Tower Radio Ltd & Anor v Revenue & Customs [2013] UKFTT 387 (TC)

“Whether the sums or benefits received by officers or employees pursuant to arrangements registered as Disclosed Tax Scheme 54003391 and adopted by the Lead Case Appellants and others during the tax years 2003-04 and/or 2004-05 are: (a) chargeable to income tax as employment income, and, if so, as PAYE income; and/or (b) constitute earnings liable for National Insurance Contributions.”

“24(B)(ii) [Mr Litman] ceases to hold office or employment with Tower Radio Limited (otherwise than by reason of death) and does not continue or take up an office or employment with any other Group Company”

“The particular consequences in the present case were obviously not foreseen or intended by the legislature; but legislation, especially legislation which is highly engineered, can have unintended consequences.”

“If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work ( Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1 ) or they do not ( Furniss v. Dawson [1984] AC 474 .) If they do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in Inland Revenue Commissioners v. McGuckian [1997] 1 WLR 991 , 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes.”

“[4] Part 7 of ITEPA 2003 is headed 'Employment Income: Income and Exemptions Relating to Securities.' Its provisions reflect three different, and to some extent conflicting, legislative purposes. First there is Parliament's recognition that it is good for the economy, and for social cohesion, for employees to own shares in the company for which they work. Various forms of incentive schemes are therefore encouraged by favourable tax treatment (those in force in 2003 are covered in Chs 6–9 inclusive of Pt 7). [5] Second, if arrangements of this sort are to act as effective long-term incentives, the benefits which they confer have to be made contingent, in one way or another, on satisfactory performance. This creates a problem because it runs counter to the general principle that employee benefits are taxable as emoluments only if they can be converted into money, but that if convertible they should be taxed when first acquired. … [6] The principle of taxing an employee as soon as he received a right or opportunity which might or might not prove valuable to him, depending on future events, was an uncertain exercise which might turn out to be unfair either to the individual employee or to the public purse. At first the uncertainty was eased by extra-statutory concessions. But Parliament soon recognised that in many cases the only satisfactory solution was to wait and see, and to charge tax on some 'chargeable event' (an expression which recurs throughout Pt 7) either instead of, or in addition to, a charge on the employee's original acquisition of rights. [7] That inevitably led to opportunities for tax avoidance. The ingenuity of lawyers and accountants made full use of the 'wait and see' principle embodied in these changes in order to find ways of avoiding or reducing the tax charge on a chargeable event, which might be the occasion on which an employee's shares became freely disposable (Ch 2) or the occasion of the exercise of conversion rights (Ch 3). The third legislative purpose is to eliminate opportunities for unacceptable tax avoidance. Much of the complication of the provisions in Pt 7 (and especially Chs 3A, 3B, 3C and 3D) is directed to counteracting artificial tax avoidance. There is a further layer of complication in provisions which regulate the inevitable overlaps between different chapters. It is regrettable that ITEPA 2003, which came into force on 6 April 2003 and was intended to rewrite income tax law (as affecting employment and pensions) in plain English, was almost at once overtaken by massive amendments which are in anything but plain English.”

“Each case involved the use of a carefully planned tax avoidance scheme which was designed to enable the appellant bank to provide substantial bonuses to employees in the tax year 2003–04 in a way that would escape liability to both income tax and national insurance contributions ('NICs'). The mechanism chosen for this purpose was an award of redeemable shares in a special purpose offshore company set up to participate in the scheme. It was intended that the shares thus awarded to employees would be 'restricted securities' subject to the special taxation regime contained in Ch 2 of Pt 7 … If the plan worked, the shares would escape taxation under the detailed and prescriptive provisions of Ch 2, and the only tax to which they would potentially be subject in the hands of the employees would be capital gains tax ('CGT'). In practice, however, such liability was likely to be non-existent for non-UK domiciled employees, of whom there were a large number, provided they took care not to remit the proceeds of redemption of the shares to the UK; while for employees who were UK-domiciled, the scheme was structured so as to enable redemption to take place after the shares had been held by them for two years, by when (with the benefit of business taper relief) the rate of CGT chargeable would be only 10%, unless the employee had meanwhile left the bank's employment.”

“Generalising across this appeal and the other appeal heard by the tribunal, and in broad outline, the steps involved in the scheme, as HMRC saw it, were as follows … (1) The bank decided that it would give certain employees amounts by way of bonuses in addition to other earnings for the year. It was asserted by the bank that this was done in such a way that the amounts did not constitute earnings of the employees. (2) Company Z was created in an offshore jurisdiction. Company Z was not controlled by the bank. (3) A special class of shares was created in Company Z; the shares in that class (“the restricted shares”) were subject to non-permanent restrictions. (4) The bank - or another company or special purpose vehicle (“SPV”) - purchased the restricted shares. (5) The purchaser received the restricted shares, passing legal title to a nominee, and allocated beneficial interests in the restricted shares to the employees identified at (1) in amounts equal in value to the amounts that the bank had decided would be payable as bonuses to those employees. (6) Exemption from a charge to tax on the acquisition of the beneficial interests in the restricted shares by those employees at step (5) was asserted under s 425 of ITEPA. (7) A short while later, the restrictions were removed from the restricted shares. Exemption from a charge to tax on those employees on this event was asserted under s 429 of ITEPA. (8) A further short while later, those employees became entitled to redeem their beneficial interests in the restricted shares. Arrangements were made so that the restricted shares could be redeemed by Company Z when timely applications were made. The redemptions took place at a value that was, or was contended to be, slightly less than the price paid by the bank or SPV for the restricted shares. Many employees redeemed their restricted shares at this time. (9) Employees were entitled not to redeem their restricted shares on this occasion but, if they wished, could hold them in the scheme for the two years necessary to mitigate a charge to capital gains tax. Some did so and then redeemed their restricted shares. (10) A short while after the two-year period ended, the rest of the shares that were previously restricted were redeemed at the initiative of Company Z, and Company Z ceased any activity. (11) In due course Company Z was wound up.”

