UBS AG v Revenue And Customs [2010] UKFTT 366 (TC)

FTT-Tax
UBS AG v Revenue And Customs
[2010] UKFTT 366 (TC) · 2010-02-18
[41]“[41] In my judgment, none of the reasons advanced by Mr Prosser are good reasons for not applying the principles of purposive interpretation to paragraphs 1, 2 or 3 of schedule 13. Quite clearly, the statute requires the court to focus on the terms of issue but that is no different from the need to focus on the acts of the lessor in Mawson . Moreover, as Mr Prosser accepts, paragraph 3(1C) and paragraph 3(1A)(b) proceed on the basis that facts extraneous to the transaction will be relevant, thus confirming that the application of paragraph 3 will not depend only on the terms of issue of the securities. Having said that, I would wish to make it clear that the mere fact that the parties intend to obtain a tax advantage is not in itself enough to make a statutory relief inapplicable.[42][42] I see no reason to hold that the new approach to statutory interpretation applies only if there is a composite transaction consisting of several elements destined to lead to a particular result. Mr Prosser urged us to accept that the language of practical certainty is derived from the jurisprudence on pre-ordained transactions for the purposes of the Ramsay jurisprudence. Thus, he submits, that purposive interpretation should be confined to composite transactions, just as the transaction in SPI was a composite transaction. In my judgment, the principle is that set out in the first sentence of [32] of Mawson . This principle is not expressed to be limited to composite transactions. It can thus apply to a single multi-faceted transaction which on its face operates in a particular way but which when examined against the facts of the case does not operate as a transaction to which the statute was intended to apply.[43][43] Mr Prosser puts forward a supplementary argument based on the fact that paragraph 3 of schedule 13 was amended by the Finance Act 1999 so as to broaden the occasions for redemption relevant to determining whether a security is a RDS. All such occasions are made relevant. An explanatory note prepared by the Revenue at the time of the Finance Bill 1999 makes this clear: it states that there had been a device to avoid the income charge by arranging an artificial option to redeem early at par. Mr Prosser submits that this note shows that the approach of the Special Commissioner that account should be taken only at the terms that the parties intended to operate was wrong as a matter of construction. I propose to deal with this point briefly. As we pointed out to Mr Prosser, there are difficulties about this explanatory note. It is undated; it is unclear at what stage of the Parliamentary process the note was produced, it is not accompanied by clause 59 to which it relates, and we are not told whether the note appeared in any explanatory notes published with the Act itself. Leaving those points on one side, I consider that the note provides no real assistance even for the purpose of establishing the context for the enactment and the mischief to which the amendment was directed (which in this case constitute the limited purposes for which such a note can be used as an aid to interpretation: see R (Westminster City Council) v National Asylum Service [2002] 1 WLR 2956 at [2] to [6] per Lord Steyn). It did not purport to set out the meaning of clause 59 on a comprehensive basis and it is expressed in very general terms. Mr Ewart seeks to counter Mr Prosser's reliance on it by submitting that it supports the Revenue's case that its true meaning is that regard should be had only to those occasions on which there is a real possibility of redemption. I accept this submission. In my judgment, it would be contrary to the policy implicit in the note to treat it as supporting the argument that, once the artificiality referred to in the note is removed, Parliament intended account to be taken of all other events on which redemption could take place, irrespective of their artificiality. [44] Is a purposive interpretation of the relevant provisions possible in this case? In my judgment, there is nothing to indicate that the usual principles of statutory interpretation do not apply and accordingly the real question is how to apply those principles to the circumstances of this case. In my judgment, applying a purposive interpretation involves two distinct steps: first, identifying the purpose of the relevant provision. In doing this, the court should assume that the provision had some purpose and Parliament did not legislate without a purpose. But the purpose must be discernible from the statute: the court must not infer one without a proper foundation for doing so. The second stage is to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.[45][45] I have described the processes involving two distinct steps. I have not overlooked that in Mawson Lord Nicholls held that the court did not need to force its thinking into two separate compartments (see [32] of his speech set out in paragraph [27] of this judgment). In my judgment, the process is likely to be an iterative one. While one probably starts with determining the purpose of the relevant provision, it may well be necessary to refine that purpose as and when the facts are more closely defined. This may be what Lord Hoffmann had in mind when he spoke in Carreras (see paragraph 23 of this judgment) of the need to find facts "in the process of construction". 49 Counsel for both appellants both submitted that the task of the tribunal in these appeals was to look at the clear, broad wording of the relevant sections of Chapter 2 of Part 7 and to apply them. The wording was, as Mr Prosser QC put it, “formulaic and highly prescriptive … containing extremely wide definitions and highly detailed and comprehensive rules.” Mr Goy QC dealt with each relevant provision on a more specific basis, submitting that each element in the Chapter should have appropriate weight, and suggesting that the proper conclusion of the tribunal on the question of purpose should be similar to that of Proudman J in Mayes v HMRC [2009] EWHC 2443 , when she concluded at [45] that:
“I cannot extract from the legislation any underlying or overriding purpose enabling me to conclude that parts of the scheme may be ignored.” 50 For HMRC, Mr Lasok QC based his argument on the view of his clients that the schemes were “designed to abuse the provisions of Part 7 of ITEPA so as to avoid a charge to income tax and NICs on remuneration to employees”
. In his view the interpretation of Part 7 involves consideration of the line of cases that started with Ramsay v IRC [1982] AC 300 , and included in particular Barclays Mercantile Bank Finance Ltd v Mawson [2004] UKHL 51 , [2005] 1 AC 684 and IRC v Scottish Provident Institution [2004] UKHL 52 , [2004] 1 WLR 3172 and the decisions followed and approved in those decisions. He returned to this approach at several points in his argument, contending that the tribunal should approach the scheme constructed by the Appellants on the basis that they did not reflect normal commercial business dealings and were simply devices which sought to abuse the relevant sections. 51 The tribunal’s view is that it is required by the relevant provisions to look at Chapter 2 as a whole, with appropriate attention being paid to the fact that it is one chapter in a code of legislation drafted as a whole (with some common phraseology and definitions), and passed by Parliament as a whole. It therefore respectfully follows the view of Lord Walker and notes his comments about Part 7 as a whole, while noting that the Supreme Court was looking more specifically at Chapter 3D (categorised by His Lordship as a chapter “especially” aimed at eliminating unacceptable tax avoidance) while the tribunal’s focus is Chapter 2 (not so categorised). Nonetheless, in the view of the tribunal, the passages set out above from the Supreme Court’s decision frame the tribunal’s view with respect to the first of the two stages identified by Arden LJ in Astall at [44]. 52 Chapter 2 is one of the series of parallel subsidiary sets of rules dealing with specific, practical situations within the general Part 7 code of rules dealing with securities provided to employees in connection with their employments. As Lord Walker recognised, the general code reflects a long tradition of issuing shares to employees as an “effective long-term incentive”. As these appeals show, there is nothing in Chapter 2 requiring that the securities be held long term, or for any specific period. The policy of “wait and see” is applied regardless of the period between acquisition and realisation. Nor is there anything requiring a necessary connection between the shares issued to the employees and their employing companies. Nor, unlike the parallel codes dealing with other situations covered by Part 7, is there anything expressly prohibiting the use of the provisions with the sole or main aim of reducing the short-term tax burden on the employer or the employee rather than as a long-term incentive. 