
[58] Finally, I should note a further argument advanced by the appellants, namely that the wide construction of section 203F(2)(f) adopted by the Upper Tribunal deprived other parts of the definition of “readily convertible asset” in subsection (2) of content. In particular, it was suggested that that construction meant that there was no need for the listing of specific assets in paragraphs (a)-(c) of that subsection. The answer to this is in my opinion that the various paragraphs within subsection (2) are not intended to be mutually exclusive. Paragraphs (a) and (b) are designed to cover established exchanges, where the easy convertibility of the asset is very obvious. Paragraph (c) is intended to deal with the type of case that had been anticipated in Spectrum Computer Supplies Ltd, supra. Paragraph (d) was designed to deal with a further type of specific trading regime. It is apparent that these provisions, most obviously paragraph (c), are designed to deal with very specific situations. The remaining paragraphs, however, are more general in their import. That is a perfectly legitimate drafting technique, and when it is used it cannot be inferred from the existence of the specific provisions that the more general ones must be restrictively construed; the specific provisions are inserted to deal with particular, identifiable cases, and the more general provisions are included to catch other, more amorphous, situations. To interpret the legislation otherwise would ignore its fundamental purposes, and thus would contravene the Ramsay principle.
Conclusion
[59] For the foregoing reasons I am of opinion that the effect of the scheme was that a payment was made to each of the employees for the purposes of section 203(1) of the Taxes Act 1988. If that is wrong, I am of opinion that the effect of the Scheme was that the employee-shareholder was given a readily convertible asset, on a proper interpretation of section 203F(2)(f) of the same Act. On either basis, the amounts received by the relevant employee were subject to PAYE. I accordingly consider that the cross-appeal by HMRC must be sustained and the appeal by the appellants refused.
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
| | [2013] CSIH 84 |
Lord President Lord Drummond Young Lord Glennie | XA100/12 OPINION OF LORD GLENNIE in the Appeal to the Court of Session under section13 of the Tribunals, Courts and Enforcement Act 2007 by ABERDEEN ASSET MANAGEMENT PLC Appellants; against THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS Respondents: In respect of a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 31 January 2012 _______________ |
Act: A Young, QC; Pinsent Masons LLP
Alt: Ghosh, QC; Artis; Solicitor to the Advocate General
23 October 2013
[60] I agree, for the reasons given by your Lordships, that the taxpayers’ appeal should be refused and the cross-appeal by HMRC allowed. In deference to the careful arguments advanced before us, I should just add a few words of my own.
[61] The First-tier Tribunal held that the Scheme failed because the grant of the share options to the FBT did not have the effect of diluting the value of the two original shares at the time they were transferred to the relevant employee. That decision is not challenged. The only remaining question is as to where the liability to pay the income tax on the bonuses paid to the employees under the Scheme lay: with the appellants or with the individual employees? This depends upon whether the transfers under the Scheme fall within the PAYE regime.
[62] It is important to note that an appeal from the First-tier Tribunal to the Upper Tribunal lies only on a point of law: s 11(1) of the Tribunals, Courts and Enforcement Act 2007. So too, an appeal to this court lies only on a point of law: ibid. s.13(1). It follows that, in deciding the questions raised on this appeal and cross-appeal, this court is bound by the findings of fact made by the First-tier Tribunal.
[63] It is convenient to consider the cross-appeal first. This has been described as the “Ramsay/ cash box issue”. The question is: did the transfer of the shares to the employee under the Scheme amount to “payment” within the meaning of that word in s 203(1) of the Taxes Act? If it did, the PAYE regime applies and the appellants are liable for the tax.
[64] For the purposes of this issue, the relevant findings of fact are summarised in the Opinion of Lord Drummond Young. They include the findings, in paragraph 42 of the Decision of the First-tier Tribunal (the paragraph numbering is somewhat erratic), that “the structures put in place simply operated as means of channelling the additional remuneration from employer to employee”; that “the cash is put into the hands of the employees by the transfer to them of the control of the offshore money box company which has no assets other than the cash injected by the EBT received from the appellants”; that “each employee is given the key to the money box”; that “the assets of the company, namely cash, are effectively at the disposal of the employee”; and that “the facts, viewed realistically, show unequivocally that control is vested in the employee who has access to the pot of money contained within the corporate money box.”
[65] The word “payment” is not defined in the PAYE provisions. I agree with Lord Drummond Young in rejecting, for the reasons he gives, the argument – based on a distinction between actual payment in sub-section (1) of s.202B and notional payment in sub-sections (8)-(11) thereof and a comparison of that section with s.203A(1) – that payment for the purposes of ss.203(1) and 203A means actual or cash payment. That, as he says, is too narrow a reading of the word. It is clear from the authorities to which we were referred that for the purpose of PAYE and National Insurance Contributions, “payment” can include the crediting of a bonus to a director’s current account with the company (Garforth v Newsmith Stainless Ltd 1978 52 TC 522, a PAYE case) and the payment of a bonus by assignment to the employee of book debts due to the employer (Spectrum Computer Supplies Ltd v Revenue and Customs Commissioners [2006] STC (SCD) 668, a case concerned with National Insurance Contributions). In Garforth, at p.528, Walton J quoted Jenkins LJ in Re Vestey’s Settlement [1950] 2 All ER 891, 901 as supporting the proposition that the word “payment” has no one settled meaning but takes its colour from the context in which it is found. He went on to say, in the context of the PAYE provisions, that “when money is placed unreservedly at the disposal of directors by a company that is equivalent to payment”.