“[6] The FTT dismissed the bank's appeal in each case, but not for identical reasons because there were some important factual differences between the two schemes, which had been devised and implemented independently of each other and with different teams of professional advisers. In broad terms, however, the issues in each case can be grouped under three headings: (1) First, did the employees become entitled to be paid their bonuses in money before the sums allocated to them were applied in acquiring scheme shares? If the answer to this question is yes, the bonuses were subject to income tax and NICs in the usual way, and the scheme failed because, if for no other reason, it came into operation too late: the tax and NIC liabilities which it was designed to avoid would already have been triggered, and nothing in the schemes could remove those liabilities retrospectively. (2) Secondly, assuming the answer to the first question to be no, and also assuming the provisions of Ch 2 to be applicable, did any charge to tax arise in accordance with those provisions? In practice, this question involves consideration of two main technical issues: (a) were the scheme shares 'restricted securities' within the meaning of the definition of that term in s 423 of ITEPA? And if so, (b) were the employees entitled to exemption under s 429 for the charge to tax that would otherwise admittedly have arisen under s 426 on the happening of a chargeable event when the shares ceased to be subject to the relevant restriction? In order for the scheme to succeed, each of those questions needs to be answered in the affirmative: in other words, the shares awarded to the employees had to be 'restricted securities', and the exemption under s 429 had to be available. (3) Thirdly, and as an alternative to (2), can it be concluded, by application of the Ramsay principle as it is now to be understood, that on a realistic appraisal of the facts the scheme fell outside the scope of Ch 2 altogether (rather than that the Ramsay principle affected the application of particular elements of the statutory regime)? (See WT Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes v Rawling) [1981] STC 174 , [1982] AC 300 .) [7] In the UBS appeal, the FTT answered the first question in HMRC's favour in relation to the guaranteed element of the bonuses of a small group of about ten employees, but subject thereto held that no entitlement to payment of cash bonuses had crystallised before the scheme was set in motion. Under our second heading, the FTT held that the scheme shares were not restricted securities, with the result that the scheme failed, but (if that conclusion was wrong) that the exemption under s 429 was available; or (in other words) that, subject to the global Ramsay argument, the scheme would have succeeded if the shares were indeed restricted securities. However, the FTT also held that HMRC succeeded on the Ramsay argument, so in its view the scheme failed on both broadly purposive and more narrowly technical grounds. [8] In the DB appeal, none of the employees had guaranteed amounts of bonus, and the FTT held, in line with its reasoning on the UBS appeal, that no entitlement to payment of bonuses had crystallised for any of the employees before the transfer of funds into the scheme. Under our second heading, the FTT held (on materially different facts from those in UBS) that the shares were restricted securities, and (again on materially different facts) that the s 429 exemption was available, so on a technical analysis the scheme succeeded. However, the FTT again held under the third head that the Ramsay argument succeeded, so the overall result was, once more, that the scheme failed.”

“[54] The basic question under this heading is whether any of the employees became entitled to payment of their bonuses in money before the sums which had been allocated to them within UBS were applied in the acquisition of, and the grant to them of beneficial interests in, the NVS. Resolution of this question does not depend on the provisions of Ch 2, but on the application to the facts of the basic charge to income tax on earnings from employment.”

“[61] … That question is whether the words 'entitled to payment' in Rule 2 of s 18(1) denote only a present right to present payment, or whether they are wide enough to include a right to payment in the future (which may or may not be subject to defeasance or contingencies). UBS argues for the former interpretation, while HMRC argue for the latter. Surprising though it may seem, there appears to be no direct authority on the point. [62] In our view there are several powerful reasons which indicate that the former interpretation is correct.”

“[160] The FTT then stated its conclusions (see at [139]–[140]): '[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 Ch 2 of Pt VII [sic] of ITEPA. [140] The tribunal therefore takes the view that [ UBS ] fails in this appeal by reference to the application of Ch 2 of Pt 7 of ITEPA to the facts of the scheme as a whole.' [161] With all due respect to the FTT, we are bound to say that we find its reasoning on this part of the case very difficult to follow. The FTT found (at [95]) that the NVS were real shares, some of which were held by employees for more than two years, and real dividends were paid on them. The FTT therefore accepted that the NVS were 'securities', which in that context must mean securities within the meaning of Ch 2, and said that the 'more significant question' was whether they were restricted securities. The FTT then went on to hold (wrongly, in our view) that they were not restricted securities. But if the NVS were securities within the meaning of Ch 2—and the contrary seems to us unarguable—how can it then be said that the scheme as a whole nevertheless falls outside the scope of Ch 2? [162] Unless all the FTT meant was that the securities were not restricted securities, in other words merely stating other reasons for their earlier conclusion, the only plausible basis for such a contention, in our judgment, would be if, on a realistic appraisal of the facts, the scheme was not one which provided securities (in the form of the NVS) to employees, but one which provided them with money. By virtue of ITEPA, s 420(5)(b), 'money' is excluded from the definition of 'securities' which applies for the purposes of Chs 1 to 5. We readily accept that, in an appropriate case, it might well be possible to construe 'money' in this context purposively, and to treat the exception as applying to arrangements which, viewed realistically, are no more than disguised or artificially contrived methods of paying money to employees. There is plenty of authority for applying a Ramsay approach (in the sense explained by Arden LJ in Astall to 'money in, money out' schemes of that kind: see, for example, NMB (payment of bonuses by the purchase and immediate sale of platinum sponge) and DTE Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455 , [2001] STC 777 , 74 TC 14 (payment of bonuses through artificial trust arrangements which ended with the falling in of a contingent reversionary interest a few days after the scheme was set in motion). However, caution is needed because everything always depends on a careful scrutiny of the particular statutory provisions in issue, and it is impossible to generalise from instances where such an analysis is appropriate to a broad proposition that any tax avoidance scheme designed to turn an otherwise taxable bonus into something else, and to leave the employee at the end of the day with money in his pocket, will necessarily fail in its object. It also needs to be remembered that the mere existence of a tax avoidance motive is, in itself, irrelevant, although it may of course throw light on matters such as the commerciality of the arrangements made, or the likelihood of pre-planned events occurring. [163] The need for caution in attributing too broad a meaning to the 'money' exception in s 420(5)(b) is reinforced by the fact that the definition of 'securities' in s 420(1) includes debentures and other instruments creating or acknowledging indebtedness, while s 424(1)(c) makes it clear that redeemable shares are also included. Thus securities which are convertible into money, and a wide range of securities which create, evidence or secure indebtedness, plainly fall within the scope of Pt 7. Moreover, since one of the legislative purposes of Pt 7 is, as Lord Walker said in Gray's Timber ( [2010] STC 782 at [7], [2010] 1 WLR 497 at [7]), to eliminate opportunities for unacceptable tax avoidance, including in particular Chs 3A, 3B, 3C and 3D, one naturally expects the definition of 'securities' for the purposes of (among others) those chapters to be a wide one, and the exceptions to it to be relatively narrow. [164] Wherever the precise boundary of the 'money' exception should be drawn, it is in our opinion clear that the facts of the present case fall well outside it, and that the NVS are therefore within the definition of 'securities'. The real and enduring nature of the NVS, combined with the fact that nearly half of them were not redeemed for two years, makes it impossible to ignore them, or to regard them as a mere vehicle for the transfer of money. It is true that over half of the NVS were redeemed at the first opportunity, in March 2004, and it was plainly intended that this opportunity would be taken by those employees who would not in practice be liable to CGT on a disposal of the shares. But even in their case the shares were held for a period of almost two months, and because of the investment in UBS shares the amount received on redemption bore no necessary relation to the initial amount of the bonus. Furthermore, HMRC have never sought to argue that those employees who redeemed their shares at the first opportunity should be taxed differently from those who held their shares until 2006. [165] A related aspect of the matter is that the sums determined by HMRC to be due from UBS, by a determination notice issued under reg 80 of the Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682 ('PAYE Regulations') on 13 October 2008, were tax on the gross amount paid by UBS into ESIP, not tax on the different amount eventually received by the employees when the NVS were redeemed. In our view there is no intellectually coherent way, in this case, of equating the payment in by the employer with the ultimate payment out received by the employee, and the facts are resistant to any form of high-level Ramsay analysis or reconstruction. The problems for HMRC are compounded by the fact that Ch 2 contains a very detailed and prescriptive code for dealing with restricted securities, in the context of a part which had as one of its main objectives the countering of tax avoidance. Experience has shown that advantage can sometimes be taken of detailed statutory codes of this general nature in a way that is resistant to a Ramsay analysis, with the result that even the most artificial of tax avoidance schemes may succeed in their object. For a recent example, which also involved a chargeable event regime although in the context of life insurance policies, see the decisions of Proudman J and the Court of Appeal in Mayes v Revenue & Customs Comrs [2009] EWHC 2443 (Ch) , [2010] STC 1 , affirmed at [2011] EWCA Civ 407 , [2011] STC 1269 , 81 TC 247 . [166] In his oral submissions, Mr Lasok [counsel for HMRC] deployed a kaleidoscopic variety of arguments designed to persuade us, in one way or another, that the FTT's conclusion on this part of the case, if not all of the reasoning by which the FTT reached it, could and should be upheld. We admire his ingenuity, but are unpersuaded. In our judgment the FTT's conclusion was in law an impossible one, and there is no proper basis for holding that the scheme fell outside the scope of Ch 2. It follows that we would allow UBS's appeal on this ground, as well as on the restricted securities issue.”