53 Chapter 2 is a subset of rules within a code enacted as a whole. In the view of the tribunal it is to be read as a set of rules to be read together and not as a series of individual sections that either charge tax or exempt from income tax as a series of disconnected free-standing rules to be interpreted separately. In that sense, the rules in Chapter 2 serve a single purpose. The tribunal therefore rejects any argument that individual parts of those rules should be read any more broadly than other parts or that there is any sound reason to give particular phrases a wide interpretation. Both the purpose of the rules and their meaning are to be derived from the full context of the rules as a whole. And, in the view of the tribunal, as a whole they are to be viewed as providing rules to deal with a real, practical situation facing employers and the tax authorities. This is the problem of deciding whether and when any benefit received from restricted shares by employees by reason of their employment is liable to income tax at any stage rather than capital gains tax on disposal. The rules contain limits, as may be expected, but the limits are to be read as an integral part of the rules. 54 The tribunal therefore takes the view that the purpose of each provision in Chapter 2 is to be derived from the context of the chapter as a whole. The purpose is to make provision that, unless the employer and employee jointly decide otherwise, and subject to defined exceptions, amounts derived from securities that are within the definition of restricted securities are to be charged to income tax not on acquisition by an employee (as the underlying rules of income tax provide) but on the occurrence of a later chargeable event, rather than being charged to capital gains tax on disposal by the employee. The tribunal does not consider it relevant to its interpretation and application of Chapter 2 that an individual who acquires assets that fall within Chapter 2 can, subject to entirely separate capital gains tax provisions, claim exemption from capital gains tax on disposal of those assets in certain circumstances. 55 Following the guidance of Arden LJ, the tribunal must apply the provisions, so interpreted, to the “actual facts”. The tribunal does not accept that the Scheme is an “abuse” of the legislation if it is found to comply with the provisions of Chapter 2 but results in an outcome that was not desired by HMRC. As Arden LJ reminded us, there is no general doctrine of abuse of legislation, or of tax legislation, in the United Kingdom. However, the tribunal agrees with Mr Lasok QC that in examining whether the Scheme is within Chapter 2 it must look at the reality of what is happening and not be restricted only to a step by step approach to events that ignores the business reality of any step, or that multiple steps are in reality parts of a single event. Nor should it restrict its focus to one step at a time exclusive to the other steps or parallel events. That is, in the tribunal’s view, a matter of “second stage” application of the tests to the facts rather than interpretation of the legislation. But the tribunal accepts from the authorities that it must be alert to a situation where the arrangements, viewed as a whole, do not create the required assets (restricted securities) or events. See the conclusion at [25] of Lord Nicholls delivering the opinion of the House of Lords in IRC v Scottish Provident ). PART 2: THE SCHEME Witness evidence 56 The following witnesses gave evidence. 57 For UBS, oral evidence of fact was given by four employees of UBS at the relevant times: 57.1 Geoffrey Hayward was a senior member of the UBS HR staff in London who took part in the planning and delivery of the Scheme. He gave evidence of the purposes behind the development and design of the Scheme. He also gave evidence about the times at which the decisions were taken about the awards of bonuses to UBS employees under the Scheme. But he was not involved in the detailed implementation of the Scheme. 57.2 Jonathan Ferrara was the senior member of the UBS staff in Jersey who was asked by colleagues to become the UBS director of ESIP Ltd, and did so. He gave evidence of his briefings about and involvement in the ESIP Ltd board meetings and decisions taken by the company. 57.3 Nicholas Anderson was the UBS employee in charge of the tax department in the United Kingdom at the times relevant to the appeal. He gave evidence of his own involvement and that of others, including the lawyers and tax advisers acting for UBS at the time, in the design of the Scheme and the drafting of relevant documents. He was also questioned, both with regard to this appeal and more generally, on the practice of pre-drafting company board minutes and the use of those pre-drafts. He was also questioned on the relationship between UBS and Mourant. 57.4 Rebecca Jackson gave evidence by video-link from New York. She was a member of the Human Resources team in London at the relevant times. She acted as a key resource in implementing the scheme but had no decision making powers. 58 Each of the witnesses commented on the difficulties of recalling in detail the events challenged in the appeal. This was particularly so in the evidence of Rebecca Jackson. The tribunal accepts those reservations as understandable given both the time since the events occurred and the nature of the details being questioned. The key issue of fact before the tribunal was whether the documents produced by the Appellant were genuine both in the sense that they were contemporary records and that they recorded meetings and discussions that actually occurred. The tribunal accepts the evidence of all the UBS witnesses as honest attempts to answer, without any concealment or sidestepping, the challenges to their witness statements to the best of the individual’s recollection. It was also clear in each case that the witness had both made his or her witness statement and given his or her evidence informed by the documents. With those points taken into account, the tribunal accepts the evidence of each witness. 59 The tribunal refused an application by the Appellant at a late stage to admit further evidence and call further witnesses from third parties. In the event, the decisions of the tribunal did not turn on the issues understood to have been supported by that evidence. It therefore records the refusal but does not address the matter further. 60 The Appellant also called two expert witnesses, David Bowes and Dr David Ellis. Mr Bowes gave expert evidence about the valuation of the shares in ESIP Ltd as at 29 January 2004. Dr Ellis gave expert evidence as an economist of the likelihood of the occurrence of the trigger event (that is, the level of the FTSE 100 Index exceeding the stated amount between 29 January 2004 and 19 February 2004). The tribunal accepted the evidence of both witnesses as competently given expert evidence. It deals with the questions, in so far as they are relevant to the decision of the tribunal, in its general consideration of the facts. 61 HMRC called one expert witness, David Croft. He gave evidence on both the valuation question and the likelihood question. He also gave evidence on the hedging arrangements using call options made in parallel with the Scheme. He did so as an experienced businessman with direct experience in these issues. His expertise was questioned by Mr Prosser QC. The tribunal notes that he is not a professional share valuer, but that he had considerable practical expertise in dealing with share values and similar issues. It therefore finds value in his evidence, subject to the relevance of specific professional expertise to some parts of his evidence. But the tribunal accepts Mr Prosser’s point, put to the witness in cross-examination, that he had gone beyond the evidence properly to be given by an expert witness in some of the comments made in his expert report. He had, in the report, made comments on other aspects of the appeal as described to him in his brief. The tribunal excludes from its consideration any evidence by this witness that is not directly focussed on the questions of valuation at the relevant date, the trigger event, and the hedging arrangements. 62 The tribunal accepts from the expert evidence, and finds, that the trigger event created a genuine uncertainty. It was not likely to occur, but there was a genuine possibility that it could occur. It also finds that the existence of the trigger event, and of the effect that this would have on ownership of the shares in question, was such as to reduce the market value of the shares when they were acquired by the beneficiaries by a small amount but not so small an amount that it could be ignored as irrelevant to the tests to be applied. It also finds that the hedging arrangements would normally meet most of the reduction in receipts that an individual might otherwise experience in the event of the trigger event occurring and might, in remote circumstances, result in a gain to that individual. Documentary evidence 63 Extensive documentary evidence was put before the tribunal. It is satisfied that it had before it all the key documents about the scheme save for communications with all individual employees. It is satisfied that it saw appropriate examples of such documents. It also had before it several streams of emails, including streams of emails about the design and development of the Scheme, and of the reaction of employees to the Scheme. 