[66] Mr Young QC, for the taxpayer, sought to contrast this case with cases such as Garforth. In Garforth, he submitted, the directors had a legal right to sums in the current account with the company. In contrast, in the present case, the rights incidental to ownership of the shares in the companies gave no legal or direct right to the money; the companies’ assets were controlled and managed by the directors. That may be so, but the test is a practical one, to be determined as a matter of fact. The findings of the First-tier Tribunal, to which I have referred, are findings in fact that the effect of the Scheme was to place the money in the money box companies unreservedly at the disposal of the individual employees to whom the shares were allotted. Those findings are, in my view, determinative of this argument. What happened under the Scheme amounted to payment.
[67] I was at one point troubled by the submission that, under a Scheme such as this, the PAYE provisions in s 203(1) requiring the person making the payment to deduct the income tax from the payment made (and to account to HMRC for the tax so deducted) could not work in practice; and that this showed that the conferring of benefits in this way was not to be treated as a payment for the purpose of the PAYE provisions. I was not attracted to the “strained” construction of s 203 advanced by HMRC to answer this concern, under which it was suggested that the deduction could be achieved by the declaration of a dividend by the directors of the money box company before funds were paid to the employee (the shareholder in the money box company). In argument before us, however, Mr Ghosh QC, for HMRC, recognised the artificiality of that approach. He reminded us that the transactions comprising the Scheme should be viewed as one. It was wrong to look at the deduction question solely in relation to the transfer of the shares. That was too narrow a focus. The overall effect of the Scheme was to make a payment of the money in the money box companies and to put that money unreservedly at the disposal of the employee. The appellants could have complied with their obligation under s 203(1) to deduct the income tax before making payment to the employee simply by deducting the tax from the amount of money which they paid or caused to be paid into the money box company. This seems to me to provide an attractive and satisfactory solution to the problem.
[68] The appellants’ appeal on the “readily convertible assets” issue raises, to my mind, a short point of construction. The point of law focused in their Note of Arguments is simply this: whether the “trading arrangements” referred to in s 203F(2)(f), the existence of which makes the asset “readily convertible” for the purpose of s 203(1), require to have an existence distinct from the asset itself. They argue that the Upper Tribunal was wrong to hold that such arrangements could be wholly intrinsic to the asset.
[69] The argument for the appellants is based first on the wording of s 203F(2)(f), which defines a “readily convertible asset” as including “an asset for which trading arrangements are in existence” (emphasis added). They submit that the words “for which” suggest that the trading arrangements are separate from the asset itself. They also rely upon s 203F(3A), which provides that “trading arrangements” for any asset exist “whenever there exist any arrangements the effect of which in relation to that asset is to enable that person … to obtain an amount [of money]” (emphasis added). They submit that this language also suggests a separation between the asset and the trading arrangement. Finally, they rely upon s 203F(3B)(a)(ii), which explains that the reference to enabling money to be obtained is to be construed as a reference to enabling an amount to be obtained by that person by any means at all, including “by using any rights comprised in or attached to any asset or other property to obtain any asset for which trading arrangements exist”. That too, they say, points to the trading arrangements being separate from and extrinsic to the asset itself.
[70] The appellants describe their submission as being based upon “a close textual analysis” of the provisions. For my part, I do not consider that a close textual analysis leads to the conclusion for which the appellants contend. The words relied upon are, at best, neutral on this issue. In the absence of wording pointing clearly to the result contended for, I would be reluctant to decide the case on a close textual analysis in the absence of some reason being identified as to why the framers of the PAYE provisions in the legislation should have thought it important to distinguish between trading arrangements intrinsic to the asset and trading arrangements extrinsic to it. No such reason was put forward.
[71] So far as concerns the reliance placed upon the obiter remarks of Jonathan Parker LJ in DTE Financial Services Limited v Wilson [2001] EWCA Civ 455 at para.47, it is sufficient for present purposes to note that the wording which he was considering is different from that in the provisions under consideration in this appeal. The wording with which he was concerned, and which seemed to influence him in his reading of the relevant provision, required the trading arrangements to be in existence at the time the asset was provided; and defined the necessary arrangements as being “for the purpose of enabling the person to whom the asset is provided” to obtain money. There is no such wording in the provisions with which we are concerned.
[72] The First-tier Tribunal found as a fact (in paras.104-105) what the trading arrangements were. The asset comprised the shares in the money box company. The money box company existed by reason of arrangements which had previously been made, the effect of which arrangements was that the employee was able to obtain money by means of, for example, a loan, which would not be repaid, equal to the amount subscribed for the shares. The bundle of rights comprising the shares enabled him to use company law procedures to secure the granting of the loan. The provision of the shares was the culmination of those underlying arrangements. Those were the “trading arrangements”, the effect of which was to enable the employee to obtain money. The First-tier Tribunal did not in terms decide whether or not such arrangements were properly described as an arrangement “extraneous to the asset”, but they were in no doubt that it satisfied the test in s.203F(3A). There can be no doubt that the trading arrangements which they describe are in large part, if not wholly, extrinsic to the asset itself. In those circumstances the point of law raised by the appellants is, to my mind, academic and irrelevant to the disposal of this appeal.
[73] For those reasons, which add little (if anything) to those given by your Lordships, I too would dismiss the appellants’ appeal and allow the cross-appeal by HMRC.