“(a) AAM established an offshore employee benefits trust ('EBT') for its employees, which was a discretionary trust with professional trustees from the Isle of Man. The beneficiaries were senior employees or directors of AAM who were to be rewarded with additional remuneration for past performance (an 'employee'). (b) Substantial funds were transferred by AAM into the EBT. (c) An Isle of Man company (a 'company'—referred to by the tribunal as a 'money box company') with £2 share capital was created or acquired for each employee who, because of his good performance, was to be favoured. The directors of the company were professional administrators from Jersey or the Isle of Man from the same organisation as the professional trustees. (d) The EBT subscribed for the two shares in the company. One share was paid for at par (£1) and the other at a very substantial premium which might range from about £100,000 to nearly £2.9m (the tribunal's summary refers to a figure of 'over £1m' but the larger figures appears from the details given later in the decision). (e) At or about the same time, a family benefits trust ('FBT') was established by the trustees of the EBT for each of the employees; the beneficiaries were the employee and his immediate family with a charitable longstop. The trustee of the FBT was a professional trustee again from the same organisation. The trust fund of the FBT was a nominal £10 provided by the EBT. (f) The company's authorised share capital was increased by £10,000 and it then granted to the FBT an option to subscribe for 10,000 ordinary shares in the company. The existence of the option was said by AAM to dilute the value of the two original shares. (g) One or both shares in the company were transferred to a nominee company for behoof of the employee. (h) The option would subsist usually for a year and would then lapse without exercise. In practice, none of the early options, which were exercisable for one year, was exercised. Later options, which were granted for ten years, have not yet lapsed but none has been exercised. (i) The employee held the beneficial interest in the company. He benefited by inter alia receiving soft loans or the use of property from the company. In this way, as the tribunal put it— 'the employee receives substantial additional financial benefits which are said to be immune from liability for PAYE and national insurance contributions. Had the employee simply been paid a cash bonus of an identical amount to the sums paid into the money box company for good performance, the bonus would have fallen within the PAYE and national insurance regimes.' (j) The company would ultimately be stripped of its funds by one means or another. Some tax consequences might ensue depending on how this was carried through.”

“[10] … it is clear that the exit strategy (ie how the employee would obtain the benefits which he wanted by virtue of his ownership of the shares) was really a matter for the decision of the employee. Subject, no doubt, to the lawfulness of any request, the directors would comply with the employee's wishes. It is true that there was no arrangement that there would be a particular outcome, indeed, there was no communication between the directors of the company and the employee concerned until after transfer of the shares. But the tribunal expressly stated at [29] on p 40 of the decision that the facts, viewed realistically, show unequivocally that control was vested in the employee who had access to the pot of money contained within the corporate money box. And at [43] on p 43 of the decision, the tribunal expressly stated that the directors would, in reality, be inevitably compelled to comply with the employee's wishes. Whether that is a finding of fact or a reflection of the powers which the employee would have as owner of the company does not, in my view, matter. The point is that, as a result of the arrangements, the employee became the owner of a company from which he could in practice extract the cash within it whenever he wished, albeit that a tax charge of one sort or another, depending on the method of extraction, might result. To use different language, it was preordained that the employee would receive 100% of the shares in a cash-rich company. It was not pre-ordained that he would use his control of the company in any particular way but how he would do so was his choice, a choice which would in practice be observed and implemented by the directors.”

“[81] ... The purpose of the scheme was to provide a bonus to employees. It was the mechanism by which the benefit of a sum of money was to be channelled to an employee, although it failed in its aim of diluting the value of the shares, and thus of providing an actual substantial value to the employee at a diluted value for income tax purposes. The scheme was a composite transaction; the scheme itself, ending as the tribunal found with the transfer of shares, did not provide the employee with cash or money in his own bank account, but it did provide the employee with the rights of a shareholder holding 100% of the shares in a cash-rich debt-free company. As the tribunal held (see [10], above) the facts, viewed realistically, show unequivocally that control was vested in the employee who had access to the pot of money contained within the corporate money box and the directors would, in reality, be inevitably compelled to comply with the individual employee's wishes. And as I put it in that paragraph, the employee became the owner of a company from which he could in practice extract the cash within it whenever he wished, subject of course to whatever tax charge of one sort or another, depending on the method of extraction, might result. [82] But even so, the employee had no present right to receipt of cash from the company when its shares were transferred to him. The case is different from Garforth (Inspector of Taxes) v Newsmith Stainless Ltd [1979] STC 129 , [1979] 1 WLR 409 where the directors had an immediate right to payment (even though it might have been necessary to sue for the debt, just as it might be necessary to sue on a cheque representing payment of salary if the employer defaulted). Mr Ghosh [counsel for HMRC] says that what the employee received was as good as money. I do not agree with that. There is a difference, in my view, between an immediate right to obtain money (eg by drawing on a bank account to which salary has been credited by direct debit or cheque) and obtaining money only after the implementation of a procedure required by company law. This is not a case where it is possible to lift the corporate veil so as to treat the company's money as that of the employee. Nor, on the findings of fact, is this a case where the composite transaction ends up with money (in the conventional sense) in the hands of the employee (eg in his bank account). Indeed, it needs always to be remembered that the emolument in question is the shares and not the money in the company. [83] In my judgment, the transfer of shares to an employee was not a 'payment' to that employee for the purposes of s 203. The powers which he had over 'his' company did not result in his rights being 'as good as cash' as Mr Ghosh would have it or, as I would say, being able to turn what was prima facie a benefit in a form not consisting of money (ie shares) into a benefit consisting of money. The money is not unreservedly at the disposal of the employee, a condition which is, I consider, a necessary, even if not a sufficient, condition for there to be a payment within s 203 [TA 1988 – being the predecessor of the PAYE rules in Part 11 ITEPA].”

“As I see it, viewing the matter through Ramsay eyes, the composite transaction in the instant case involved only three relevant stages: first, the purchase by DTE of the contingent reversionary interest; second, the assignment of that interest to Mr MacDonald; and third, the payment of the cash sum by the trustee to Mr MacDonald when the interest fell into possession.”

“[32] DTE v Wilson , it is to be noted, was a case where the employee ended up with cash, and was always intended to end up with cash; the composite transaction included the step of providing him with cash. That is to be contrasted with the present case where the pre-ordained series of transactions ended with the transfer of shares and only put the employee in the position of being able to obtain cash if he wanted it.”

