In Fidex v HMRC [2016] EWCA Civ 385 (21 April 2016), the Court of Appeal found that HMRC was not precluded from raising a substantive issue by the terms of its closure notice; and that the derecognition of bonds as part of a scheme had not triggered the intended debit under FA 1996 Sch 9 para 19A, as the debit was unallowable under para 13.
The appeal related to a tax avoidance scheme called Project Zephyr. The purpose of the scheme was to create a loss of around €84m, as a result of the derecognition of bonds held by Fidex, which would be available for group relief throughout the BNP Paribas group of companies of which Fidex was a member.
There was both a procedural issue and a substantive issue. The procedural issue was whether HMRC was precluded from raising the substantive issue by the terms of its closure notice. The substantive issue was whether the debits were attributable to an unallowable purpose.
In relation to the procedural issue, applying Tower MCashback [2011] UKSC 19, the Court of Appeal found that the scope of the appeal was defined by the conclusions stated in the closure notice but that HMRC was not restricted to the process of reasoning by which it had reached those conclusions; it was free to deploy new arguments in support of them. The conclusion was that the sum of €83,849,399, representing the value of derecognised listed bonds, should not have been included in the change in basis adjustments.
As for the substantive issue, the Court of Appeal observed that the question was whether and to what extent the debit was attributable to the unallowable purpose for which the bonds were held. The court found that the debit arose from and was entirely attributable to Project Zephyr.
Why it matters: Fidex had argued that if, in an accounting period, a company had one or more allowable main purposes for being a party to a loan relationship and one unallowable main purpose, it was not just and reasonable to attribute the whole of the relevant debit to the unallowable purpose. The court accepted that Fidex may have held the bonds irrespective of the unallowable purpose, but that was not the issue. The issue was whether the debit was attributable to the unallowable purpose for which the bonds were held.
In Tottenham Hotspur v HMRC [2016] UKFTT 389 (3 June 2016), the FTT found that payments received by footballers on a transfer between clubs were not ‘from’ their employment and therefore were not subject to NICs; and were only subject to income tax above the £30,000 threshold.
The appellant was the parent company of the well-known football club. In 2011, Tottenham had paid two of its players, Peter Crouch and Wilson Palacios, for their agreement to leave Tottenham to join Stoke City. The issue was whether, as HMRC contended, the payments were earnings fully subject to income tax and NICs or compensation for early termination and therefore not ‘from’ the players’ employment.
The FTT pointed out that the fact that the parties might have had substantial reasons not connected with the players’ employments for making or receiving the payments (for example, Tottenham’s wish to secure a transfer fee) was not sufficient to prevent the payments being ‘from’ employment, provided that there was a ‘sufficiently substantial’ employment-related reason for making the payments (see Kuehne + Nagel [2012] EWCA Civ 34).
There were provisions that would have entitled Tottenham to terminate the players’ contracts early if particular circumstances had arisen. However, none of these early termination provisions were engaged, so neither the players nor Tottenham had any operative right of termination. Tottenham had therefore made the payments in return for the surrender of the players’ rights under their employment contracts.
As the contracts were not terminated following a breach of contract, the termination was by mutual agreement (although both the players and Tottenham had been under pressure to reach an agreement). Additionally, both the FIFA rules and the employment contracts permitted the parties to terminate the contracts early by mutual agreement. However, payments made following such a mutual agreement were not within the scope of the principle in EMI Group Electronics [1999] STC 803, as the contracts had not specifically provided for the payments. The payments under the mutual agreement were therefore not ‘from’ employment.
Why it matters: The FTT noted that whether or not a contract provided for the possibility to terminate it by mutual agreement was irrelevant, given that any contract could, in any event, be so terminated. However, payments made following such a mutual agreement were not within the scope of the principle in EMI Group Electronics.
Commenting on the decision, BKL Tax’s Brass Tax observed: ‘Although Spurs would probably have happily traded their recent win before the First-tier Tribunal … for a win in the Premier League, we venture to suggest that the decision will prove of even greater and longer-lasting significance than three points at White Hart Lane.’ (Tottenham Hotspur and termination arrangements, Tax Journal, 23 June 2016).
In Project Blue v HMRC [2016] EWCA Civ 485 (26 May 2016), the Court of Appeal found that FA 2003 s 71A did not apply to a land transaction, so that s 75A was not in point.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Minister of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
· MoD contracted to sell the land to PBL for £959m;
· PBL contracted to sell the land to a Qatari bank (MAR). Under leaseback arrangements, PBL was to pay MAR rent (representing instalments of the purchase price); and
· PBL and MAR granted each other put and call options over the land.
