Jones Bros Ruthin (Civil Engineering) Co Ltd and Britannia Hotels Ltd v HMRC [2022] UKFTT 26 (TC) (reported in Tax Journal, 11 February 2022) was a lead case in which the First-tier Tribunal (FTT) considered tax planning put into place by Britannia Hotels Ltd and others.
The bare outline of the planning was that instead of remunerating employees with bonuses subject to income tax and NICs, the employer would provide them with what purported to be ‘contracts for differences’ (CFDs) virtually certain to deliver what was hoped to be a profit subject only to capital gains tax.
In a lengthy and delayed judgment (the case was heard in March 2021 but the decision released only last month), the FTT decided that the planning failed to achieve its objective because the arrangements did not bring into existence anything that fell within the meaning of ‘contracts for differences or contracts similar to differences’. That was, in the view of the FTT, a commercial concept and must be construed as requiring a commercial or business purpose. The FTT took the view that ‘the scope of the provisions does not extend to commercially irrelevant features, the only purpose of which is to bring the arrangements within the legislation to obtain the tax benefit’. In this, the FTT echoed the Supreme Court’s decision in UBS AG v HMRC [2016] UKCS 13.
Essentially, therefore, the FTT held that although the arrangements had been designed to have something of the appearance of CFDs, the lack of any commercial purpose denatured them.
In particular, it is a fundamental characteristic of a CFD that it is, er, a contract for a difference. The FTT cited the definition given by the European Securities and Markets Authority:
‘A CFD is an agreement ... to exchange the difference between the current price of an underlying asset (shares, currencies, commodities, indices, etc.) and its price when the contract is closed. CFDs are leveraged products. They offer exposure to the markets while requiring you to only put down a small margin (“deposit”) of the total value of the trade. They allow investors to take advantage of prices moving up (by taking “long positions”) or prices moving down (by taking “short positions”) on underlying assets. When the contract is closed you will receive or pay the difference between the closing value and the opening value of the CFD and/or the underlying asset(s).’
This therefore implies a direct one-to-one correlation with movement in the underlying asset. That was not a characteristic of the arrangements in the present case, which were more in the nature of ‘hurdles’ that triggered entitlement to payments.
On the contrary, the evidence pointed to the arrangements as being nothing more than:
‘Contracts which were devised and intended to operate as a mechanism for the Appellants to pay cash bonuses as reward for the employees’ services without the liability to tax which would otherwise be due. The employees as either staff or directors were intended to receive the earnings under the arrangements and the Appellants intended to pay those earnings.’
The case is therefore another in the line of cases which the courts have approached by ‘taking a purposive approach on a realistic view of the facts’ and in which they have been ‘entitled to consider the wider circumstances relevant to the receipt of the payments in order to determine their character’.
In other words, the question that the courts will ask themselves is ‘What’s really going on here?’ – and they will make their decision accordingly.
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Britannia: contracts for differences
What’s really going on here?
Jones Bros Ruthin (Civil Engineering) Co Ltd and Britannia Hotels Ltd v HMRC [2022] UKFTT 26 (TC) (reported in Tax Journal, 11 February 2022) was a lead case in which the First-tier Tribunal (FTT) considered tax planning put into place by Britannia Hotels Ltd and others.
The bare outline of the planning was that instead of remunerating employees with bonuses subject to income tax and NICs, the employer would provide them with what purported to be ‘contracts for differences’ (CFDs) virtually certain to deliver what was hoped to be a profit subject only to capital gains tax.
In a lengthy and delayed judgment (the case was heard in March 2021 but the decision released only last month), the FTT decided that the planning failed to achieve its objective because the arrangements did not bring into existence anything that fell within the meaning of ‘contracts for differences or contracts similar to differences’. That was, in the view of the FTT, a commercial concept and must be construed as requiring a commercial or business purpose. The FTT took the view that ‘the scope of the provisions does not extend to commercially irrelevant features, the only purpose of which is to bring the arrangements within the legislation to obtain the tax benefit’. In this, the FTT echoed the Supreme Court’s decision in UBS AG v HMRC [2016] UKCS 13.
Essentially, therefore, the FTT held that although the arrangements had been designed to have something of the appearance of CFDs, the lack of any commercial purpose denatured them.
In particular, it is a fundamental characteristic of a CFD that it is, er, a contract for a difference. The FTT cited the definition given by the European Securities and Markets Authority:
‘A CFD is an agreement ... to exchange the difference between the current price of an underlying asset (shares, currencies, commodities, indices, etc.) and its price when the contract is closed. CFDs are leveraged products. They offer exposure to the markets while requiring you to only put down a small margin (“deposit”) of the total value of the trade. They allow investors to take advantage of prices moving up (by taking “long positions”) or prices moving down (by taking “short positions”) on underlying assets. When the contract is closed you will receive or pay the difference between the closing value and the opening value of the CFD and/or the underlying asset(s).’
This therefore implies a direct one-to-one correlation with movement in the underlying asset. That was not a characteristic of the arrangements in the present case, which were more in the nature of ‘hurdles’ that triggered entitlement to payments.
On the contrary, the evidence pointed to the arrangements as being nothing more than:
‘Contracts which were devised and intended to operate as a mechanism for the Appellants to pay cash bonuses as reward for the employees’ services without the liability to tax which would otherwise be due. The employees as either staff or directors were intended to receive the earnings under the arrangements and the Appellants intended to pay those earnings.’
The case is therefore another in the line of cases which the courts have approached by ‘taking a purposive approach on a realistic view of the facts’ and in which they have been ‘entitled to consider the wider circumstances relevant to the receipt of the payments in order to determine their character’.
In other words, the question that the courts will ask themselves is ‘What’s really going on here?’ – and they will make their decision accordingly.