“[23] On the basis of those facts the First-tier Tribunal concluded (see [2009] SFTD 209 at [71]) that the cash received by the employees was a profit arising from the employment because it was made in reference to the services the employee rendered by virtue of his office and was something in the nature of a reward for past, present or future services (the test applied by Upjohn J in Hochstrasser (Inspector of Taxes) v Mayes; Jennings v Kinder (Inspector of Taxes) (1958) 38 TC 673 at 685, [1959] Ch 22 at 33 ). The First-tier Tribunal also concluded that if it viewed the transactions realistically and applied the relevant statutory provisions construed purposively to those transactions, it reached the same result. First, it relied upon the fact that if any employee left employment it ceased to be eligible under the 1999 ET, even if that employee left after the close of the financial year and after PA had handed over funds to Mourant. This was designed to keep employees at PA. Second, it relied on the fact that PA had gone out of its way to 'sell' the arrangements to employees. The arrangements, the First-tier Tribunal found, were inherently part of the process of motivating and awarding employees, of which the presentations were themselves part (see at [70]). In those circumstances the First-tier Tribunal found that the payments received by the employees were emoluments. But they then continued by concluding they were also dividends or distributions within the scope of Sch F. Accordingly, they applied s 20(2) of ICTA since they thought both Sch E and Sch F were relevant. Section 20(2) required the cash received by the employees to be taxed under Sch F as dividends and not under Sch E as emoluments (see at [86] and [89]). However, absent any equivalent provision in SSCBA, since they were emoluments, they were earnings for the purposes of the SSCBA 1992 and were liable to NICs. [24] The Upper Tribunal adopted the same approach and reached the same conclusion. They concluded that the dividends fell within the meaning of dividend or distribution under s 209 of ICTA and that the inevitable consequence was that they were chargeable under Sch F and not under Sch E by virtue of the operation of s 20(2) of ICTA. They too agreed that the dividends were remuneration derived from employment for the purposes of the SSCBA.”

“[59] ... In concluding that the payments were emoluments in the hands of PA's employees, they [the First-tier Tribunal and the Upper Tribunal] hit the nail on the head. But they failed to drive it in. They concluded that the payments were emoluments by having regard to all the circumstances of the case and by looking to the substance and purpose of the payments and not to the mere form in which they were received. In reaching their conclusion, they followed a long-accepted, traditional approach to the facts. That approach enabled them, within accepted limits, to look beyond the form of distributions, mere machinery, by which the intention to pay bonuses was fulfilled. [60] Once that conclusion had been reached, there was no room whatever for any further consideration of a different schedule. If the payments were emoluments in the hands of PA's employees, they could not be dividends or distributions in the hands of those employees. Any other conclusion offends the basic principle expressed in Salisbury House Estate Ltd v Fry that if income falls within one schedule it cannot be taxed under another. The First-tier Tribunal and Upper Tribunal concluded that the payments were from employment, on an analysis of the facts which, as I believe, cannot be impugned. It follows that that income cannot also be charged under any other schedule, let alone Sch F.”

“ Viewed through Ramsay eyes [66] This conclusion is sufficient to uphold the Revenue's appeal. It owes little to the Revenue's deployment of familiar anti-avoidance jurisprudence. This is not a case where it is necessary to erect any new signposts or to paint the old. But I should not overlook the application of the principles summarised by Lord Nicholls in Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] UKHL 51 at [32], [2005] STC 1 at [32], [2005] 1 AC 684 : '[32] The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description …' He subsequently adopted (at [36]) the neat apothegm, often cited thereafter, of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd ( [2003] HKCFA 46 at [35], (2004) 6 ITLR 454 at [35]): '… The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.' [67] The purpose of the relevant statutory provisions is to classify the income according to an appropriate and mutually exclusive schedule. In the instant appeal, viewed realistically, the payments were emoluments. [68] The insertion of the steps which created the form of dividends or distributions did not deprive the payments of their character as emoluments. The insertion had no fiscal effect because s 20, construed in its statutory context, does not charge emoluments under Sch F. The exotic attempt advanced orally by Mr Mullan [counsel for taxpayer] to classify both the award of the shares and the distributions as income and thereby raise the spectre of double-recovery fails for the same reason. The award of the shares and the declaration of the dividend were, in reality not separate steps but the process for delivery of the bonuses. [69] This is the approach which led to the conclusion that the transfer of platinum sponge to directors as a bonus was 'earnings' and not 'payments in kind' for the purposes of the Social Security (Contributions) Regulations 1979, SI 1979/591 . The court looked at the substance of the transaction (see NMB Holdings Ltd v Secretary of State for Social Security (2000) 73 TC 85 at 125). The arrangements whereby the directors could immediately sell the platinum sponge for cash, to the bank which held the sponge, stamped the transaction as something different from 'payments in kind' exempt from the Social Security legislation (see the endorsement of the court's approach and conclusion by Lord Hoffmann in MacNiven [2001] STC 237 at [68], [2003] 1 AC 311 at [68]). [70] Similarly in DTE Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455 , [2001] STC 777 , 74 TC 14 , a composite transaction consisted of three stages, the purchase by an employer of a contingent reversionary interest in a trust fund in a sum equivalent to the intended bonus, the assignment of that interest to the employee and the payment of the cash sum by the trustee when the interest fell into possession. Viewed, as Jonathan Parker LJ put it, 'through Ramsay eyes', the company decided that its employee should have a £40,000 bonus and the employee got that bonus (see [2001] STC 777 at [41], 74 TC 14 at [41]). In the instant appeal PA decided that its employees should receive a bonus, Mourant identified which of the employees, from the list provided by PA, should receive a bonus and those employees received a bonus. That, to adopt the dismissive terms of Special Commissioner de Voil in DTE , was the beginning and end of the matter. It is, in my view, the beginning and end of these appeals.”

“[14] At that time, a scheme had already been worked out by Robson Rhodes for dealing with at least part of the remuneration for the employees for the financial year ending 28 February 2004 and, if possible, subsequent years. It involved delivering shares to the employees, subject to forfeiture in certain circumstances, for example if the employee left the company within 12 months, was in breach of any requirement imposed on him by the Financial Services Authority ('FSA'), or indeed at the absolute discretion of the directors. [15] The value of the shares would be represented by investments held by S1, and their ultimate value would depend on how the investments fared. The employees would have 'some element of certainty' however, in that a fixed dividend would be paid and only after that could the discretionary forfeiture provisions operate. The appellant would capitalise S1 and request the trustee to invest in low risk securities such as Treasury stock and other low risk investments. The plan was that S1 would be seen to operate independently of the appellant, and neither it nor the employees would retain control of the funds subscribed.”