64 The tribunal was invited by Mr Lasok QC to find that specific documentation presented by the Appellant was a sham. The tribunal considers that point below. 65 Aside from the specific challenge made by Mr Lasok QC as to a sham, the tribunal finds the events listed in the chronology annexed to this decision to have occurred as stated in that chronology. It finds that the documentation presented to it was the documentation used and relied on in developing and implementing the Scheme. While it accepts that HMRC have shown that some of the documents such as board minutes were pre-drafted and some signatures and events did not occur precisely when they should have occurred, the tribunal considers these happenings to be the kind of human error that normally occurs when detailed plans are put into effect, and not evidence that the events did not occur or that the documents were not genuine records. 66 The tribunal finds as follows with regard to the persons involved in the Scheme: ESIP Ltd This was the company established for the purposes of the Scheme. It was a Jersey company. Its shareholding is detailed below. It is the SPV referred to in early drafts of the Scheme. At the relevant times it had three directors. Two were appointed by Mourant and the third, Mr Ferrara, by UBS. Juris Ltd. A Jersey resident company owned and controlled by Mourant, and independent of UBS. This company acted as nominee for the ESIP Ltd non-voting shares purchased by UBS as part of the Scheme. Lively Ltd A company similar to Juris Ltd. Mourant A Jersey-based trust company, part of the Mourant Group, and unrelated to UBS. It controlled both Juris Ltd and Lively Ltd. It acted as trustee to the Sidemore Trust. RBS Jersey A Jersey subsidiary the Royal Bank of Scotland Sidemore Trust A charitable trust established under Jersey law with Mourant as trustee. UBS UBS AG, the employer and provider of the bonus funds. UBS Master Employee Trust A trust established by UBS but operating under independent trustees PART 3: ANALYSIS 67 There are four critical dates in the chronology: (a) the date on which the employees earned their bonuses (b) 26 January 2004, when the shareholders of ESIP Ltd adopted a new Memorandum and articles for the company creating non-voting shares (“NVS”) (c) 29 January 2004, when NVS in ESIP Ltd were allocated to employees (d) 19 February 2004, when the restricted period ended 68 The tribunal must find as fact the first of those dates. HMRC contended it was 23 January 2004, in which case it predated 26 January, when the shares were created and when the Scheme started. The Appellant contended that it was either 29 January, when the shares were allocated to employees, or some later date in February. 69 The tribunal finds that the other dates are as stated, and must examine what happened on those dates. Did employees earn their bonuses before 29 January 2004? 70 The tribunal has set out the relevant law in Part 1. It is not a question to be decided by the provisions of Part 7, but a general question of law or fact to be determined in accordance with general rules of contract law and, if relevant, employment law. 71 The core of the argument for HMRC was that the Appellant must have allocated individual sums to employees as their entitlement to bonuses before the Scheme started. This was necessary because only certain individuals could subscribe to the Scheme. To be a subscribing employee, the employee had to have earned a minimum of £20,000 as a bonus for 2003. So the individual bonus entitlement of an employee had to have been determined before the individual could be allowed to enter the Scheme. And Mr Lasok contended on the evidence of the documents produced that this allocation occurred on 23 January 2004. 72 The tribunal agrees with Mr Lasok QC that 23 January 2004 was when the relevant committee within the Appellant had agreed the list of those entitled. There was no evidence that any individual, once on the list, had been removed, or that anyone else had any discretion to remove anyone from the list or alter the amount any individual received. That is, however, not the relevant issue. The relevant issue is when the employee became entitled to be paid the bonus: see rule 2 in section 18 of ITEPA. 73 The tribunal saw in evidence information issued to employees at the relevant time, and correspondence between the Appellant and various individuals about their appointments to posts within the Appellant, including examples of letters of appointment. It was informed of the other bonus systems run by the Appellant. It also saw the presentational material shown and distributed to employees about the Scheme and it heard the evidence of the witnesses. Subject to one point to which the tribunal returns below, it is satisfied that the evidence gives a consistent clear picture that indicates that the employees were not entitled to, or to be paid, their bonuses until the February pay day, and it saw and heard no evidence to suggest that employees thought otherwise. As the evidence included streams of emails between employees and the Appellant’s HR team, the tribunal considers that had there been any significant view by any relevant person that there was entitlement as HMRC suggests, then it would have seen evidence of this. The tribunal would also expect this to be the case, consistently with what it understands to be the general law, namely that an employee seeking to show entitlement to a “discretionary” bonus being awarded after the event must show that he or she has clear entitlement in law to be paid that bonus. 74 That finding applies to all relevant employees (said to number 426 in total) save for a small number, said to involve about 10 employees. These were employees who were appointed on terms that guaranteed them a bonus during the first year of appointment. The tribunal saw examples of these letters of appointment, and was informed by both parties that the Appellant had disclosed all relevant correspondence to HMRC about those appointed on these terms. The tribunal did not ask to see all the letters, because it is deciding this case as a matter of principle. It does not therefore need to make a finding listing those individuals. 75 In these cases, the tribunal finds that the terms of the letters it saw made it completely clear that the employee was entitled to the bonus identified not as a matter of discretion but as a matter of entitlement. That is the only natural and reasonable conclusion from the use of the phrase in the letters that the tribunal saw:
“... in your case the actual incentive award for 2003 is guaranteed to be not less than £...”
. The letter continues:
“You will not be eligible to receive your incentive award if you or the bank have served notice of termination prior to the incentive payment date. In the case of your guaranteed incentive award, you will be entitled to receive the award if your employment has terminated because of total disability, death, retirement or redundancy.” 76 The first point that emerges from this is that an employee who receives a guaranteed bonus may also receive additional bonus. In so far as the bonus is in addition to the amount stated to be guaranteed, then the guarantee does not apply to it. Any additional amount must be considered in the same way as the full bonuses provided to those with no guarantee. 77 The second point is that the guarantee is just that, save for the limitation. It is to be received unless either the employee himself or herself serves notice to quit, or the employer serves notice for some reason other than the four reasons stated. The tribunal did not examine the contracts of the employees in detail to establish what grounds were available to an employer of such an employee. In the absence of evidence the tribunal assumes that the general law applies and that the employer has the same rights as any employer to dismiss without notice for gross misconduct, but would otherwise be liable for any wrongful or unfair dismissal. However, in reality, if an employee is given notice in these circumstances (but not redundancy) then the entitlement to receive any further sums from the employer would be lost in any event or alternatively open to recovery by other means. 78 In principle, and subject to evidence of contracts not seen by the tribunal, the tribunal finds that the guaranteed part of the bonus should be regarded as precisely that. It is fully satisfied that the letters reflected specific negotiations with specific individuals, and notes that the letters also say that the provisions apply “exceptionally in your case...”
