Tax and the City - Freshfields

AnalysisThe tax and the Citybriefing for SeptemberSPEED READ New figures indicate increased tax receiptsfrom the banking sector. HMRC continues to pursueavoidance transactions through the courts, narrowlymissing out on victory in Lloyds TSB Equipment Leasingbut successfully challenging yet another PAYE and NICsscheme in Tower Radio. High risk promoters of these sortsof schemes face tougher sanctions under new proposals.The FTT’sdecision inTower/Totalis difficultto reconcilewith theotherauthoritiesin this area12Helen Lethaby has been a tax partner at FreshfieldsBruckhaus Deringer for seven years. She has experienceacross the corporate tax spectrum, with a particularemphasis on tax structured finance, leasing and fundsstructuring, and advises a number of clients in thebanking and asset management sector. Email: helen.lethaby@freshfields.com; tel: 020 7427 3506.Bank taxationStatistics published by HMRC on 30 August 2013reveal that the banking sector generated morein the way of PAYE receipts in 2012/13 than inany previous year. No doubt, this will be taken asconfirmation that bankers have not been payingthemselves any less since the financial crisis,regardless of what other factors may be in play.Corporation tax receipts were greater than in2011/12 – notwithstanding the 2% drop in therate – but are still some way off pre-crisis levels.The bank levy makes up some of the difference.HMRC may wish to take some of the credit forincreasing receipts by pointing to its continuedefforts to combat avoidance and ‘encourage’compliance, including through the banking codeof practice.Lloyds TSB Equipment LeasingThe taxpayer only just managed to hang onto victory before the Upper Tribunal (UT)in HMRC v Lloyds TSB Equipment Leasing(No. 1) Ltd [2013] UKUT 0368 (TCC), a casewhich involved leasing arrangements designedto sidestep now repealed rules denying anequipment lessor capital allowances where theequipment was leased to a non-resident. Inparticular, the arrangements were designed totake advantage of the protected leasing let-out,which applied where the relevant equipment wasa ship and used by a UK taxpayer in the course ofa trade of time chartering.Statoil, a Norwegian energy company, hadagreed terms with a Japanese shipping company,K-Line, for the commission and time charter oftwo ships. Having explored a number of fundingoptions, the parties settled on a structure whichinvolved Lloyds Leasing taking a novation of theshipbuilding contracts, with a view to becoming(capital allowances) owner of the ships uponcompletion, and entering into finance leaseswith two Statoil/K-Line joint venture companiesbased in the Cayman Islands. The joint venturecompanies in turn granted bareboat charters ofthe ships to K-Euro, a UK resident subsidiary ofK-Line with an existing container ship operationbusiness (albeit that business was transferredout of K-Euro, and K-Euro’s role in the leasingarrangements themselves somewhat diminished,prior to commencement of the leases). In order tocomplete the final link in the leasing chain, K-Linenovated the time charters it had already agreedwith Statoil to K-Euro. So K-Euro was intended tobe the UK taxpayer using the ships in the courseof a trade time chartering, thereby preventing adenial of capital allowances at the Lloyd Leasinglevel. But the exemption applied only if obtainingcapital allowances was not one of the mainobjects of the transactions. HMRC challenged theavailability of allowances on a number of bases,including that K-Euro was not trading and/or thata main object of the transactions was to obtain theallowances.At the First-tier Tribunal (FTT) Judge EdwardSadler, a leasing expert, found in favour of thetaxpayer on all key points, including on tradeand main object – conclusions on these issuesare typically treated as findings of fact and soare difficult to overturn on appeal. Nevertheless,HMRC did appeal, arguing that no person couldreasonably have come to the conclusions thatthe FTT did on the facts and that in relation tomain object the FTT had misdirected itself on thecorrect legal test.The UT – Mr Justice Newey and HowardNowlan – held that there was sufficient basisfor the FTT’s view that K-Euro was trading. MrJustice Newey also found (by a hair’s breadth)that the FTT had applied the correct legal test fordetermining main object – an examination of thepossible range of objectives and their assessmentin some sort of hierarchy – and that he could notgo so far as to call its factual conclusion one thatno reasonable tribunal could have reached. JudgeNowlan disagreed on both counts, however. Hethought the FTT had quoted the correct legal testbut then failed to apply it, treating the fact that thetransactions had achieved a commercial objectiveas some sort of panacea. As for the facts, thosecited by Judge Nowlan paint a rather differentpicture – seemingly of the parties and advisersscrabbling to ensure that K-Euro was respectedas having commercial substance – from those onwhich the FTT chose to focus. As chairman ofthe tribunal, Mr Justice Newey’s view prevailedand HMRC’s appeal was dismissed, but the splitdecision on main object will almost certainlyresult in a further HMRC appeal.Tower RadioTower Radio Ltd and Total Property SupportServices Ltd v HMRC [2013] UKFTT 387(TC) were joined cases (referred to below forconvenience as Tower/Total) involving taxpayerswho had bought the same scheme from a firmof London accountants. Both companies hadsignificant reserves, which the persons whowere both the main founder shareholders andthe key directors/employees of the respectivewww.taxjournal.com ~ 13 September 2013