“[89] The case for the application of Pt 7 of the 2003 Act was forcefully pressed by Mr Ghosh [counsel for the taxpayer], on the basis principally that the facts would admit of no other course. The case, he said, was inevitably one in which the tribunal must recognise that the employees had a distinct legal character as such and, until awarded the shareholdings they received in S1 and S2 by the appellant, they had nothing. They therefore had received shares, or a beneficial interest in shares, and must be taxed under the provisions of Pt 7 designed explicitly for such a case. [90] Although we have found that the employees were entitled to monetary amounts, and that those amounts had been credited to them in the books of the appellant before an interest in the shares of S1 and S2 arose, we must address this alternative argument on the basis that those findings are unable to be sustained. We look principally for guidance to the very recent decision of the Court of Appeal in PA Holdings . There, in a scheme a good deal more complex than that in this case, the taxpayer employer had wished to pay its employees discretionary annual bonuses. The company's employees had no contractual right to the bonuses, though a clear expectation that they would be paid in accordance with criteria which had been published to them. … [93] It is difficult to see how this case could be distinguished from PA Holdings . The sums eventually paid in the liquidation to the employees were, to all intents and purposes, the same sums as had been paid into the two companies by the appellant at the outset—para [35]. The employees received what they expected to receive, and from the appellant's viewpoint the bonuses had been distributed in accordance with the agreed amounts drawn down from accumulated profit in order to capitalise the companies. It is unnecessary for us to express any view on the purposes for which the provisions of Pt 7 of the 2003 Act were enacted, because it suffices to say that in these circumstances they cannot apply to a situation which is already covered by ss 18 and 686 of the Act. [94] A word should be added about the fact of the investment activity undertaken in the companies. We have recorded what actually took place - paras [29]–[31] - and it remains to evaluate it. Our assessment of the investment activity that took place was that it was essentially cosmetic, and that no significant risk was ever contemplated in regard to it.”

“ Inserted Steps with no Commercial Purpose : It is important to note that Lord Brightman [in Furniss v. Dawson ] made it quite plain that the fact that the overall transaction had a legitimate commercial or business purpose (in Furniss v. Dawson the sale of the shares, in this case the payment of a bonus) is not what this requirement is referring to. It refers to the steps inserted by which that purpose is achieved. In this case everything that was done following the decision to pay bonuses of a given cash amount was done to ensure that the amount (or very close to it) was received by the directors. But the purchase, transfer and re-purchase of the platinum sponge located in Hong Kong had no commercial or business purpose at all. Neither NMB nor the directors had any use for platinum sponge; it was of course chosen simply because it was a commodity to which the Regulations did not expressly apply. It also follows in my judgment that those steps had no purpose other than to avoid the payment of secondary contributions on the bonuses and cannot sensibly be described as tax mitigation. Both counsel accept that the distinction is an exclusive one and that it overlaps with the final question in Lord Brightman's formulation, but in this case there was no genuine tax loss to be realised, no genuine wish to split a freehold estate, no express reliance on a specific statutory provision of the kind in issue in Willoughby . What there was was a decision to pay and the actual receipt of cash bonuses with an artificial scheme created in the middle whereby the money went into and out of platinum sponge in the course of about 24 hours. Looked at as a whole, that, in my judgment, is tax avoidance not mitigation.”

“… I have no doubt that Langley J was right when he recently decided in [ NMB ] that a payment of bonuses to directors in the form of platinum sponge held in a bank, accompanied by arrangements under which they could immediately sell it for cash to the bank, was not a 'payment in kind' which fell to be disregarded for the purpose of national insurance contributions. In commercial terms the directors were paid in money. It is obvious that such a transaction was not what the Social Security (Contributions) Regulations 1979, SI 1979/591 contemplated as a payment in kind. But there can be equally little doubt that the bonuses were 'paid' and, in the absence of some contrary context, I can see no reason not to treat them as paid when the directors were credited with platinum sponge and the employer's obligation to pay them was discharged.”

“[16] According to a minute of a board meeting held on or before Wednesday 19 April 1995 (the precise date is not material) the three directors 'contemplated'—without, of course, deciding—that DTE would pay them each a bonus of £40,000. On 19 April 1995 DTE provided the operator of the scheme with all the details necessary to set the scheme machinery in motion in relation to each of the three directors. On Monday 24 April 1995 the requisite contingent reversionary interest was created. The following day, Tuesday 25 April 1995, DTE took an assignment of the interest for a consideration of £40,600 (the additional £600 representing the fee payable by DTE for entering into the scheme). Next day, Wednesday 26 April 1995, DTE assigned the interest on to Mr MacDonald. On Friday 28 April 1995 the interest fell into possession and a sum of £40,000 was duly remitted to Mr MacDonald's bank account. [17] DTE's accounts for the year ended 30 April 1995 record, with admirable candour: 'Bonus payments were made in the form of assignments of interests in Offshore Trusts.'”

“[42] So far as the Ramsay issue is concerned, therefore, the only question (to my mind) is whether it is legitimate to apply the Ramsay principle—or, if one prefers, adopt a Ramsay approach—to the concept of 'payment' in the context of the statutory provisions relating to PAYE. In my judgment it plainly is. I accept Mr Glick's [counsel for HMRC’s] submission that in the context of the PAYE system the concept of payment is a practical, commercial concept. In some statutory contexts the concept of payment may (as Lord Hoffmann pointed out in MacNiven ) include the discharge of the employer's obligation to the employee, but for the purposes of the PAYE system payment in my judgment ordinarily means actual payment: ie a transfer of cash or its equivalent. [43] Nor can I accept Mr Thornhill's [counsel for the taxpayer’s] submission that to apply the Ramsay principle to the PAYE system will inevitably introduce confusion and uncertainty into the statutory code. The true position, as I see it, is that for those employers who operate the PAYE system in a straightforward manner, and who do not resort to the complexities of tax avoidance schemes, there will be neither confusion nor uncertainty; whereas for those employers who choose to operate such schemes the effect of applying the Ramsay principle is to restore the certainty which the legislature intended. [44] In my judgment, therefore, the cash payment received by Mr MacDonald was a payment of assessable income within the meaning of s 203(1) of the 1988 Act. …”

“Dear Bernard Proposed Bonus Payments I am writing, as promised, following our recent meeting at which we discussed the various ways in which your company could provide discretionary bonus payments to the directors and certain senior employees.”

“Dear Bernard BONUS ARRANGEMENTS I gather that the bank account of [SPV] has now been opened and that the money, namely £1,000,001 in respect of Tower Radio Limited’s subscription for shares in that company has been transferred. As you know, the plan is for the 1,000,000 “A” ordinary £1 voting shares in [SPV] to be transferred to you as discretionary bonuses for the years to 30 April 2003 and 2004. To achieve this, the shareholders of Tower Radio Limited need to give approval to the transfer of the company’s assets to a director under s 320 Companies Act 1985 and the directors of Tower Radio Limited need to hold Board Meetings to vote the bonuses. In this regard, I attach the following:”

“Whether the sums or benefits received by officers or employees pursuant to arrangements registered as Disclosed Tax Scheme 54003391 and adopted by the Lead Case Appellants and others during the tax years 2003-04 and/or 2004-05 are: (a) chargeable to income tax as employment income, and, if so, as PAYE income; and/or (b) constitute earnings liable for National Insurance Contributions.”