. Accordingly, to that extent, the general rules did not apply. 79 On that basis, the tribunal finds and decides that once the Appellant had identified a specific sum as the bonus for 2003 for that individual, as it did on 23 January 2004, then to the extent that the sum identified was or included a guaranteed amount, the employee had an enforceable right to be paid that sum. It follows that it is then irrelevant for the purposes of Part 7 that the individual then decides to put his or her money into the Scheme, if the Scheme allows this to be done. The liability to pay income tax and National Insurance contributions has already arisen. That is not a matter of concern to the tribunal in this appeal. 80 The tribunal therefore finds that those employees given a guaranteed bonus for 2003 were entitled to that bonus once it was identified, and the tribunal finds that this occurred before the day on which the Scheme started, 29 January. The employees concerned had earned their bonuses for ITEPA purposes before the sums were paid into the Scheme. The tribunal therefore finds that HMRC succeeds on this aspect of the appeal. 81 As this is a decision in principle, the tribunal makes no finding identifying the relevant individuals or the amounts that those individuals were guaranteed. The tribunal therefore gives liberty to the parties, should it prove necessary to them, to bring the matter back to the tribunal for a full decision. The tribunal also accepts that there may have been terms not in evidence to the tribunal that should have been taken into account in this analysis in respect of specific individuals whose details were not before the tribunal, and the liberty to apply also relates to any such issues. 82 More generally, the tribunal finds that the evidence set out above about guaranteed bonuses is also evidence that these provisions were exceptional. The evidence further confirms the general finding of the tribunal that in all other cases no bonuses were earned by employees before the start of the Scheme on 29 January 2004. The restricted securities 83 On 26 January 2004, the shareholders of ESIP Ltd passed a special resolution amending the memorandum and articles of association of the company. The tribunal has already found that these events occurred and that these alterations took place as evidenced for the Appellant. 84 The purpose of the amendments was to put in place the specific form of share structure that had been planned as the central element of the Scheme, namely a class of shares (NVS shares) that were to be restricted securities for the purposes of Part 7 of ITEPA, but with a specific and time limited restriction. 85 The definition of a restricted security is in section 423(1) of ITEPA. Section 422 provides that the securities must be restricted securities at the time of their acquisition. There are two conditions or, rather, one general condition and a set of other conditions one of which must also be met:
“(a) there is any contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies, and (b) the market value of the employment-related securities is less than it would be but for that provision.” 86 Section 422 provides that these conditions must be met at “the time of the acquisition”
. Section 421B(1) and (2) provide the relevant definitions for this rule. Chapter 2 applies to securities:
“... acquired by a person where the right ... to acquire the securities or interest is available by reason of an employment of that person or any other person. (2) For the purposes of subsection (1)— (a) securities are, or an interest in securities is, acquired at the time when the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest (and not, if different, the time when the securities are, or interest is, conveyed or transferred) ...” 87 It was not in dispute that the employees acquired their interests in the shares in the Scheme by reason of their employments. The tribunal finds that the day on which the employees acquired their interests in the shares was 29 January 2004. 88 Two questions therefore arise: were there restrictions in place at the time of acquisition by the employees? If there are restrictions in place, did they affect the market value of the shares? 89 The new Memorandum of ESIP Ltd authorised a change in the share capital. Article 2 (“share capital”) of the Articles provided the details. The most important of the provisions of Article 2 relevant to this appeal (with abbreviations added) are: “(1) The Company shall have an authorised share capital of UK £27,000 divided into (i) 2,600,000 Voting Ordinary Shares with a par or nominal value of UK £ 0.01 each (“VOS”) and (ii) 100,000 Non-Voting Shares with a par or nominal value of UK £0.01 each (“NVS”) ... (6) The unissued NVS shall be at the disposal of the directors and (save as otherwise directed by the Company in general meeting) they may allot or otherwise dispose of them to such persons at such times and generally on such terms and conditions as they think proper, subject nevertheless to this Article 2, and provided that no shares shall be issued at a discount. (7) Subject to Article 2(15) the rights attaching to a NVS of the Company shall be as follows: ... (d) Some or all of the NVS may be redeemed by the Company at any time after the expiry of the Restricted Period at a price per NVS equal to the Redemption Value divided by the number of NVS in issue at the relevant date (“the Redemption Price”) ... (e) On the First Optional Redemption Date some or all of the NVS held by a Holder shall be redeemable on notice to the Company given by the Holder during the Notice Period at a price equal to the Redemption Price ... ... (14) Unless a sale has previously occurred under this Article 2(14), if the closing value of the Index on any date during the Restricted Period is greater than the Trigger Level, the legal and beneficial interest in each NVS in issue shall be immediately and automatically sold to the Purchaser for a consideration equal to the Forfeiture Price. Any such sale shall be regarded as effecting the transfer of beneficial ownership of such NVS at that time, and shall be completed by the transfer of the registration of that NVS into the name of the Purchaser as soon as practicable after that time (in all cases notwithstanding the fact that the Forfeiture Price has not yet been paid to the Holder), and the Forfeiture Price shall be paid in full by the Purchaser to the Holder of the NVS no later than 30 April 2004. If the preceding paragraph applies:” [the paragraph then sets out administrative provisions] “During the Restricted Period, unless an automatic sale for a consideration equal to the Forfeiture Price has taken place in accordance with the above provisions of this Article 2(14), any interest (whether legal or beneficial) in a NVS shall not be transferable for Consideration in any circumstances and in the event of any purported transfer of such NVS or interest therein for Consideration such purported transfer shall be null and void and the purported transferee shall not be entitled to be registered as a Holder of that NVS. (15) Notwithstanding the preceding provisions of these Articles and anything else expressed or implied in these Articles, at any time at which the Holder of beneficial owner of any NVS is a Group Company, that NVS shall, except to the extent that the Group Company is the Purchaser and has acquired the NVS pursuant to Article 2(14), confer the following rights and for the avoidance of doubt the provisions set out in Article 2(7) to 2(14) (other than Article 2(13) shall not apply to that NVS:” [The sub-paragraphs that follow remove rights to dividends and distributions and to receive notices of or vote at any meetings save those affecting NVS rights, entitle the holders of the shares to recover only the nominal value of the shares on winding-up and prohibit any transfer or redemption.]” 90 The “Restricted Period” is defined elsewhere as being the period from 1 pm on 29 January 2004 to 19 February 2004. The “Index” is the London Stock Exchange share index usually referred to as the FTSE 100. (This was decided by the directors of ESIP Ltd, and is common ground). The “Trigger Level” is the FTSE 100 level of 4947.15. (This was also determined by the directors). The “Forfeiture Price” was 90 per cent of the then Market Value. The “Purchaser” was UBS Employee Benefits Trust Ltd. The “Market Value” was the price estimated in good faith by the directors to be obtainable on a sale of the NVS in the open market between a willing seller and a willing buyer with no restrictions applying. 91 In other words, if at any time between 1 pm on Thursday 29 January 2004 and Thursday 19 February 2004 (that is, three weeks later) the level of the FTSE 100 index exceeded 4947.15, then the automatic forfeiture provision applied. As a result the employee would receive in due course only 90 per cent of the amount he or she would otherwise receive on redeeming the share. 92 Was this a “contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies” for the purposes of section 423 of ITEPA? The full text of the section is set out above. 93 For the Appellants, Mr Prosser QC submitted that the NVS were real shares with real economic consequences. Further they were shares to which the provisions in the articles and the resulting trigger applied as an arrangement or condition and that subsection (2) applied to them. This requires: “(a) ... a transfer, reversion or forfeiture of the employment-related securities, or (if the employment-related securities are an interest in securities) of the interest or the securities, if certain circumstances arise or do not arise, (b) as a result of the transfer, reversion or forfeiture the person by whom the employment-related securities are held will cease to be beneficially entitled to the employment-related securities, and (c) that person will not be entitled on the transfer, reversion or forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion or forfeiture) at the time of the transfer, reversion or forfeiture.”
