The First-tier Tribunal’s decision in Aberdeen Asset Management v HMRC [2010] UKFTT 524 (TC) marks another victory in HMRC’s battle against tax avoidance schemes and illustrates one Tribunal’s blunt approach in applying the dictum of Ribeiro PJ in Arrowtown (Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 at para 35).
The facts
Aberdeen established an offshore employee benefits trust (EBT) and transferred funds to it. For each relevant employee, an offshore company (Offco) was established with £2 of share capital. The EBT subscribed for one share for £1 and for the other at a substantial premium.
The EBT set up a family benefits trust (FBT) for each employee. Each Offco then increased its authorised share capital and granted the corresponding FBT an option to subscribe for the unissued shares, thus diluting the value of the existing shares in each Offco. One or both of those existing shares were then transferred the employee’s nominee. Funds were extracted from the Offcos by way of soft loans, although the purchase of assets for the employees’ use was also a possibility. The options lapsed.
The issues
Aberdeen argued that employees had no entitlement to the amounts ultimately received; that Ramsay did not apply to treat the share transfers as payments of money; that the transactions were not shams; that the receipt of shares was not the receipt of the underlying cash in the offshore companies; that the shares, when received, should be treated as discounted in value as a result of the existence of the options; and that the shares were not ‘readily convertible assets’ for the purposes of the relevant PAYE provisions.
Aberdeen succeeded on two arguments, namely the ‘no contractual entitlement’ and the ‘no sham’ arguments, but lost heavily on the rest. In considering the Ramsay question, the Tribunal applied the Arrowtown dictum (approved by the House of Lords in Barclays Mercantile Business Finance v Mawson [2005] STC 1): ‘...the ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically,’ holding that there was a composite transaction consisting of a series of steps which began with the establishment of the EBT and ended with the transfer of shares to the individuals. In paragraph 30 of its decision, the Tribunal said:
‘The [scheme] was a mechanism to pay cash bonuses. That is the effect of the various elements of the [scheme] which are intended to operate together. That is a form of payment which the statutory provisions, in question, construed purposively, were plainly designed to catch. In our view, this conclusion is entirely consistent with the theme of the Ramsay approach, namely to have regard to the purpose of a particular provision (or, here, combination of provisions) and interpret the statutory language so far as possible in a way which best gives effect to that purpose….’
The Tribunal also held, distinguishing Sempra Metals ([2008] STC (SCD) 1062), that the receipt of the shares in what was a cash box company was sufficient to place its pot of cash at the disposal of the employee, notwithstanding that further steps would be required to extract it. The Tribunal said:
‘The law is no longer impressed, if it ever was, by superficial facts and apparent discretions. The law looks through these arrangements, identifies the substance of the transaction (by viewing the facts realistically), and considers whether they fall within the taxing provision in issue, construed purposively. The structures created here were essentially the medium by which cash bonuses were paid to senior employees. The statutory provisions under consideration apply to cash bonuses and their equivalent.’
The Tribunal also held that, if the correct analysis was that each employee did receive shares, those shares constituted remuneration for past performance and, viewing the facts realistically, should be valued on the basis that the options would not be exercised, so that their aggregate value would be broadly equivalent to the net asset value of the relevant offshore company.
Aberdeen illustrates the potential elasticity of purposive construction and just how easily it can shade into a ‘substance over form’ approach. With a finding of no sham, the Tribunal declared the purpose of the legislation and adopted a ‘realistic’ view of the facts, discarding any that would frustrate that purpose. The primary result (that cash was received) would have been no different if there had been a finding of sham.
The statement in paragraph 30 (‘[The legislation’s] overall purpose is to tax the material rewards of employment’) is unexceptional as a general statement, but is no help in interpreting individual provisions. The complexity of employment income legislation suggests that a purposive approach cannot be appropriate in all circumstances (see Gripple Ltd v HMRC [2010] STC 2283).
The Tribunal’s view (in paragraph 48) that the statutory provisions apply to cash bonuses ‘and their equivalent’ is easy to say, but does not sit well alongside the detailed legislation taxing the receipt of shares by employees, which is largely unnecessary if the Tribunal is correct. Potential difficulties with this broad-brush approach are how it might apply to individuals who had the use of assets acquired by their Offcos, rather than cash and the finding that employees who received only one share would be charged to tax on half of the value.
Aberdeen accordingly reads as a rather unsubtle application of the Arrowtown formula and may represent a high water mark in that respect. Whether a subtler application of the formula will assist the taxpayer in any particular case is, however, quite another matter.
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Barrie Akin, Barrister, Gray’s Inn Tax Chambers