“[54] The basic question under this heading is whether any of the employees became entitled to payment of their bonuses in money before the sums which had been allocated to them within UBS were applied in the acquisition of, and the grant to them of beneficial interests in, the [award shares]. Resolution of this question does not depend on the provisions of Ch 2, but on the application to the facts of the basic charge to income tax on earnings from employment. … [61] At the heart of this part of the case is a question of construction … That question is whether the words 'entitled to payment' in Rule 2 of s 18(1) denote only a present right to present payment, or whether they are wide enough to include a right to payment in the future (which may or may not be subject to defeasance or contingencies). UBS argues for the former interpretation, while HMRC argue for the latter. Surprising though it may seem, there appears to be no direct authority on the point. [62] In our view there are several powerful reasons which indicate that the former interpretation is correct.”

“[71] … Even on the most favourable view of the facts from HMRC's perspective, we do not think it can be said that any of the relevant employees, including those with guaranteed minimum bonuses, became entitled to immediate payment of the sums which UBS decided to award to them on 23 January 2004. Quite apart from the fact that no information about the awards was communicated to the employees at that stage, their only contractual right under their contracts of employment, even after the amount of their bonuses had been privately determined by UBS, was to have it paid to them on or around the February pay day. At best, therefore, it was a right to a future payment, which would not mature into a taxable receipt for income tax and PAYE purposes unless and until it became immediately payable. That never happened, because by prior agreement with the employees who had applied to participate in the scheme, the relevant parts of their bonuses were applied by UBS in the purchase of NVS [ie the award shares] and the conferral of beneficial interests in those shares on the employees. The shares were admittedly earnings from the employees' employment with UBS, but they were non-monetary earnings, and by virtue of s 19(4) they were treated as received at the time when the benefit was provided, that is to say on 29 January 2004. [72] In relation to the 416-odd employees who had no guaranteed minimum bonus, the finding by the FTT (see [2010] SFTD 1257 at [73]) that they 'were not entitled to, or to be paid, their bonuses until the February pay day' is in our judgment unassailable. In relation to the handful of employees with a guaranteed minimum bonus, the FTT considered that their entitlement to the minimum amount made all the difference, because they had an enforceable right to be paid that sum. However, it is clear from the sample contract of employment which was considered by the FTT, and extracts from which they quoted, that the cash element of the award, including the guaranteed minimum amount, would be paid after deduction of tax 'in or about February following the calendar year specified in the awards'. In our view this must be understood as a reference to the February pay day, and there is no ground for supposing that the right to immediate payment of the bonus, or any part of it, would accrue earlier for the employees in this category than it would for those without a guaranteed minimum. Furthermore, there is a logical difficulty in the view which the FTT appears to have adopted that the right to be paid the guaranteed minimum did not accrue until 23 January 2004. Since the guarantee was provided when the contract of employment was entered into, the contractual right to future payment of the guaranteed minimum must have accrued at that date, even if the right was liable to be defeated on the happening of certain conditions (for example if the employee was dismissed for misconduct). At the date when the contract was entered into, the right was on any view a right to payment in the future, and on the construction which we would place on Rule 2 there would be no taxable receipt of it before the future pay day when it was actually paid. We are satisfied, therefore, that the FTT fell into error in holding that the relevant employees received the guaranteed minimum amounts of their bonuses on 23 January 2004. [73] We should add that Mr Lasok [counsel for HMRC] advanced a number of further arguments to the general effect that, whatever the original contractual arrangements may have been between UBS and the employees who participated in the ESIP scheme, their contracts must have been varied (whether expressly or by necessary implication) in such a way as to confer a right to immediate payment of the part of their bonuses which was applied by UBS in the purchase of NVS. Only on such a footing, submitted Mr Lasok, could UBS have applied the relevant sums on the employees' behalf. We do not consider it necessary to review these arguments in any detail, however, because we consider that they all suffer from the same fallacy. We are unable to see any necessity, either legal or factual, for the bonuses to have become immediately payable to the employees before UBS could apply them in the purchase of the NVS. It was enough that UBS had decided what amounts it would award to each employee before the scheme was set in motion. There was no need for the employees to have first acquired the right to have the relevant parts of their bonuses paid to them in money, and in our view there is nothing in the scheme documentation which brought about such a result. [74] For all these reasons, we conclude that there was no receipt of money earnings by any of the employees, including those with guaranteed minimum bonuses, before the scheme was set in motion.”

“the cash the employees received as dividend income is subject to the Sch F rates and not to the basic or higher rates. Additionally, … there is no liability to make national insurance contributions ('NICs') in respect of these payments.”

“[2] Both the First-tier Tribunal and the Upper Tribunal were agreed that the income the employees received was from their employment (see [2009] UKFTT 95 (TC) , [2009] SFTD 209 and [2010] UKUT 251 (TCC) , [2010] STC 2343 respectively). But both also agreed that, because that income was received in the form of dividends, the provisions of Sch F and s 20(2) of the Income and Corporation Taxes Act 1988 (' ICTA ') dictated the conclusion that the income had to be taxed as dividends or distributions under Sch F and could not be charged as emoluments under Sch E. Since there was no equivalent to s 20(2) in the Social Security Contributions and Benefits Act 1992 ('SSCBA'), the finding that the income was from employment meant that the payments were 'earnings' for the purposes of the SSCBA and thus liable to NICs. [3] HMRC ('the Revenue') appeal against the decision of the Upper Tribunal, contending that the dividends were in reality bonuses and liable to be taxed under Sch E; Sch F and s 20(2) do not apply. PA contends, as an additional ground for upholding the decision, that the dividend income was not from employment. PA also appeals against the decision that the payments received in the form of dividends were 'earnings' for the purposes of SSCBA on the same basis: that the income was not from employment.”

“[32] PA Holdings contends that the source of payments transferred by Juris [the trustees’ nominee] to the persons beneficially entitled to them was their beneficial interest in the shares. The shares, and not the dividends, were emoluments and exempt from charge by virtue of s 140A , ICTA. Section 140A(3) exempts from tax chargeable under Sch E an employee's acquisition of a conditional interest in shares (provided that the employee's interest ceases to be conditional within five years from acquisition). The source of the dividends received by the employees was the shares and they received them in their capacity as shareholders and not as employees.”

“HMRC have a separate and largely self-contained argument based on the contention that art 2(15) of the Articles of ESIP is an artificial device which was never intended to have legal effect, and that it should therefore be disregarded. If that contention is correct, it is common ground that … the exemption in s 429 of ITEPA would accordingly be unavailable.”

“[150] In this statutory context, we ask ourselves whether it is possible, as a matter of construction of s 416(2)(b) and (c), to disregard art 2(15) on the ground that it was deliberately designed to circumvent those provisions in a way that would have been commercially unacceptable to UBS had ESIP in fact gone into liquidation while the shares were owned by UBS, and which was in practice acceptable to UBS only because the possibility of a liquidation occurring during that period was so remote that it could safely be ignored. [151] The argument is tempting, but with some regret we do not think we can yield to it. There is a clear distinction between the rights attaching to the NVS [ie the award shares], which is a question of law to be determined by construction of the articles, on the one hand, and the likelihood of the happening of an event which would bring those rights into play, on the other hand. The sheer improbability of a liquidation occurring during UBS's period of ownership of the shares cannot, in itself, be a reason for construing art 2(15) as if it meant the opposite of what it says, or for ignoring it altogether—particularly where such a liquidation is required to be supposed by s 416 itself. Furthermore, since art 2(15) is expressed to apply at any time when the NVS are beneficially owned by UBS or another group company, there can be no basis for disregarding it for the purposes of s 416 merely because the period of ownership was (and was always intended to be) very short. During that period, the inescapable fact is that the NVS were beneficially owned by UBS and nobody else; and the rights which attached to the NVS were those in art 2(15), not those in art 2(7)–(14). Application of s 416(2) to this state of affairs produces the result that UBS did not control ESIP, and in agreement with the FTT we would so hold.”