companies wished to extract in as tax-efficientmanner as possible. It is worth pausing here, forthe case largely proceeds on the basis that the taxavoidance at issue in the case was the avoidanceof employment income (including PAYE andNIC); however, given the ‘business owner’ statusof the protagonists and the fact that they couldhave paid themselves dividends, the case mightmore naturally be seen as one of avoidance ofincome tax on distributions. (Admittedly, inTower Radio at least, a dividend would haveaccrued to the benefit of certain family membershareholders as well, but presumably they couldhave waived their dividend rights as easily asthey voted through the bonus proposal.)The planning was designed to secure CGTtreatment (CGT then being chargeable at 18%,or 10% with business asset taper relief) forthe extracted funds, as opposed to income taxtreatment (40% for employment income, plusemployee and employer NICs, or an effectivetax rate of 25% for dividends). It involved eachemployer company using its reserves to subscribefor two classes of shares in a new special purposecompany (SPC), and awarding the class carryingthe majority of the economic rights to the keyindividual as a bonus, on terms that a cessationof office or employment otherwise than by reasonof death would result in the individual beingrequired to sell the shares for 95% of their marketvalue. This restriction was intended to confer‘restricted securities’ status on the SPC shares,such that their award escaped an upfront incometax charge by virtue of ITEPA 2003 s 425. Theplan was then that, sooner or later, the SPC wouldbe liquidated and its assets distributed to theindividual pursuant to his shareholder rights. As aliquidation does not constitute a ‘chargeable event’for the purposes of the restricted securities code,no further income tax charge would arise andinstead the individual would be subject to CGT.The FTT heard the case shortly afterpublication of the UT’s decision in UBS AG andDB Group Services (UK) Ltd v HMRC [2013] STC68 (the UBS/DB case). These cases also involvedplanning designed to exploit the restrictedsecurities code (originally conceived of as a meansto prevent vesting and transfer restrictions fromdepressing a day one income tax charge). TheUT held in the UBS/DB case that the prescriptivenature of the code did not lend itself to a broadbrushRamsay approach and that the cases stoodor fell on their technical merits.The FTT in Tower/Total also had to take intoaccount the Court of Appeal’s decision in PAHoldings Ltd v HMRC [2012] STC 582, whichconsidered that the essential nature of certaindividends as employment income meant that theemployment income rules took precedence overany other head of charge.Cutting a long and complex story short, theFTT considered that the Tower/Total facts weredifferent from those in UBS/DB, predominantly13 September 2013 ~ www.taxjournal.combecause the employee beneficiaries in Tower/Totalcontrolled the relevant companies, whereas theemployees in UBS/DB, being employees of largeinternational banks, did not. Because the Tower/Total individuals could effectively control the flowof funds from start to finish, Ramsay did applyto recharacterise the liquidation proceeds as a defacto cash bonus, following the line of authoritiesincluding DTE Financial Services Ltd v Wilson[2001] STC 777. Interestingly, the FTT did notapply PA Holdings (or even more recently SloaneRobinson Investment Services Ltd v HMRC [2012]SFTD 1181) to hold that the entitlement to bonuseshad crystallised before the mechanics were put inmotion, but rather treated the arrangements as themode of delivery on Ramsay grounds.The FTT’s decision in Tower/Total is difficultto reconcile with the other authorities in thisarea, but it was arguably operating on a falsepremise – that the case was about avoiding tax onemployment income. It would perhaps have madefor a more coherent decision had HMRC treatedthe scheme as one of dividend tax avoidanceand challenged it under, say, the transaction insecurities rules.High risk promotersHMRC remains committed to tackling the‘dodgy’ tax advisers who resist informationrequests and fail to inform their clients of therisks of entering into tax avoidance schemes. Aconsultation document entitled Raising the stakeson tax avoidance, published on 12 August 2013(available via www.lexisurl.com/hx677), seeksviews on a number of new measures, including:the criteria for identifying ‘high riskpromoters’, including a mixture of objectiveand subjective criteria;graduated procedures for dealing with highrisk promoters, including informal enquiries,voluntary undertakings, designations andappeals;the sanctions to be attached to high riskpromoter status, including beefed-upinformation powers, naming and shaming(including mandatory self-naming as part ofthe marketing process), and obligations onintermediaries and users;a statutory override of any contractualobligations with respect to confidentialityand/or disclosure to HMRC; andfurther penalties for non-compliance.HMRC is also investigating ways of tacklingrogue advisers accused of ‘misselling’ taxschemes, and is proposing penalties for taxpayerswho fail to amend their tax returns followingan HMRC win in a case on a mass-marketedscheme.The disclosure of tax avoidance schemesregime (DOTAS) generally remains under review,with HMRC seeking informal feedback on theeffectiveness of the regime and HMRC’s newapproach to communications.HMRCremainscommittedto tacklingthe ‘dodgy’tax advisersFor relatedreading, visitwww.taxjournal.comNews: Corporationtax and PAYEstats published for2012/13 (5.9.13)Cases: HMRCv Lloyds TSBEquipment Leasing(Alan Dolton, 28.8.13)Tower Radio: PAYEand NIC mitigationschemes (PhilipFisher, 2.8.13)Raising the stakeson tax avoidance(Heather Self, RayMcCann, MichaelAvient & JonathanLevy, 30.8.13)13