Tax Advisor 2010 tax avoidance case law review - Olswang

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(ii) Schedule F) took precedence. Accordingly, the dividends could not be taxed as employment income, and PAYE did not apply. The dividends were earnings for NICs purposes and, because there is no equivalent to section 20(2) ICTA in the NICs legislation, a NICs liability arose for the employer. The UT’s reasoning in relation to the Ramsay decision is of particular interest. The UT confirmed that Ramsay could apply to determine whether a payment was in fact an emolument, and therefore an amount of employment income, and so within the charge to tax in what is now Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"). This makes sense; Ramsay has frequently been applied to determine whether a profit or loss really exists from a commercial perspective, and hence there is no logical reason why it should not apply to determine whether a payment, viewed realistically, is an amount of employment income, given that an “emolument” is also a commercial concept. However, the UT decided that the application of Ramsay could not exclude the dividend from the distribution rules; the payment was clearly in fact a dividend, and so it was not possible to interpret the distribution rules in a way which prevented them from applying here. Therefore the taxpayer could rely on section 20(2) ICTA for the proposition that the payment could not be taxed as employment income. HMRC have sought permission to appeal this decision. UBS AG v Revenue and Customs Commissioners [2010] UKFTT 366 (TC) UBS established a scheme to incentivise employees through paying them bonuses in the form of restricted securities. The intention was to avoid any income tax or NICs on the payment, relying on the detailed provisions of section 425 and 429 ITEPA, as in force at the time of the scheme (subsequent legislative amendments have removed the possibility of implementing similar tax planning). The shares could, on the face of it, be forfeited for 90% of their market value, although additional option arrangements ensured that the actual amount of exposure faced by the employees was minimal. The FTT first decided that the securities issued were not "restricted securities", as defined in section 423 ITEPA. It seems that the Tribunal considered that the existence of the option arrangements meant the forfeiture provisions did not reduce the market value of the shares. More interestingly, the Tribunal commented obiter that, if it was wrong on this point, the scheme as a whole was a preordained structure designed to deliver a tax efficient bonus to employees. Thus, Ramsay, the arrangements should be viewed realistically and so the cash that the employees received should be taxed as an emolument. This decision has a potentially wide impact, especially in relation to employee incentivisation structures. Viewed realistically, any such structure could be said to have the intention to deliver 2
earnings to employees in a tax efficient manner. It is surprising that the FTT decided that the Ramsay doctrine can apply in relation to the interpretation of highly prescribed technical code such as that contained in Part 7 ITEPA. Peter Schofield v Revenue and Customs Commissioners [2010] UKFTT 196 (TC) This decision concerned a complicated structure for the artificial creation of a capital loss involving four interlinked options. Viewing each option in isolation, a significant capital loss was made on the "closing out" of the first option, whilst a significant capital gain was made on the "closing out" of the third option. The taxpayer argued that the capital loss on the first option was tax deductible whilst the capital gain on the third option was exempt from charge because it was an option over gilt-edged securities. The FTT had little difficulty in finding that the four options needed to be viewed as a single composite transaction under which no actual loss had arisen. The scheme had built in the possibility that, due to fluctuations in the FTSE 100, the scheme would only realise a small profit or a small loss, but this was not enough to stop Ramsay applying. This would appear to be a straightforward application of the House of Lords decision in Scottish Provident Institution v Revenue and Customs Commissioners [2005] STC 15; interlinked financial instruments should be viewed as a single transaction for the purposes of determining whether a loss has arisen, and the artificially inserted slim possibility of the scheme not working as planned can be ignored. Following the Court of Appeal’s restatement of this principle last year in Astall v Revenue and Customs Commissioners [2010] STC 137 this decision appeared inevitable. Andrew Berry v Revenue and Customs Commissioners [2009] UKFTT 386 (TC) This decision concerned gilt strip planning, which was a popular way of artificially creating an income loss through the acquisition of a gilt strip and the granting of an option over the gilt strip to a third party. The planning relied on creating a loss under paragraph 14A of Schedule 13 Finance Act 1996. To succeed the taxpayer had to show that the scheme was not self-cancelling, in the sense that there was a realistic possibility that the option would not be exercised and Mr Berry would be left owning the gilt strips. To this end the scheme had built in to it a possibility (agreed by the parties as being 7%) that the option would not be exercised, such that Mr Berry was left owning the gilt strips. Unsurprisingly, the FTT applied Astall. The tribunal held that the possibility of the option not being exercised was part of the scheme, the parties proceeded on the basis that this possibility could be ignored, and so the possibility should be ignored in applying the legislation. In essence, this was a self-cancelling scheme in which Mr Berry never really owned the gilt strips and therefore 3
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Page 5 and 6: the FTT determined that, as a quest

Tax Advisor 2010 tax avoidance case law review - Olswang

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