The UT had found that PBL was liable to SDLT in the sum of £38m based on a consideration of £959m under s 75A. PBL contended that the party liable was MAR.
Under FA 2003 s 45 (before its 2008 amendments), PBL was not liable to SDLT, as the completion of the contract between the MoD and PBL was ‘disregarded’ under ‘sub-sale relief’. Furthermore, under FA 2003 s 71A, no SDLT was payable on the transfer from the MoD to MAR under the second contract. This was because s 71A ensured that no SDLT was triggered by an Ijara lease transaction. Consequently, both the transfer to MAR and the leaseback by MAR were exempt alternative finance transactions. Finally, s 75A applied to a series of transactions between a vendor ‘V’ and a purchaser ‘P’, where the total SDLT payable was less than would have been payable on a direct sale by V to P.
The court observed that the purpose of s 71A was to limit SDLT to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be ‘strange’ for Parliament to have intended that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free under sub-sale relief. The court therefore thought that the ‘much more obvious construction of s 71A’ was that cases falling within s 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor, which triggered SDLT so that MAR was liable.
As to s 75A, the court stressed that there was no reference in the provision to the purpose of the transaction being tax avoidance. Under s 75A, MAR was ‘P’ and must be treated as such. However, this was only relevant if the court was wrong in relation to s 71A.
Why it matters: The Court of Appeal reversed the UT’s decision, finding that s 75A did not apply because s 71A did not apply, so that the notional transaction and the actual transaction were identical for s 75A purposes. Interestingly, the s 71A argument was not run by PBL in the FTT and was given relatively short shrift by the UT.
Commenting on the decision, Patrick Cannon observed: ‘The implications of this decision for other types of sub-sale planning done under s 45(3) are interesting. They give taxpayers who undertook such planning grounds for optimism, where their planning did not depend on the intermediate purchaser having a special status so as to confer a statutory exemption on the sub-purchaser.’ (‘Court of Appeal in Project Blue: the fog clears’, Tax Journal, 9 June 2016).
In Airtours Holidays Transport v HMRC [2016] UKSC 21 (11 May 2016), the Supreme Court found that Airtours was not entitled to recover input tax in relation to a report prepared by PwC and paid for by Airtours.
The issue was whether Airtours was entitled to recover input tax in respect of services provided by PwC and paid for by Airtours. This in turn depended on whether the services provided by PwC had been supplied to Airtours.
Airtours, which had borrowed money from around 80 banks, had been in serious financial difficulties and had sought refinancing. It had commissioned PwC to produce an accountants’ report to satisfy the banks that its restructuring proposals were viable.
The first issue was whether PwC had contractually agreed with Airtours that it would supply services to it, such as providing a report to the banks. The Supreme Court found that PwC’s obligation to provide its services was owed solely to the banks; and that Airtours was a party mainly for the purpose of agreeing to pay PwC’s fees.
The second issue was whether the facts that Airtours had a substantial commercial interest in the services being provided by PwC to the banks, and that it had agreed to pay PwC for the services, led to the conclusion that the services were ‘supplied’ to Airtours (as well as to the banks). The court found that the benefit which Airtours received was not the services from PwC, but the enhanced possibility of funding from the banks.
Why it matters: Two Lords dissented, observing that the approach taken by Lord Neuberger was too narrow. In their view, the real issue was whether, on the facts, the arrangements between the banks, PwC and Airtours involved the supply of services to Airtours or merely third party consideration provided by Airtours for services rendered to the banks alone. Airtours’ future had depended on the report, so that the value of the services provided by PwC was as great to Airtours as it was to the banks. They concluded that a tripartite agreement had been entered into and that PwC had owed a duty of care to Airtours.
Commenting on the decision, Nick Skerrett and Gary Barnett observed: ‘it appears that whilst the Supreme Court may have answered the direct question in this case, it may, in doing so, have cast new doubt on the question of whether a taxpayer who is the recipient of a supply can deduct, as input tax, VAT paid by another person as “third-party consideration”’ (‘Supreme Court in Airtours: Redrow redacted’, Tax Journal, 19 May 2016).
In N Pattullo v HMRC [2016] UKUT 270 (14 June 2016), the UT found that HMRC had made a discovery (TMA 1970 s 29(1)) and that HMRC could not have been aware of the insufficiency of tax at the time the enquiry window had closed (s 29(5)).
Mr Pattullo had entered into a tax avoidance arrangement in the 2003/04 tax year. The arrangement had involved the use of capital redemption contracts (CRCs) and had sought to take advantage of the wording of TCGA 1992 s 37. Some 925 participants in the scheme had been identified and 909 enquiries opened. However, at the time Mr Pattullo had submitted his return, disclosure of the CRC scheme had not been required by law. It was ultimately held that the scheme did not achieve its purpose.
