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The First De Sales Limited Partnership and others v HMRC

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In The First De Sales Limited Partnership and others v HMRC [2018] UKUT 396 (27 November 2018), the UT found that an appeal relating to the implementation of a tax avoidance scheme should be struck out.

Each of the appellants had implemented a scheme designed to generate tax losses. They were all employers and they each had entered into a deed of restrictive undertakings with an employee and a third party. Under each deed, the employee agreed to be bound by certain restrictive undertakings and the employer made payments to the third party. Their appeal had been struck out by the FTT on the ground that it had no reasonable prospect of success.

The substantive issue was whether the payments were deductible under ITTOIA 2005 s 69. The UT therefore had to decide whether the appellants had ‘a realistic prospect’, as opposed to a ‘fanciful’ one (Swain v Hillman [2001] 1 All ER 91) of establishing that at least part of the sums were deductible. This, in turn, depended on the interpretation of the phrase ‘in respect of’ (a restrictive undertaking) in ITEPA 2003 s 225. The scheme was set out in a memorandum which had been given to the appellants. It identified a ‘loophole’ in the tax legislation and did not explain why the undertakings given by employees had any value.

The UT accepted HMRC’s view that s 225 is concerned with commercial or ‘real world’ payments. It noted that the language of s 225, with the use of the phrase ‘in respect of’, requires ‘a nexus between the payment and the giving of the undertaking’. There was no nexus between the payments and the undertakings, and ‘no commercial rationale, for the grossly disproportionate payments purportedly attributed to the restrictive undertakings’. The UT therefore considered that the FTT had been right to apply the Ramsay principle ([1979] 1 WLR 974) to the transactions and to strike out the appeal.

Read the decision.

Why it matters: Referring to Lord Reed’s eponymous observation in UBS [2016] UKSC 13, the UT concluded: ‘That paragraph is apt to describe the schemes which are the subject of this appeal, save in one respect. Houdini always allowed himself a reasonable prospect of escape from the handcuffs in which he was bound. These schemes do not have any reasonable prospect of enabling taxpayers who invested in them to escape from the manacles of tax.’

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