Remember the decision of the Upper Tribunal in Fisher v HMRC [2020] UKUT 62 (TCC)? An English company controlled by the taxpayers transferred its business to a Gibraltar company in order to avoid UK betting duty. The Upper Tribunal concluded that there was no tax avoidance purpose and so the income of the Gibraltar company could not be taxed on the Fisher family under the transfer of assets abroad regime.
In Davies and others v HMRC [2020] UKUT 67 (TCC) (reported in Tax Journal, 20 March 2020), an Isle of Man company transferred the right to acquire a development property in the UK to a Mauritius company. The taxpayers took out insurance policies in Bermuda under which the benefits payable were linked to the value of the Mauritius company. One of the purposes of the transfer was to avoid tax in the UK on the profits of the development by taking advantage of the UK/Mauritius double tax treaty. The Upper Tribunal decided that this was tax avoidance and that the taxpayers should therefore pay tax under the transfer assets abroad rules on the profits of the Mauritius company.
Whatever the courts may say, these decisions demonstrate that, ultimately, tax avoidance is all a matter of perception. As much as anybody may try to do so, it is impossible to define. HMRC’s favoured definition is that:
‘Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law.’
Why is setting up a company in Mauritius (which is within the scope of any tax which Mauritius chooses to charge) any more contrived or artificial or contrary to the intention of Parliament than setting up a company in Gibraltar (which charges a much lower rate of betting duty than the UK)?
The answer perhaps is to be found in the other reasons given by the taxpayers in each case for what had happened. In Fisher, it was a question of the company’s survival. All its competitors were operating in Gibraltar. If it did not move the business, it would simply not be competitive. The transaction had a compelling commercial reason.
On the other hand, in Davies, the reason given by the taxpayers for the creation of the structure was their desire to use the life policies which were linked to the value of the Mauritius company as a form of pension arrangement. This is very different from the overriding commercial imperative in Fisher, but it is nonetheless an argument which succeeded in the well known decision of the House of Lords in IRC v Willoughby [1997] 4 All ER 65.
The First-tier Tribunal (FTT) in Davies accepted that taking out a life policy is not tax avoidance (so the principle that opting into a specific statutory regime is not tax avoidance survives) but decided (without any real analysis) that using a Mauritius company in order to take advantage of a tax treaty did constitute tax avoidance. The Upper Tribunal did not analyse whether using a tax treaty in this way was in fact tax avoidance but simply decided that, on the facts, the FTT had been entitled to reach the conclusion that the taxpayers had a tax avoidance purpose.
It is hard not to have a suspicion that both tribunals in Davies were far from being persuaded by the taxpayers’ assertion that pension planning was their main objective rather than avoiding UK tax on the development profits.
So, what are the lessons to be learned? Perhaps the key point is that, in assessing whether it will be possible to persuade HMRC or a tribunal that a transaction does not have a tax avoidance purpose, the critical question to ask is whether, when you have told your story, you will be standing on the moral high ground. If what you have done looks a bit like a scheme, you will lose.
In reaching its decision, the Upper Tribunal has clarified two other points:
A taxpayer will not be able to rely on a double tax treaty to avoid a UK tax charge on income which is deemed to arise to them under the transfer of assets abroad rules. This is because the income on which they are taxed is income which is deemed to arise and not the actual income of the non‑resident recipient (in this case the income of the Mauritius company).
Even where relief from tax is, in principle, available under a double tax treaty, that relief will normally have to be claimed. If a claim is not made within the relevant time limit, the relief will not be available. It will therefore generally be necessary for the taxpayer to refer to a treaty claim in their self-assessment tax return although, in certain circumstances, if HMRC subsequently assess tax it may be possible to make a claim at that stage.
In the current climate, both HMRC and the courts are reluctant to allow treaty benefits to be claimed if the result is that the taxpayer will not pay tax in any jurisdiction. Although the Supreme Court recently noted in Fowler v HMRC [2020] UKSC 22 that double non-taxation was not a factor in the decision, it is difficult to read the judgment without feeling it informed the conclusion. Great care should therefore be taken in placing reliance on a treaty if double non-taxation would be the result.