The first issue was whether a discovery could comprise a series of discoveries. The FTT had found that the threshold had been crossed in the period June to November 2009, when the Drummond [2009] STC 2206 case (which concerned a similar scheme) had been decided by the Court of Appeal and leave to appeal had been refused. The UT detected no error of law in this finding.
Mr Pattullo also argued that TMA 1970 s 29(1) required HMRC to make an assessment immediately upon making a discovery. The UT agreed, noting that the requirement for the discovery to be acted upon while it remained fresh arose on the natural meaning of s 29(1) itself. However, the FTT had found that the discovery had been made sometime between July and November 2009 and that the assessment had been made in January 2010. The discovery had therefore not been stale by the time of the assessment.
The second issue was the level of knowledge and expertise to be expected of the hypothetical officer, when deciding whether he should have been aware of the insufficiency of tax (TMA 1970 s 29(5)). The UT thought that the discovery in sub-s (1) found its counterpart in the state of awareness in sub-s (5). The question of reasonableness therefore came not in the need to construct a fictional hypothetical officer, but rather in the test of whether the actual officer ought reasonably to have been aware of the insufficiency.
The UT found that in January 2006 (when the enquiry window had closed), a hypothetical officer would not have had any real understanding of the arcane world of CRCs. Furthermore, the Drummond case had only reached the Court of Appeal in 2009. The FTT had therefore been right (although it had erred in law when ascertaining the characteristics of the hypothetical officer) to find that the hypothetical officer could not have been aware of the insufficiency.
Why it matters: The UT clarified what is meant by ‘discovery’. It considered that there may be ‘hesitation on the doorstep, shifting forwards then back again before finally going in’; ‘crossing the threshold’ was therefore not like ‘crossing the Rubicon’. The UT also refined the notion of reasonableness of ‘the hypothetical officer’. It noted that the question of reasonableness should arise as an objective test, by reference to the standards of knowledge and expertise reasonably to be expected of an HMRC officer dealing with tax returns raising ‘this kind of question’ and giving ‘this amount of information’. The question was therefore whether the officer’s lack of awareness of the insufficiency as at the relevant date could properly be categorised as unreasonable.
In Fidex v HMRC [2016] EWCA Civ 385 (21 April 2016), the Court of Appeal found that HMRC was not precluded from raising a substantive issue by the terms of its closure notice; and that the derecognition of bonds as part of a scheme had not triggered the intended debit under FA 1996 Sch 9 para 19A, as the debit was unallowable under para 13.
The appeal related to a tax avoidance scheme called Project Zephyr. The purpose of the scheme was to create a loss of around €84m, as a result of the derecognition of bonds held by Fidex, which would be available for group relief throughout the BNP Paribas group of companies of which Fidex was a member.
There was both a procedural issue and a substantive issue. The procedural issue was whether HMRC was precluded from raising the substantive issue by the terms of its closure notice. The substantive issue was whether the debits were attributable to an unallowable purpose.
In relation to the procedural issue, applying Tower MCashback [2011] UKSC 19, the Court of Appeal found that the scope of the appeal was defined by the conclusions stated in the closure notice but that HMRC was not restricted to the process of reasoning by which it had reached those conclusions; it was free to deploy new arguments in support of them. The conclusion was that the sum of €83,849,399, representing the value of derecognised listed bonds, should not have been included in the change in basis adjustments.
As for the substantive issue, the Court of Appeal observed that the question was whether and to what extent the debit was attributable to the unallowable purpose for which the bonds were held. The court found that the debit arose from and was entirely attributable to Project Zephyr.
Why it matters: Fidex had argued that if, in an accounting period, a company had one or more allowable main purposes for being a party to a loan relationship and one unallowable main purpose, it was not just and reasonable to attribute the whole of the relevant debit to the unallowable purpose. The court accepted that Fidex may have held the bonds irrespective of the unallowable purpose, but that was not the issue. The issue was whether the debit was attributable to the unallowable purpose for which the bonds were held.
In Tottenham Hotspur v HMRC [2016] UKFTT 389 (3 June 2016), the FTT found that payments received by footballers on a transfer between clubs were not ‘from’ their employment and therefore were not subject to NICs; and were only subject to income tax above the £30,000 threshold.
The appellant was the parent company of the well-known football club. In 2011, Tottenham had paid two of its players, Peter Crouch and Wilson Palacios, for their agreement to leave Tottenham to join Stoke City. The issue was whether, as HMRC contended, the payments were earnings fully subject to income tax and NICs or compensation for early termination and therefore not ‘from’ the players’ employment.