“[71] … I very much doubt whether, since [ Barclays Mercantile Business Finance Ltd v ] Mawson , it really is necessary to return each time to the base camp in Ramsay and trek through all the authorities from then on. For practical purposes, it should, in general, be possible to start from the position stated in the unanimous report of the Appellate Committee in Mawson at [26]–[42] under the heading 'The Ramsay principle.' Mawson was obviously meant to be a significant judicial stocktaking of the 'new approach' to the construction of revenue statutes first applied in Ramsay and followed subsequent cases on the Ramsay principle. The stated aim in the report delivered by Lord Nicholls was to 'achieve some clarity about basic principles' whilst recognising realistically that it is no doubt (see [2005] STC 1 at [27], [2005] 1 AC 684 at [27])— '… too much to expect that any exposition will remove all difficulties in the application of the principles because it is in the nature of questions of construction that there will be borderline cases about which people have different views …' [72] I would prefer to incorporate, rather than replicate, in this judgment all that follows that passage in Mawson . The House of Lords has already unanimously decided and clarified in Mawson the important point of principle raised by HMRC in this appeal, ie the scope of application of the Ramsay principle. A summary of the key paragraphs in Mawson , which themselves are a summary of the legal position in the light of the previous case law, could not begin to do full justice to the authoritative text of the Committee's report and might give rise to the kind of further doubts that the Appellate Committee wished to dispel by their guidance. The principle is now clearer, but, as this case shows, the difficulties in its application and the scope for different conclusions remain and are probably irremovable by any legitimate judicial process.”

“T he ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.” “The relevant statutory provisions, construed purposively”

“(i) The employee held the beneficial interest in the company. He benefited by inter alia receiving soft loans or the use of property from the company. … (j) The company would ultimately be stripped of its funds by one means or another.”

“In their discussion of the Ramsay issue (see WT Ramsay Ltd v IRC [1981] STC 174 , [1982] AC 300 ), the tribunal expressed the conclusion, at [27] on p 39 of the decision, that— 'it is reasonably clear on the facts found that there was a composite transaction consisting of a series of steps which began with the establishment and transfer of money into the EBT and ended with the transfer of the shares to the employees. Thereafter, a variety of financial arrangements and transactions could and indeed did take place'. (Mr Prosser's [counsel for taxpayer’s] emphasis added.) In other words, unlike in other tax avoidance cases, such as DTE Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455 , [2001] STC 777 , 74 TC 14 , the transfer of the shares did not form part of a composite transaction which ended with a payment of money, unless the share transfer of itself was, or was to be treated as, a payment of money.”

“[10] ... Reading the decision as a whole, it is clear that the exit strategy (ie how the employee would obtain the benefits which he wanted by virtue of his ownership of the shares) was really a matter for the decision of the employee. Subject, no doubt, to the lawfulness of any request, the directors would comply with the employee's wishes. It is true that there was no arrangement that there would be a particular outcome, indeed, there was no communication between the directors of the company and the employee concerned until after transfer of the shares. But the tribunal expressly stated at [29] on p 40 of the decision that the facts, viewed realistically, show unequivocally that control was vested in the employee who had access to the pot of money contained within the corporate money box. And at [43] on p 43 of the decision, the tribunal expressly stated that the directors would, in reality, be inevitably compelled to comply with the employee's wishes. Whether that is a finding of fact or a reflection of the powers which the employee would have as owner of the company does not, in my view, matter. The point is that, as a result of the arrangements, the employee became the owner of a company from which he could in practice extract the cash within it whenever he wished, albeit that a tax charge of one sort or another, depending on the method of extraction, might result. To use different language , it was preordained that the employee would receive 100% of the shares in a cash-rich company. It was not pre-ordained that he would use his control of the company in any particular way but how he would do so was his choice, a choice which would in practice be observed and implemented by the directors . ”

“(a) Whether the employee in reality receives a payment of money (the Ramsay Issue)? (b) Whether the employee should be regarded as receiving money, being the money owned by the company, when he acquired shares in the company on the basis that the money owned by the company was unreservedly at the disposal of the employee (the cash box issue). (c) Whether the shares were readily convertible assets as defined in the relevant legislation (the PAYE issue).”

“… the guidance in BMBF v Mawson required the tribunal to identify the relevant transaction to which the tax legislation was to be applied and that this involved the tribunal in considering the relevant documents and the relevant evidence as to the intentions held by the parties.”

“[81] … The purpose of the scheme was to provide a bonus to employees. It was the mechanism by which the benefit of a sum of money was to be channelled to an employee, although it failed in its aim of diluting the value of the shares, and thus of providing an actual substantial value to the employee at a diluted value for income tax purposes. The scheme was a composite transaction; the scheme itself, ending as the tribunal found with the transfer of shares, did not provide the employee with cash or money in his own bank account , but it did provide the employee with the rights of a shareholder holding 100% of the shares in a cash-rich debt-free company. As the tribunal held (see [10], above) the facts, viewed realistically, show unequivocally that control was vested in the employee who had access to the pot of money contained within the corporate money box and the directors would, in reality, be inevitably compelled to comply with the individual employee's wishes. And as I put it in that paragraph, the employee became the owner of a company from which he could in practice extract the cash within it whenever he wished, subject of course to whatever tax charge of one sort or another, depending on the method of extraction, might result. [82] But even so, the employee had no present right to receipt of cash from the company when its shares were transferred to him. The case is different from Garforth (Inspector of Taxes) v Newsmith Stainless Ltd [1979] STC 129 , [1979] 1 WLR 409 where the directors had an immediate right to payment (even though it might have been necessary to sue for the debt, just as it might be necessary to sue on a cheque representing payment of salary if the employer defaulted). Mr Ghosh [counsel for HMRC] says that what the employee received was as good as money. I do not agree with that. There is a difference, in my view, between an immediate right to obtain money (eg by drawing on a bank account to which salary has been credited by direct debit or cheque) and obtaining money only after the implementation of a procedure required by company law. This is not a case where it is possible to lift the corporate veil so as to treat the company's money as that of the employee. Nor, on the findings of fact, is this a case where the composite transaction ends up with money (in the conventional sense) in the hands of the employee (eg in his bank account). Indeed, it needs always to be remembered that the emolument in question is the shares and not the money in the company. [83] In my judgment, the transfer of shares to an employee was not a 'payment' to that employee for the purposes of s 203. The powers which he had over 'his' company did not result in his rights being 'as good as cash' as Mr Ghosh would have it or, as I would say, being able to turn what was prima facie a benefit in a form not consisting of money (ie shares) into a benefit consisting of money. The money is not unreservedly at the disposal of the employee, a condition which is, I consider, a necessary, even if not a sufficient, condition for there to be a payment within s 203.”

“[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 Ch 2 of Pt VII [ie 7] of ITEPA. [140] The tribunal therefore takes the view that [UBS] fails in this appeal by reference to the application of Ch 2 of Pt 7 of ITEPA to the facts of the scheme as a whole.”