Article 2 brought the shares within the subsection because it caused a forfeiture to occur if the FTSE 100 index crossed the trigger level, and the resulting sum received by an employee was only 90 per cent of what would otherwise be received. He fortified this argument by the expert evidence of Dr Ellis that there was a genuine possibility that the FTSE 100 would rise to the level required and that therefore the trigger condition was a genuine one. This was supplemented by the expert evidence of Mr Bowes to confirm that the result was a reduction in the market value. 94 Mr Lasok QC first contended that the shares were not restricted securities on the general ground that the provisions of Part 7 did not apply to tax avoidance schemes. More specifically, Mr Lasok QC raised two arguments why, in his submission, the shares in ESIP Ltd were not restricted securities. The first submission was that there was little or no likelihood of the condition operating. The second was that any reduction in value resulting was de minimis and could be ignored. The tribunal, he submitted, must also take into account that the Scheme was designed with a call option working in parallel to the forfeiture provision so as to ensure that the employees lost nothing if the trigger event occurred. 95 The tribunal has little trouble in accepting that the NVS were real shares. It was possible for an employee to hold them for over two years, and some did so. If they did so, they received dividends from the sums invested in ESIP Ltd and invested by it. Those shares were securities. The more significant question is whether they were restricted securities. 96 The tribunal notes three aspects of the forfeiture provision that deserve consideration. The first is that the actual trigger was not a matter in any contract or agreement between the Appellant and/or the employees with each other or any third party. Nor was it an inherent part, as a matter of law, of the Scheme or of the rights of the holders of the non-voting shares. It was created as a decision of the directors of ESIP Ltd. However, in reality, they did not just produce their ideas out of thin air – earlier versions of the form of trigger used had been discussed in some detail since the idea of the Scheme first emerged, and the actual form used had been discussed thoroughly by those responsible within the Appellant. If it is seen in that context, it was certainly an aspect of an arrangement, namely the arrangement under which the Scheme was created. 97 The second aspect is the period for which the restriction operated. It was precisely three weeks. It was not argued for HMRC that this period was of itself too short to amount to a restriction. Rather, this went to the question whether the restriction caused any loss in value. The tribunal agrees that the period of itself does not remove the fact that there was a restriction. But it is relevant in assessing both market value and the Scheme as a whole. 98 In the view of the tribunal, the period is a factor to be taken into account in assessing the nature of the trigger event, and not a separate issue. The trigger event was, adopting the analysis of Dr Ellis, a 6.5 per cent rise in the FTSE 100 index in the three week period. That, of course, has little to do with the relationship between employer and employee, not least because the Appellant’s shares were not even in the FTSE 100. But, as Mr Prosser QC rightly contended, there is nothing in Chapter 2 that states the purpose of any restriction. It does not have to be employee-related. 99 In the view of the tribunal, the trigger event and the period chosen are to be seen alongside the call option arrangements to which Mr Lasok QC drew attention. It is clear that from the earliest inception of the thinking that went on about ESIP Ltd, there was a constituent element that involved using a device to neutralise the effect of any trigger event. The proposal was that the trigger event should be hedged so that if the share prices rose above the level set, then an arrangement should be in place to compensate the company for the loss it would suffer in the enforced sale of its shares. As a result, the company’s loss of funds would be made good so that the payout to the shareholders of the NVS would not be affected significantly by the reduction caused by the forced redemption. 100 In an email dated 22 August 2003 and marked as of high importance from Nicholas Anderson (who gave evidence to the tribunal) to others in UBS, Mr Anderson outlined issues involved in what was then called NECAP. At the time it was proposed to use the UBS share price as the basis for the trigger event. Among other points in the email it is stated:
“3. The value of “X” [the trigger price] above needs to be chosen so that there is a 10% chance of it being hit ... 4. We would then want to hedge the employee’s market risk by buying out of the money [given to the SPV] call options within the SPV itself (not by the employees themselves). What we are thinking of is that the SPV would purchase sufficient ... call options that, if the ... share price does hit [the trigger level] within the one month, the option payout is sufficient to compensate employees for their obligation to sell the SPV shares at 90% of FMV.” 101 That thinking remained a central strand of the Scheme. It was presented to senior management of UBS in December 2003 by Geoffrey Hayward’s second in command in these terms (taken from a copy of the Powerpoint presentation slides in the papers): “Trigger Event”
If the FTSE rises by specified amount (equating to 5-10% probability) during first 3 weeks after award, shares will automatically be sold back to UBS for 90% of fair value. To hedge this risk, SPV spends 3 of its 100 available cash in purchasing call options. Remaining 97 is placed on 3 week deposit. “Trigger Event” Occurs (<10% chance) -Option gain will increase SPV’s NAV to 112. Hence employees’ shares are sold to UBS for 112 x 90% = 100. Funds are paid to employees on 31March 2004. This takes form of capital gain. “Trigger Event” Does not Occur (>90 % chance) -SPV will invest its remaining 97 of cash in UBS shares (either actual or synthetic). The shares will automatically be redeemed on 1 March 2006.” 102 This remained the thinking and was built into the various timelines for the Scheme that were disclosed by UBS to HMRC. The most relevant of these developing documents (of which the tribunal saw a series) is that of 22 January 2004, sent just ahead of the start of the main events of the Scheme. It was sent by Rebecca Jackson to Jonathan Ferrara after he had agreed to take on the UBS directorship of ESIP Ltd. The timeline is detailed and shows the series of events to take place. Those relevant to this point (the purchase of the call options) are:
“Mon 26 Jan. ESIP Ltd board meets. Geoffrey reports that he has met with UBS the previous day. UBS has indicated that it intends to offer to subscribe for NVS on certain terms (draft terms presented to meeting). Notes that he has received a presentation from UBS London Equities proposing hedging strategy which directors should consider to meet the terms of subscription. Directors agree these are sensible but await offer from UBS. Could be 27th Document 17: ESIP Ltd board minute reflecting above. Wed 28 Jan In late pm (near LSE closing time) London HR sub-committee meets and submits offer (with FTSE trigger number). Fixed. Document 12: HR sub-committee minutes reflecting above. Document 13: Letter from UBS London to ESIP LTD setting out subscription offer for B shares ... Thu 29 Jan ... ESIP Ltd board meeting to decide to place order for FTSE options with UBS London Equities. Document 17: ESIP Limited board minutes reflecting above. Order placed by phone by ESIP Ltd to UBS London Equities for purchase of FTSE options.” 103 The UBS offer was made as planned. It contained the requirement foreseen in the December presentation that ESIP Ltd keep 97 per cent of the capital for investment but use 3 per cent for the purchase of options. That was agreed and the options were purchased. The papers also contain documents showing the thinking behind the level of options required. These include drafts of an index call warrant in the name of UBS Investment Bank. The proposal is for a settlement amount of 14.112% on settlement date (20 February 2004) if the FTSE closes above the barrier level on any day between and including 28 January 2004 and 19 February 2004. Someone has annotated this with the handwritten comment: “Change forced sale payout from 100% - 99% (demonstrate participants have lost some value) – premiums will reduce,” 104 The tribunal finds that the events occurred as planned. The agreement between UBS and ESIP Ltd that led to the subscription was duly accepted by both parties, and ESIP Ltd duly agreed to hedge at the level agreed with UBS London Equities. (The evidence is that a complex option was agreed, but the details do not matter.) The final terms were a premium of £2.2 million for a payout if the event had materialised that would have left employees with 99.2 per cent of their entitlement. The money given to ESIP Ltd by UBS was therefore split 97/3 as planned. 105 It is clear to the tribunal from this that there is a close interlinking between the trigger event chosen, the period of the restrictions chosen, and the method of hedging chosen. The aim was at first that there should be a complete offset between the loss to an employee if the trigger event occurred with the result communicated to senior management that there would be no reduction in value in the payout to the employee. He or she would receive the same whether or not the trigger event occurred. At some point someone thought a deliberate near miss was better than an exact hit in terms of offsetting the loss. As the trigger event did not occur, this was not tested. 106 It is also clear to the tribunal that the reality was that the Scheme as a whole was carefully designed so that employees could not suffer any significant loss if the trigger event was realised. The reality of the risk was that an employee stood about a 10 per cent chance of losing 0.8 per cent of the bonus amount to be weighed against the opportunity to remove a 41 per cent tax charge. (The tax charge is not relevant, however, to the quantification of the value to be realised under the Scheme.) 107 In that context, little turns on the evidence of Dr Ellis (or the evidence from Mr Croft) about the precise extent of the risk. The specific risk taken as the trigger event was, the tribunal finds, deliberately chosen as an objective, limited risk that a counterparty was prepared to offset entirely. The premium was priced at 3 per cent in total in the call option. Dr Ellis estimated risk on differing bases but between, at the extreme (in rounded terms), 6 per cent and 12 per cent. Mr Croft’s evidence put the risk in the same area. 108 Mr Lasok QC robustly urged the tribunal to look at events with that in mind, and to find that as a result the securities were not restricted. That requires an examination of the tests in the legislation. 109 A market value criterion is applied twice in the relevant parts of the definition of a restricted security. Section 423(1), as we have seen, lays down the general condition that the condition imposing the condition must be such that “ the market value of the employment-related securities is less than it would be but for that provision. Section 423(2) imposes three conditions, the third of which is that the employee: “... will not be entitled on the transfer, reversion or forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion or forfeiture) at the time of the transfer, reversion or forfeiture.”