The FTT pointed out that the fact that the parties might have had substantial reasons not connected with the players’ employments for making or receiving the payments (for example, Tottenham’s wish to secure a transfer fee) was not sufficient to prevent the payments being ‘from’ employment, provided that there was a ‘sufficiently substantial’ employment-related reason for making the payments (see Kuehne + Nagel [2012] EWCA Civ 34).
There were provisions that would have entitled Tottenham to terminate the players’ contracts early if particular circumstances had arisen. However, none of these early termination provisions were engaged, so neither the players nor Tottenham had any operative right of termination. Tottenham had therefore made the payments in return for the surrender of the players’ rights under their employment contracts.
As the contracts were not terminated following a breach of contract, the termination was by mutual agreement (although both the players and Tottenham had been under pressure to reach an agreement). Additionally, both the FIFA rules and the employment contracts permitted the parties to terminate the contracts early by mutual agreement. However, payments made following such a mutual agreement were not within the scope of the principle in EMI Group Electronics [1999] STC 803, as the contracts had not specifically provided for the payments. The payments under the mutual agreement were therefore not ‘from’ employment.
Why it matters: The FTT noted that whether or not a contract provided for the possibility to terminate it by mutual agreement was irrelevant, given that any contract could, in any event, be so terminated. However, payments made following such a mutual agreement were not within the scope of the principle in EMI Group Electronics.
Commenting on the decision, BKL Tax’s Brass Tax observed: ‘Although Spurs would probably have happily traded their recent win before the First-tier Tribunal … for a win in the Premier League, we venture to suggest that the decision will prove of even greater and longer-lasting significance than three points at White Hart Lane.’ (Tottenham Hotspur and termination arrangements, Tax Journal, 23 June 2016).
In Project Blue v HMRC [2016] EWCA Civ 485 (26 May 2016), the Court of Appeal found that FA 2003 s 71A did not apply to a land transaction, so that s 75A was not in point.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Minister of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
· MoD contracted to sell the land to PBL for £959m;
· PBL contracted to sell the land to a Qatari bank (MAR). Under leaseback arrangements, PBL was to pay MAR rent (representing instalments of the purchase price); and
· PBL and MAR granted each other put and call options over the land.
The UT had found that PBL was liable to SDLT in the sum of £38m based on a consideration of £959m under s 75A. PBL contended that the party liable was MAR.
Under FA 2003 s 45 (before its 2008 amendments), PBL was not liable to SDLT, as the completion of the contract between the MoD and PBL was ‘disregarded’ under ‘sub-sale relief’. Furthermore, under FA 2003 s 71A, no SDLT was payable on the transfer from the MoD to MAR under the second contract. This was because s 71A ensured that no SDLT was triggered by an Ijara lease transaction. Consequently, both the transfer to MAR and the leaseback by MAR were exempt alternative finance transactions. Finally, s 75A applied to a series of transactions between a vendor ‘V’ and a purchaser ‘P’, where the total SDLT payable was less than would have been payable on a direct sale by V to P.
The court observed that the purpose of s 71A was to limit SDLT to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be ‘strange’ for Parliament to have intended that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free under sub-sale relief. The court therefore thought that the ‘much more obvious construction of s 71A’ was that cases falling within s 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor, which triggered SDLT so that MAR was liable.
As to s 75A, the court stressed that there was no reference in the provision to the purpose of the transaction being tax avoidance. Under s 75A, MAR was ‘P’ and must be treated as such. However, this was only relevant if the court was wrong in relation to s 71A.
Why it matters: The Court of Appeal reversed the UT’s decision, finding that s 75A did not apply because s 71A did not apply, so that the notional transaction and the actual transaction were identical for s 75A purposes. Interestingly, the s 71A argument was not run by PBL in the FTT and was given relatively short shrift by the UT.
Commenting on the decision, Patrick Cannon observed: ‘The implications of this decision for other types of sub-sale planning done under s 45(3) are interesting. They give taxpayers who undertook such planning grounds for optimism, where their planning did not depend on the intermediate purchaser having a special status so as to confer a statutory exemption on the sub-purchaser.’ (‘Court of Appeal in Project Blue: the fog clears’, Tax Journal, 9 June 2016).
In Airtours Holidays Transport v HMRC [2016] UKSC 21 (11 May 2016), the Supreme Court found that Airtours was not entitled to recover input tax in relation to a report prepared by PwC and paid for by Airtours.
The issue was whether Airtours was entitled to recover input tax in respect of services provided by PwC and paid for by Airtours. This in turn depended on whether the services provided by PwC had been supplied to Airtours.
