In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March 2016), the Supreme Court found that a share scheme designed to avoid income tax and NICs on the payment of bankers’ bonuses had failed.
The appeals related to avoidance schemes designed to avoid the payment of income tax on bankers’ bonuses by taking advantage of ITEPA 2003 Part 7 Ch 2 (as amended by FA 2003 Sch 22). Instead of paying the bonuses directly to the employees, the banks used the amounts of the bonuses to pay for redeemable shares in a special purpose offshore company. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares which were intended to bring them within the scope of the exemption from income tax (s 426). Once the exemption had accrued, the shares were redeemable by the employees for cash. Employees could then cash in their shares immediately or two years later if they wanted to qualify for a 10% CGT rate.
The Supreme Court rejected the banks’ contention that it was impossible to attribute to Parliament an unexpressed intention to exclude these schemes from the ambit of the provisions. The court noted that the main purpose of the exemption was to promote employee share ownership by encouraging share incentive schemes and that Chapter 2 had been introduced partly for the purpose of forestalling tax avoidance schemes. More specifically, nothing could suggest that Parliament had intended that s 423 should also apply to transactions without any ‘connection to the real world of business’, where a restrictive condition had deliberately been added with no business or commercial purpose but solely in order to take advantage of the exemption.
The court found that the condition attaching to the shares issued by UBS - whether the FTSE 100 rose by a specified amount during a three week period - was completely arbitrary. It had no business or commercial rationale beyond tax avoidance and could therefore be disregarded with the effect that the shares were not restricted securities. Similarly, the condition attaching to the shares offered to DB employees contained a forfeiture provision which operated for a very short period and was within the control of the employees. It could therefore also be disregarded. Income tax was therefore payable on the value of the shares at the date of their acquisition.
Having found that the shares were not restricted securities, the Supreme Court was however not prepared to go further by finding, as suggested by HMRC, that the employees had not received shares but cash. It noted that the amount of cash for which the shares might be redeemed was neither fixed nor ascertainable when the shares were acquired, and was unlikely to be the same as the bonus which had initially been allocated to the employees.
Why it matters: Unlike the Court of Appeal, the Supreme Court considered that a purposive interpretation must prevail, despite what it referred to as ‘the inability of all counsel to explain the rationale of the tax exemption’. However, the Supreme Court only accepted what it called the ‘narrower Ramsay argument’; that the shares issued had not been restricted securities. It did not agree with the wider argument that the shares should be equated with cash. This case, and particularly the fact that the Court of Appeal and the Supreme Court reached opposite conclusions, is a reminder of the difficulty of identifying tax provisions which lend themselves to a purposive interpretation.
In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March 2016), the Supreme Court found that a share scheme designed to avoid income tax and NICs on the payment of bankers’ bonuses had failed.
The appeals related to avoidance schemes designed to avoid the payment of income tax on bankers’ bonuses by taking advantage of ITEPA 2003 Part 7 Ch 2 (as amended by FA 2003 Sch 22). Instead of paying the bonuses directly to the employees, the banks used the amounts of the bonuses to pay for redeemable shares in a special purpose offshore company. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares which were intended to bring them within the scope of the exemption from income tax (s 426). Once the exemption had accrued, the shares were redeemable by the employees for cash. Employees could then cash in their shares immediately or two years later if they wanted to qualify for a 10% CGT rate.
The Supreme Court rejected the banks’ contention that it was impossible to attribute to Parliament an unexpressed intention to exclude these schemes from the ambit of the provisions. The court noted that the main purpose of the exemption was to promote employee share ownership by encouraging share incentive schemes and that Chapter 2 had been introduced partly for the purpose of forestalling tax avoidance schemes. More specifically, nothing could suggest that Parliament had intended that s 423 should also apply to transactions without any ‘connection to the real world of business’, where a restrictive condition had deliberately been added with no business or commercial purpose but solely in order to take advantage of the exemption.
The court found that the condition attaching to the shares issued by UBS - whether the FTSE 100 rose by a specified amount during a three week period - was completely arbitrary. It had no business or commercial rationale beyond tax avoidance and could therefore be disregarded with the effect that the shares were not restricted securities. Similarly, the condition attaching to the shares offered to DB employees contained a forfeiture provision which operated for a very short period and was within the control of the employees. It could therefore also be disregarded. Income tax was therefore payable on the value of the shares at the date of their acquisition.
Having found that the shares were not restricted securities, the Supreme Court was however not prepared to go further by finding, as suggested by HMRC, that the employees had not received shares but cash. It noted that the amount of cash for which the shares might be redeemed was neither fixed nor ascertainable when the shares were acquired, and was unlikely to be the same as the bonus which had initially been allocated to the employees.
Why it matters: Unlike the Court of Appeal, the Supreme Court considered that a purposive interpretation must prevail, despite what it referred to as ‘the inability of all counsel to explain the rationale of the tax exemption’. However, the Supreme Court only accepted what it called the ‘narrower Ramsay argument’; that the shares issued had not been restricted securities. It did not agree with the wider argument that the shares should be equated with cash. This case, and particularly the fact that the Court of Appeal and the Supreme Court reached opposite conclusions, is a reminder of the difficulty of identifying tax provisions which lend themselves to a purposive interpretation.