The terminology here is prescriptive: the market value must be less than it otherwise would be as viewed at the time of acquisition, and the amount received by the employee must be less than the market value. So this must be tested both at onset and on delivery. 110 There is however a difference in the phraseology of the onset test (section 423(1)(b)) and the delivery test (section 423(2)(c)): the former is related specifically to the market value of the securities, while the latter is wider. It refers to the entitlement of the employee that arises at the time of the forfeiture. The tribunal is prepared to accept that the amount received by an employee if the trigger event occurred was structured so that the market value of the NVS was reduced. But it does not accept that this is the only amount to which the employee would have been entitled under the Scheme at the time of a forfeiture. The employee would also have been entitled to the appropriate share of the sums received on exercising the options. UBS had required ESIP Ltd to invest in the options, and the agreement had taken into account the sums receivable. Further, the employees had all been informed of this, and had themselves entered the Scheme with this information in mind. The amounts receivable by the employees on the event of forfeiture occurring were therefore, as the presentation claimed, bar a small marginal difference, the same as if the forfeiture did not occur. Any difference was not a matter of the market or an unknown amount, but a precisely quantified amount known in advance as a result of a decision taken quite deliberately to structure the option so that it just undershot the amount required to balance the transaction completely. 111 Further, while the tribunal received limited evidence about the circumstances that might apply had there been a forfeiture, it noted the evidence of Mr Croft that the details of the option were such that there were circumstances in which the amount received on forfeiture could exceed the main level of return under the option, so raising the possibility that the effect of the forfeiture happening could be a gain, not a loss. Mr Croft stated that there was a very low probability of this occurring. Although the general context is that of a possibility – far short of a probability – that the trigger level of the FTSE might be met, the tribunal nonetheless puts limited weight on that aspect of Mr Croft’s evidence as compared with the general position. At the same time, it does not consider that this evidence was challenged successfully. It was a matter that it was appropriate for HMRC to put before the tribunal in this form, and while the tribunal had reservations about aspects of Mr Croft’s evidence, as noted above, it does not consider that those reservations deprive this aspect of his evidence of relevance nor does it make the evidence on this issue unsafe. It is a marginal additional aspect of the general reality of the situation that no significant loss would occur if the trigger level was crossed. That situation is a probable marginal loss of under 1 per cent in the improbable event that the trigger level was crossed with a remote possibility of a gain. That is to be compared with the picture presented by the Appellant of a 10 per cent loss. 112 Taking all the evidence into account, the tribunal finds as fact that, on a straightforward interpretation of the language of the statute, the test in section 423(2)(c), namely that an employee “ will not be entitled on the ... forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for ... forfeiture) at the time of the ... forfeiture” is not met. 113 It was not argued for the Appellant that any other aspect of the tests in section 423 was met on the facts. Accordingly, the tribunal finds that the securities were not “restricted securities” within the meaning of Chapter 2. 114 It follows that the appeal must fail. 115 The tribunal considers that, nonetheless, it should consider the other issues raised in the appeal, and on which it received evidence, in case it is wrong in law on that issue. However, it emphasises that the primary basis of its decision is that (a) the appeal fails with respect to the guaranteed bonuses of a small number of the employees because those employees received the guaranteed bonuses as earnings before the sums were paid into the Scheme, and (b) the appeal fails more generally with regard to all other bonuses in that the non voting shares used in the Scheme were not restricted securities because on the tribunal’s findings of fact they did not comply with all the requirements of section 423. The significance of section 429 116 Had the Appellants been successful in establishing that the shares were restricted, then they would next have contended, as Mr Prosser QC submitted, that they were entitled to exemption from the charge that would arise under section 426 of ITEPA by reason of section 429. This on the grounds that all four of the conditions of section 429(1) were met, namely that:
“( a) the employment-related securities are shares (or an interest in shares) in a company of a class, (b) the provision by virtue of which the employment-related securities are restricted securities, or a restricted interest in securities, applies to all the company’s shares of the class, (c) all the company’s shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and (d) subsection (3) or (4) is satisfied.”
The submission was that section 429(4) was met, namely that:
“... immediately before [the chargeable] event, the majority of the company’s shares of the class are not held by or for the benefit of any of the following— (a) employees of the company, (b) persons who are related to an employee of the company, (c) associated companies of the company, (d) employees of any associated company of the company, or (e) persons who are related to an employee of any such associated company.” 117 The tribunal interprets this as referring primarily to the shares (or, more generally to any securities or interests in securities) held by the potential taxpayer, that is, the person who may, but for section 429, be regarded as the earner for the Chapter 2 charge. The focus of this and similar appeals is on the employer, and the contended liability of the employer to collect income tax from the employee under the PAYE Regulations, and collect and account for NI contributions under the modified PAYE Regulations that apply to contribution liability. But the drafting of Part 7 is framed with the individual taxpayer in mind. “The” employment-related securities are therefore those held by an individual employee, not the employees as a group. It follows that the test in subsection (1) is to be applied by comparing an individual’s entitlements to those of the others also holding shares of that class. 118 In this case, the class of shares is the NVS, the non-voting shares. Who held those immediately before the chargeable event? This is defined by sections 426 and 427. The chargeable event is the time when the shares cease to be restricted shares – that is, following the closure of the period in which the trigger could operate up to 19 February 2004. The circumstances that would activate the charge under section 426 at that time are defined in section 427(3): “... the employment-related securities ceasing to be restricted securities, or a restricted interest in securities, in circumstances in which an associated person is beneficially entitled to the employment-related securities after the event...” 119 Mr Lasok QC submitted that UBS was an associated person with ESIP Ltd at that time. “Associated person” has the same meaning for these purposes as in section 416 of ICTA (see section 421H of ITEPA). That definition is set out above. His argument was that in reality UBS controlled ESIP Ltd. ESIP Ltd did what it was told by UBS, and it did not exercise any initiative of its own. 120 Mr Prosser QC strongly resisted that argument, and relied on the evidence of his witnesses, and in particular Mr Ferrera, as the basis for his submission that ESIP Ltd was an independent company. The evidence showed that two of its three directors were not appointed by UBS or associated with it, but were appointed by the independent company, Mourant, who by its nominees held the other voting shares in ESIP Ltd. They had held real meetings and made real decisions. 121 While the language of the timeline details cited above from the internal UBS memorandum sent to Mr Ferrera after he had agreed to become a director, and the extent to which events followed the timeline, certainly justify Mr Lasok QC in raising the argument and seeking to test the evidence thoroughly, the tribunal agrees with Mr Prosser QC. It follows from its general finding that its starting point in the analysis is that events occurred as the operative documents (and not merely the timelines) suggested. 122 The tribunal does not consider that it needs to examine the corporate structure of ESIP Ltd beyond the general finding that the NVS were held by UBS and the UBS employee benefit trust as detailed in the chronology in the annex to this decision. When the shares were sold, the sale was to UBS. That was not in dispute. The sole area of dispute was whether UBS was an associated person with ESIP Ltd within the section 416 meaning. The tribunal regards this as relatively straightforward. On the basis of its main findings of fact, it sees nothing unusual or untoward about the relationship between the two companies, and it saw no evidence to suggest there was control of the kind envisaged by section 416. It does not consider therefore that it need enter into a detailed analysis of the section. It finds on the facts that the evidence does not show that UBS and ESIP Ltd are associated persons. Did the arrangements involve a sham? 123 Mr Lasok QC also contended that there was a specific element of sham in the arrangements establishing ESIP Ltd, and that as a result there was control by UBS of that company. His contention was that Article 2(15) of the new articles of association of the company, adopted on 26 01 2004, was a sham. He clarified this submission by agreeing that he was not alleging fraud specifically on the part of UBS or any other identified person, and that he was not alleging fraud in the Snook sense (that is, by reference to the decision in Snook v London and West Riding Investments Ltd, [1967] 2QB 786). Rather, his submission was that this particular provision should be viewed in the same way as the documents in question in Antoniades v Villiers [1990] AC 417 . 124 Mr Lasok QC relied on the acceptance by Mr Prosser QC in opening that if it were not for Article 2(15), when UBS acquired the NVS in ESIP Ltd, and before it gave them to the employees, it would have obtained control of ESIP Ltd in the section 416 sense. 125 The relevant provision (repeated from above) is: “(15) Notwithstanding the preceding provisions of these Articles and anything else expressed or implied in these Articles, at any time at which the Holder of beneficial owner of any NVS is a Group Company, that NVS shall, except to the extent that the Group Company is the Purchaser and has acquired the NVS pursuant to Article 2(14), confer the following rights and for the avoidance of doubt the provisions set out in Article 2(7) to 2(14) (other than Article 2(13) shall not apply to that NVS:” [The sub-paragraphs that follow remove rights to dividends and distributions and to receive notices of or vote at any meetings save those affecting NVS rights, entitle the holders of the shares to recover only the nominal value of the shares on winding-up and prohibit any transfer or redemption.]”