Airtours, which had borrowed money from around 80 banks, had been in serious financial difficulties and had sought refinancing. It had commissioned PwC to produce an accountants’ report to satisfy the banks that its restructuring proposals were viable.
The first issue was whether PwC had contractually agreed with Airtours that it would supply services to it, such as providing a report to the banks. The Supreme Court found that PwC’s obligation to provide its services was owed solely to the banks; and that Airtours was a party mainly for the purpose of agreeing to pay PwC’s fees.
The second issue was whether the facts that Airtours had a substantial commercial interest in the services being provided by PwC to the banks, and that it had agreed to pay PwC for the services, led to the conclusion that the services were ‘supplied’ to Airtours (as well as to the banks). The court found that the benefit which Airtours received was not the services from PwC, but the enhanced possibility of funding from the banks.
Why it matters: Two Lords dissented, observing that the approach taken by Lord Neuberger was too narrow. In their view, the real issue was whether, on the facts, the arrangements between the banks, PwC and Airtours involved the supply of services to Airtours or merely third party consideration provided by Airtours for services rendered to the banks alone. Airtours’ future had depended on the report, so that the value of the services provided by PwC was as great to Airtours as it was to the banks. They concluded that a tripartite agreement had been entered into and that PwC had owed a duty of care to Airtours.
Commenting on the decision, Nick Skerrett and Gary Barnett observed: ‘it appears that whilst the Supreme Court may have answered the direct question in this case, it may, in doing so, have cast new doubt on the question of whether a taxpayer who is the recipient of a supply can deduct, as input tax, VAT paid by another person as “third-party consideration”’ (‘Supreme Court in Airtours: Redrow redacted’, Tax Journal, 19 May 2016).
In N Pattullo v HMRC [2016] UKUT 270 (14 June 2016), the UT found that HMRC had made a discovery (TMA 1970 s 29(1)) and that HMRC could not have been aware of the insufficiency of tax at the time the enquiry window had closed (s 29(5)).
Mr Pattullo had entered into a tax avoidance arrangement in the 2003/04 tax year. The arrangement had involved the use of capital redemption contracts (CRCs) and had sought to take advantage of the wording of TCGA 1992 s 37. Some 925 participants in the scheme had been identified and 909 enquiries opened. However, at the time Mr Pattullo had submitted his return, disclosure of the CRC scheme had not been required by law. It was ultimately held that the scheme did not achieve its purpose.
The first issue was whether a discovery could comprise a series of discoveries. The FTT had found that the threshold had been crossed in the period June to November 2009, when the Drummond [2009] STC 2206 case (which concerned a similar scheme) had been decided by the Court of Appeal and leave to appeal had been refused. The UT detected no error of law in this finding.
Mr Pattullo also argued that TMA 1970 s 29(1) required HMRC to make an assessment immediately upon making a discovery. The UT agreed, noting that the requirement for the discovery to be acted upon while it remained fresh arose on the natural meaning of s 29(1) itself. However, the FTT had found that the discovery had been made sometime between July and November 2009 and that the assessment had been made in January 2010. The discovery had therefore not been stale by the time of the assessment.
The second issue was the level of knowledge and expertise to be expected of the hypothetical officer, when deciding whether he should have been aware of the insufficiency of tax (TMA 1970 s 29(5)). The UT thought that the discovery in sub-s (1) found its counterpart in the state of awareness in sub-s (5). The question of reasonableness therefore came not in the need to construct a fictional hypothetical officer, but rather in the test of whether the actual officer ought reasonably to have been aware of the insufficiency.
The UT found that in January 2006 (when the enquiry window had closed), a hypothetical officer would not have had any real understanding of the arcane world of CRCs. Furthermore, the Drummond case had only reached the Court of Appeal in 2009. The FTT had therefore been right (although it had erred in law when ascertaining the characteristics of the hypothetical officer) to find that the hypothetical officer could not have been aware of the insufficiency.
Why it matters: The UT clarified what is meant by ‘discovery’. It considered that there may be ‘hesitation on the doorstep, shifting forwards then back again before finally going in’; ‘crossing the threshold’ was therefore not like ‘crossing the Rubicon’. The UT also refined the notion of reasonableness of ‘the hypothetical officer’. It noted that the question of reasonableness should arise as an objective test, by reference to the standards of knowledge and expertise reasonably to be expected of an HMRC officer dealing with tax returns raising ‘this kind of question’ and giving ‘this amount of information’. The question was therefore whether the officer’s lack of awareness of the insufficiency as at the relevant date could properly be categorised as unreasonable.