Jennifer Smithson, Richard Giangrande & Mark Hunter, Macfarlanes
Remember the decision of the Upper Tribunal in Fisher v HMRC [2020] UKUT 62 (TCC)? An English company controlled by the taxpayers transferred its business to a Gibraltar company in order to avoid UK betting duty. The Upper Tribunal concluded that there was no tax avoidance purpose and so the income of the Gibraltar company could not be taxed on the Fisher family under the transfer of assets abroad regime.
In Davies and others v HMRC [2020] UKUT 67 (TCC) (reported in Tax Journal, 20 March 2020), an Isle of Man company transferred the right to acquire a development property in the UK to a Mauritius company. The taxpayers took out insurance policies in Bermuda under which the benefits payable were linked to the value of the Mauritius company. One of the purposes of the transfer was to avoid tax in the UK on the profits of the development by taking advantage of the UK/Mauritius double tax treaty. The Upper Tribunal decided that this was tax avoidance and that the taxpayers should therefore pay tax under the transfer assets abroad rules on the profits of the Mauritius company.
Whatever the courts may say, these decisions demonstrate that, ultimately, tax avoidance is all a matter of perception. As much as anybody may try to do so, it is impossible to define. HMRC’s favoured definition is that:
‘Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law.’
Why is setting up a company in Mauritius (which is within the scope of any tax which Mauritius chooses to charge) any more contrived or artificial or contrary to the intention of Parliament than setting up a company in Gibraltar (which charges a much lower rate of betting duty than the UK)?
The answer perhaps is to be found in the other reasons given by the taxpayers in each case for what had happened. In Fisher, it was a question of the company’s survival. All its competitors were operating in Gibraltar. If it did not move the business, it would simply not be competitive. The transaction had a compelling commercial reason.
On the other hand, in Davies, the reason given by the taxpayers for the creation of the structure was their desire to use the life policies which were linked to the value of the Mauritius company as a form of pension arrangement. This is very different from the overriding commercial imperative in Fisher, but it is nonetheless an argument which succeeded in the well known decision of the House of Lords in IRC v Willoughby [1997] 4 All ER 65.
The First-tier Tribunal (FTT) in Davies accepted that taking out a life policy is not tax avoidance (so the principle that opting into a specific statutory regime is not tax avoidance survives) but decided (without any real analysis) that using a Mauritius company in order to take advantage of a tax treaty did constitute tax avoidance. The Upper Tribunal did not analyse whether using a tax treaty in this way was in fact tax avoidance but simply decided that, on the facts, the FTT had been entitled to reach the conclusion that the taxpayers had a tax avoidance purpose.
It is hard not to have a suspicion that both tribunals in Davies were far from being persuaded by the taxpayers’ assertion that pension planning was their main objective rather than avoiding UK tax on the development profits.
So, what are the lessons to be learned? Perhaps the key point is that, in assessing whether it will be possible to persuade HMRC or a tribunal that a transaction does not have a tax avoidance purpose, the critical question to ask is whether, when you have told your story, you will be standing on the moral high ground. If what you have done looks a bit like a scheme, you will lose.
In reaching its decision, the Upper Tribunal has clarified two other points:
A taxpayer will not be able to rely on a double tax treaty to avoid a UK tax charge on income which is deemed to arise to them under the transfer of assets abroad rules. This is because the income on which they are taxed is income which is deemed to arise and not the actual income of the non‑resident recipient (in this case the income of the Mauritius company).
Even where relief from tax is, in principle, available under a double tax treaty, that relief will normally have to be claimed. If a claim is not made within the relevant time limit, the relief will not be available. It will therefore generally be necessary for the taxpayer to refer to a treaty claim in their self-assessment tax return although, in certain circumstances, if HMRC subsequently assess tax it may be possible to make a claim at that stage.
In the current climate, both HMRC and the courts are reluctant to allow treaty benefits to be claimed if the result is that the taxpayer will not pay tax in any jurisdiction. Although the Supreme Court recently noted in Fowler v HMRC [2020] UKSC 22 that double non-taxation was not a factor in the decision, it is difficult to read the judgment without feeling it informed the conclusion. Great care should therefore be taken in placing reliance on a treaty if double non-taxation would be the result.
Jennifer Smithson, Richard Giangrande & Mark Hunter, Macfarlanes