In other words, it prevents several of the provisions of Article 2 from operating, on the facts, in the short period from the acquisition by UBS of the shares in ESIP Ltd until they were transferred to the nominee for the employees. One resulting risk, as identified by Mr Prosser QC, was that ESIP Ltd was wound up in that period. In his view UBS had enough shares, aside from the NVS, to prevent the necessary special resolution to do that. In his submission, UBS identified and took a risk about the events in that short period to avoid the problems that otherwise occurred. 126 Mr Lasok QC made his submissions on this point as part of a more general assertion that UBS controlled ESIP Ltd. This must be considered, he submitted, in the same objective way as the agreement between the landlord and the tenants was considered by the House of Lords in Antoniades . The House of Lords had taken the view, he argued, that, viewing the clause objectively, that it simply could not be accepted that the clause was intended to operate. It was a formal provision in the lease, but in reality it was nothing other than a device to get round the law. In argument, Mr Lasok QC accepted that the argument he put forward was not an argument about fraud but rather an argument that represented the same broad approach as that explored in tax appeals from the case of Ramsay v IRC [1982] AC 300 and appeals that followed. No reference had been made to the tax cases in Antoniades but, he submitted, this was another part of the same approach. In Ramsay and the cases that followed, the focus was on statutory construction. In Antoniades it was on the construction of the rental agreement. Here the concern of the tribunal was with the articles of a company. That was more akin to Antoniades than Ramsay . 127 The tribunal heard extended argument on this point because Mr Prosser, QC made an application on behalf of the Appellant that HMRC be precluded from advancing a sham argument as the issue had not been raised in the statement of case. The tribunal ruled during the hearing that it accepted from Mr Lasok QC’s submission to the tribunal that no direct allegation of fraud was made, and it was not therefore asked to consider any. But it considered that at least part of Mr Lasok QC’s argument was within the case stated in so far as he was arguing how the law should be applied to facts, including documents, that were in evidence. If and in so far as the argument involved an interpretation of a document, that was a matter of law and therefore not an allegation of a subjective nature. 128 The tribunal confirms that it does not regard any aspect of the articles of association of ESIP Ltd as involving any fraud (in the Snook sense or any other sense). It finds that Article 2(15) of those articles was a genuine provision in the articles properly accepted by the shareholders of the company by special resolution on 26 01 2004. It was not argued that the article was beyond the powers of the company or in any other way invalid as a matter of company law. It finds that the only scope for operation of that article was in the period of not more than a day between the acquisition of the NVS by Juris Ltd as nominee for UBS on 28 01 2004 and the transfer of the beneficial interests in those shares by UBS to named employees the following day. It does not accept, on the facts, that the provision was one to which the decision in Antoniades - that this was not a provision on which the parties intended to act - applies as it sees no basis in the evidence on which to form the view for which Mr Lasok QC contended that the parties would have ignored Article 2(15) if the circumstances that triggered it had come about. The tribunal therefore takes Article 2(15) into account in its decision that UBS did not control ESIP Ltd at any time. 129 It is therefore prepared to accept that if section 426 had applied to the shares, then any charge under that section would have been prevented by section 429. The Scheme as a whole 130 The tribunal considers, on the same basis, that it should also examine the general challenge put by HMRC to the Scheme. This is that, viewed on all the evidence, it is a tax avoidance scheme such that it falls outside the proper scope of Chapter 2 of Part 7. The tribunal therefore records its findings on this issue. 131 The tribunal approaches this part of the decision on the basis that it has seen full documentation from the Appellant, and that the oral evidence presented on behalf of the Appellant confirmed the evidence in those documents. 132 It also approaches the issue taking into account the recent guidance of Arden LJ in Astall and in particular her guidance that the second general issue in a tax avoidance case is:
“to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.” 133 The tribunal has taken the specific view that the shares in question were not in fact restricted shares by reference to the precise tests on value to be applied. It also takes the view that the issue may be addressed in a broader way. It has set out above what it takes to be the object of the relevant legislation in Chapter 2 of Part 7 of ITEPA. What are the “actual facts” of the application of those provisions here? 134 If the Scheme worked, both UBS and the individual employees derived significant benefit from it. UBS would pay the relevant bonuses into the Scheme without having to account to HMRC either for income tax or NI contributions for the employees or its own liability for NI contributions on earnings of employees. In global terms, it would need to put 100 into the Scheme and not 112, and the employees would receive 100 rather than 59. (These are the figures directly arising from the Scheme. Employees might have other tax liabilities in respect of the 100 received. A full analysis would also have to look at the extent to which any costs incurred by UBS in connection with the Scheme could be set off as deductions from profits against other tax liabilities). 135 UBS required that the 100 it put in be divided as to 97 for the purchase of the NVS in ESIP Ltd and as to 3 for the purchase of call options by ESIP Ltd. This occurred. The effect was that, at the close of the relevant period, ESIP Ltd would either have shares unaffected by the trigger event, or shares affected by the trigger event plus the benefits from the options. The Scheme was originally so constructed that the values of the beneficial interests of individuals in the shares would have been the same under either of those two outcomes. This was then altered to create a small “loss”
. The effect of the trigger event was the reduction in the value of the NVS by a predetermined amount. The options purchased were of such a value that the sums received under the options if the trigger event occurred totalled slightly less than the loss in the value of the shares, again by a predetermined amount. Both figures were artificial in the sense that neither was determined by, or could be influenced by, any event outside the control of those establishing the Scheme, or could alter once the shares and options were purchased. UBS as employer and the individual recipients as employees knew from the start of the Scheme that the employees, as shareholders, would receive the money paid in by UBS from one or both of the parallel elements a few weeks later save, in the unlikely occurrence of the trigger event, to a deliberately determined and insignificant extent. 