To what extent can the Ramsay principle (W T Ramsay Ltd v IRC [1982] AC 300; Eilbeck (Insp. of Taxes) v Rawling [1982] AC 300, [1981] 1 All ER 865) be applied to tax avoidance schemes involving employee bonuses?
In HMRC v UBS AG; DB Group Services (UK) Ltd v HMRC [2014] EWCA Civ 452, the Court of Appeal declined to apply Ramsay, despite acknowledging that elements of the schemes had no commercial purpose.
What issues did this case raise?
The case concerned two tax avoidance schemes that had been put in place by UBS and DB in 2003/04. The intention of the schemes was to deliver cash bonuses to employees free of income tax and national insurance contributions. The schemes involved the establishment of a special purpose vehicle (SPV) in which employees acquired non-voting shares that could be redeemed for cash.
The intention of the schemes was to bring the shares within ITEPA 2003 Part 7 Chapter 2 by making them subject to a restriction which reduced their market value. There was an exemption from income tax under Chapter 2 on the lifting of restrictions, provided that certain conditions were satisfied.
After the FTT found in favour of HMRC, the UT allowed the UBS appeal but dismissed the DB appeal.
One of the key issues concerned the application of the Ramsay principle to the schemes. HMRC argued that as the arrangements were simply a vehicle for delivering cash and had no commercial purpose, only a tax avoidance purpose, they should be ignored in accordance with Ramsay. It also argued that any restrictions on the SPV shares should be ignored, as they were imposed purely to bring the shares within Chapter 2.
The Court of Appeal found against HMRC on both Ramsay arguments. It held that if the legislation provided an exemption from tax provided certain conditions were met, and the arrangements were structured to come squarely within that exemption, there was no reason why the taxpayer should not be able to rely on that exemption. The employees acquired real shares which were redeemed over a period of two years (for varying amounts), so the schemes could not be recharacterised as involving only payments of money.
Another key issue considered by the court was whether UBS/DB had control of the relevant SPV. If the SPV was deemed to be under the control of UBS/DB, the exemption from tax under Chapter 2 would not apply. HMRC claimed UBS/DB had effective control, as the majority shareholder in the SPV (which was an independent offshore company in both schemes) was bound to follow UBS/DB’s instructions. However, the court decided in favour of the taxpayer on the control point in both cases.
To what extent does the judgment clarify the law?
There have been several recent cases involving employment tax avoidance schemes, such as Aberdeen Asset Management PLC v HMRC [2014] STC 438, Tower Radio Ltd v HMRC [2014] SFTD 377, and Murray Group Holdings v HMRC [2013] SFTD 149 (the Rangers case). On the face of it, the Aberdeen Asset Management judgment by the Court of Session in Scotland would seem to be inconsistent with the Court of Appeal’s decision in UBS/DB.
However, a key factor in the UBS/DB decision was that the schemes in question were intended to take advantage of a specific exemption in the restricted securities legislation. When applying Ramsay, the first step is to identify the purpose of the legislation, before then analysing how the reality of the arrangement fits in with that purpose. The court held there was no adequate evidence as to what the purpose of the relevant exemption in Chapter 2 was, and therefore the UBS/DB arrangements could not be inconsistent with that purpose.
What does this mean for HMRC?
The legislation relied upon by UBS/DB to provide an exemption from income tax under Chapter 2 was amended in 2004 to exclude any arrangements which had a tax avoidance purpose. However, the decision will be important to HMRC in the context of the other tax avoidance cases that are going through the courts. Through this decision, the Court of Appeal has demonstrated that it is willing to decide in favour of the taxpayer, even in situations where it is openly acknowledged that an arrangement was put in place to avoid tax, and where the arrangement involved elements that had no commercial purpose.
What are the implications for practitioners?
When considering the arguments relating to UBS/DB’s control of the SPVs, the courts focused on the documentary evidence detailing the decision making. On the facts, it was found that the offshore companies had acted independently and had ‘held real meetings and made real decisions’. This is consistent with the FTT’s approach in the Rangers case, which considered carefully the nature of the relevant loan arrangements and whether there was a genuine exercise of discretion by the trustee of the relevant trusts. This illustrates the importance of properly documented decision making when implementing arrangements involving trusts or SPVs (whether they involve tax avoidance schemes or not).
What are the wider trends in this area?
The tax avoidance schemes under consideration were put in place in a different era. Not only is the current legislation much more restrictive in terms of the scope for putting in place such avoidance schemes, but companies are also increasingly taking into account public perception and the political focus on tax avoidance.
However, the judgment serves as a reminder that, notwithstanding the current mood about bankers’ bonuses and tax avoidance, it is the role of the courts to make decisions on the basis of legislation and case law, rather than moral or political considerations.