136 On the evidence before it, the tribunal finds as fact that it is artificial to ignore the purchase of the options when viewing the Scheme as a whole. If the benefits that would be derived from the options are taken into account then there was, in real terms, no significant loss of market value to be suffered by the employees as a result of the restriction. In determining as a matter of fact that the reduction in value was insignificant, the tribunal has in mind that but for the scheme an employee would have received 59 from UBS if paid earnings but under the Scheme he or she would probably receive 100, possibly even more, and would receive over 99 in any event. 137 The reality is therefore as follows. Had the Scheme – or any other arrangement - not been in place, employees would have received as part of their pay in February 2004 a bonus amount determined by reference to receipts in 2003. That bonus would have been earnings. It would have been subject to deduction of income tax and NI contributions in the usual way under the PAYE Regulations, leaving in most cases a net sum of 59 per cent of the original entitlement. That is, indeed, what happened to those amounts of payable bonus not within the scope of the Scheme or which were earnings before being brought within the Scheme. It is also what would have happened had employer and employee agreed not to apply the provisions of chapter 2 as it is an optional, and not a mandatory, provision. Under the Scheme, employees received, about a month after the February pay arrangements (details in Annex), beneficial interests in shares with a right to encash the beneficial interests. If the rights were encashed, employees received the same sums as would have been received as earnings, but without any deduction of income tax or NI contributions. Alternatively, employees might less probably receive a lump of slightly less than that sum, but again with no deduction of income tax or NI contributions. There would then be a charge to capital gains tax, at the relevant rate, but no charge to NI contributions. 138 What was the purpose of the Scheme? Mr Lasok QC contended it was simply a tax avoidance scheme. Mr Prosser QC asked the tribunal to find that it had a commercial purpose aside from the tax avoidance purpose. Quite properly, he did not seek to deny the tax avoidance aspects of the Scheme, but he also pointed out the importance of the Scheme to employer/employee relations. The tribunal finds on the evidence that the predominant reason for the Scheme was the mitigation of the burden of income tax and both employer and employee NI contributions. Mr Anderson agreed in evidence that this was the only reason why an employee would agree to enter the Scheme. He and Mr Hayward suggested that the employer had other reasons for establishing the Scheme but agreed in evidence that the main reason was that of tax avoidance. The tribunal takes the view that any other benefit, such as goodwill between employees and employer, followed on from the way in which the Scheme reduced the exposure of all those involved to income tax and NI contributions and were not separate from it. It does not therefore consider that there are other primary purposes against which to assess the effect of the Scheme. 139 In other words, the Scheme delivered all employees within it a significant gain in the actual cash bonus receivable as compared with the receipt of earnings, whatever the outturn of the Scheme arrangements, although there was a possibility of an insignificant loss as between the outturns under the probable and improbable alternative outturns of the Scheme. Further, if employees so chose, the timetable of the arrangements was much the same as applied to the receipt of earnings. The tribunal does not consider that, in reality, the Scheme can be properly described as one providing restricted securities within the scope of Chapter 2 of Part VII of ITEPA. 140 The tribunal therefore takes the view that the Appellant fails in this appeal by reference to the application of Chapter 2 of Part 7 of ITEPA to the facts of the Scheme as a whole. Conclusion 141 The appeal fails with regard to the bonuses guaranteed to a few specific individuals because, the tribunal finds, those guaranteed bonuses were earnings of the individuals before the relevant amounts were paid into the Scheme. In any event, the appeal fails with regard to all bonuses because, the tribunal finds, the Scheme did not create securities that were restricted securities within the definition in section 423 ITEPA. It also finds in respect of all bonuses that, following the guidance of Arden LJ in Astall and assessing the Scheme by reference to reality and not simply to its form, the Scheme is not within the scope of Chapter 2 of Part 7 of ITEPA. 142. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. David Williams Tribunal Judge Released: 6 August 2010 Issued (with corrections): 15 September 2010 ANNEX : CHRONOLOGY OF EVENTS RELEVANT TO THE APPEAL Date Event 16 12 2003 Sidemore Trust identified as trust to invest in the SPV 18 12 2003 Draft of memorandum for investment in SPV 9 01 2004 Discussion of hedging arrangement 19 01 2004 ESIP Ltd incorporated 19 01 2004 Sidemore Trust authorised purchase of ESIP Ltd shares 20 01 2004 Juris Ltd and Lively Ltd subscribed to 100 1p shares in ESIP Ltd as nominees for Mourant as trustee of Sidemore Trust 20 01 2004 Declarations of trust by Juris and Lively, making Sidemore Trust sole shareholder in ESIP Ltd 20 01 2004 Directors appointed to ESIP Ltd board 20 01 2004 First ESIP Ltd board meeting (minutes signed by 22 01) 21 01 2004 Payment of £2 for shares in ESIP Ltd 23 01 2004 Date by which HMRC contends that bonuses had been allocated to employees by UBS 23 01 2004 Jersey Financial Services Commission consent to ESIP Ltd issuing 2.7 million £1 shares 26 01 2004 Special resolutions of ESIP Ltd shareholders adopting new articles of association reclassifying existing shares Share capital: 2.6 million 1p ordinary voting (VOS) 100,000 non-voting 1p (NVS) 26 01 2004 Mourant for Sidemore offer to subscribe to 16,998 VOS in ESIP Ltd 26 01 2004 ESIP Ltd accepts offer to subscribe 27 01 2004 UBS offer to subscribe £9,000 for 900,000 1p NVS if Mr Ferrara appointed director. Shares to go to Juris as nominee 28 01 2004 UBS gifted 100 VOS to UBS Employee Master Trust 28 01 2004 Juris agree to act as nominee for UBS 28 01 2004 UBS offered £91,880,000 to ESIP Ltd for NVS shares (£1,000 for each 1p share) conditional on, ia, purchase of call options over FTSE 100 index and then rest invested in RBS Jersey at interest until 20 02 2004 28 01 2004 ESIP Ltd board accept UBS subscription and issue 91,880 NVS to Juris 28 01 2004 Shareholding structure in place as follows: Mourant for Sidemore 1.7M VOS UBS 899,900 VOS UBS Employee Master Trust 100 VOS Juris for UBS 91,880 NVS 28 01 2004 FTSE 100 trigger level set: 4,749 29 01 2004 Date on which UBS contended award of bonuses to employees Meeting of UBS ESIP committee 30 01 2004 UBS confirm to Juris that Juris holds shares for named employees plus 24 to UBS Employee Master Trust (with 426 named employees holding 91,856 shares) 10 02 2004 UBS informs the 426 employees of allocation on 29 01 2004 18 02 2004 ESIP Ltd appoint UBS Wealth Management as broker 19 02 2004 End of restricted period . FTSE 100 level not exceed 4,749 at any time so no forced sale triggered 20 02 2004 ESIP Ltd funds released from time deposit 25 02 2004 Payday for bonuses paid in cash 27 02 2004 ESIP Ltd invests funds by purchasing UBS shares 1 – 12 03 2004 Notice period for first opportunity to request to divest/redeem 22 03 2004 First redemption approved: 47,387 shares redeemed coupled with call on Mourant and UBS to subscribe for additional VOS June 2004 Corrective special resolution of ESIP Ltd because overissue of VOS March 2006 Second opportunity to redeem/divest June 2006 Third and final opportunity to redeem/divest 30 06 2006 Termination date of agreement on subscription by UBS in ESIP Ltd

Cited in 4 later judgments