“[161] With all due respect to the FTT, we are bound to say that we find its reasoning on this part of the case very difficult to follow. The FTT found (at [95]) that the NVS were real shares, some of which were held by employees for more than two years, and real dividends were paid on them. The FTT therefore accepted that the NVS were 'securities', which in that context must mean securities within the meaning of Ch 2, and said that the 'more significant question' was whether they were restricted securities. The FTT then went on to hold (wrongly, in our view) that they were not restricted securities. But if the NVS were securities within the meaning of Ch 2—and the contrary seems to us unarguable—how can it then be said that the scheme as a whole nevertheless falls outside the scope of Ch 2? [162] Unless all the FTT meant was that the securities were not restricted securities, in other words merely stating other reasons for their earlier conclusion, the only plausible basis for such a contention, in our judgment, would be if, on a realistic appraisal of the facts, the scheme was not one which provided securities (in the form of the NVS) to employees, but one which provided them with money.”

“[162] … By virtue of ITEPA, s 420(5)(b), 'money' is excluded from the definition of 'securities' which applies for the purposes of Chs 1 to 5. We readily accept that, in an appropriate case, it might well be possible to construe 'money' in this context purposively, and to treat the exception as applying to arrangements which, viewed realistically, are no more than disguised or artificially contrived methods of paying money to employees. There is plenty of authority for applying a Ramsay approach (in the sense explained by Arden LJ in Astall[)] to 'money in, money out' schemes of that kind: see, for example, NMB Holdings Ltd v Secretary of State for Social Security (2000) 73 TC 85 (payment of bonuses by the purchase and immediate sale of platinum sponge) and DTE Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455 , [2001] STC 777 , 74 TC 14 (payment of bonuses through artificial trust arrangements which ended with the falling in of a contingent reversionary interest a few days after the scheme was set in motion). However, caution is needed because everything always depends on a careful scrutiny of the particular statutory provisions in issue, and it is impossible to generalise from instances where such an analysis is appropriate to a broad proposition that any tax avoidance scheme designed to turn an otherwise taxable bonus into something else, and to leave the employee at the end of the day with money in his pocket, will necessarily fail in its object. It also needs to be remembered that the mere existence of a tax avoidance motive is, in itself, irrelevant, although it may of course throw light on matters such as the commerciality of the arrangements made, or the likelihood of pre-planned events occurring. [163] The need for caution in attributing too broad a meaning to the 'money' exception in s 420(5)(b) is reinforced by the fact that the definition of 'securities' in s 420(1) includes debentures and other instruments creating or acknowledging indebtedness, while s 424(1)(c) makes it clear that redeemable shares are also included. Thus securities which are convertible into money, and a wide range of securities which create, evidence or secure indebtedness, plainly fall within the scope of Pt 7. Moreover, since one of the legislative purposes of Pt 7 is, as Lord Walker said in Gray's Timber ( [2010] STC 782 at [7], [2010] 1 WLR 497 at [7]), to eliminate opportunities for unacceptable tax avoidance, including in particular Chs 3A, 3B, 3C and 3D, one naturally expects the definition of 'securities' for the purposes of (among others) those chapters to be a wide one, and the exceptions to it to be relatively narrow. [164] Wherever the precise boundary of the 'money' exception should be drawn, it is in our opinion clear that the facts of the present case fall well outside it, and that the NVS are therefore within the definition of 'securities'. The real and enduring nature of the NVS, combined with the fact that nearly half of them were not redeemed for two years, makes it impossible to ignore them, or to regard them as a mere vehicle for the transfer of money. It is true that over half of the NVS were redeemed at the first opportunity, in March 2004, and it was plainly intended that this opportunity would be taken by those employees who would not in practice be liable to CGT on a disposal of the shares. But even in their case the shares were held for a period of almost two months, and because of the investment in UBS shares the amount received on redemption bore no necessary relation to the initial amount of the bonus. Furthermore, HMRC have never sought to argue that those employees who redeemed their shares at the first opportunity should be taxed differently from those who held their shares until 2006.”

“The true position, as I see it, is that for those employers who operate the PAYE system in a straightforward manner, and who do not resort to the complexities of tax avoidance schemes, there will be neither confusion nor uncertainty; whereas for those employers who choose to operate such schemes the effect of applying the Ramsay principle is to restore the certainty which the legislature intended.”

“62 Earnings (1) This section explains what is meant by “earnings” in the employment income Parts. (2) In those Parts “earnings”, in relation to an employment, means— ( a ) any salary, wages or fee, ( b ) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or ( c ) anything else that constitutes an emolument of the employment. (3) For the purposes of subsection (2) “money's worth” means something that is— ( a ) of direct monetary value to the employee, or ( b ) capable of being converted into money or something of direct monetary value to the employee. (4) Subsection (1) does not affect the operation of statutory provisions that provide for amounts to be treated as earnings (and see section 721(7)).”

“423 “Restricted securities” and “restricted interest in securities” (1) For the purposes of this Chapter employment-related securities are restricted securities or a restricted interest in securities if— (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. (2) This subsection applies to provision under which— (a) there will be 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. (3) This subsection applies to provision under which there is a restriction on— (a) the freedom of the person by whom the employment-related securities are held to dispose of the employment-related securities or proceeds of their sale, (b) the right of that person to retain the employment-related securities or proceeds of their sale, or (c) any other right conferred by the employment-related securities, (not being provision to which subsection (2) applies). (4) This subsection applies to provision under which the disposal or retention of the employment-related securities, or the exercise of a right conferred by the employment-related securities, may result in a disadvantage to— (a) the person by whom the employment-related securities are held, (b) the employee (if not the person by whom they are held), or (c) any person connected with the person by whom they are held or with the employee, (not being provision to which subsection (2) or (3) applies).”

“425 No charge in respect of acquisition in certain cases (1) Subsection (2) applies if the employment-related securities— (a) are restricted securities, or a restricted interest in securities, by virtue of subsection (2) of section 423 (provision for transfer, reversion or forfeiture) at the time of the acquisition, and (b) will cease to be restricted securities, or a restricted interest in securities, by virtue of that subsection within 5 years after the acquisition (whether or not they may remain restricted securities or a restricted interest in securities by virtue of the application of subsection (3) or (4) of that section). (2) No liability to income tax arises in respect of the acquisition, except as provided by— (a) Chapter 3 of this Part (acquisition by conversion), (b) Chapter 3C of this Part (acquisition for less than market value), or (c) Chapter 5 of this Part (acquisition pursuant to securities option). (3) But the employer and the employee may elect that subsection (2) is not to apply to the employment-related securities. (4) An election under subsection (3)— (a) is to be made by agreement by the employer and the employee, and (b) is irrevocable. (5) Such an agreement— (a) must be made in a form approved by the Board of Inland Revenue, and (b) may not be made more than 14 days after the acquisition. 426 Charge on occurrence of chargeable event (1) If a chargeable event occurs in relation to the employment-related securities, the taxable amount counts as employment income of the employee for the relevant tax year. (2) For this purpose— (a) “chargeable event” has the meaning given by section 427, (b) “the taxable amount” is the amount determined under section 428, and (c) “the relevant tax year” is the tax year in which the chargeable event occurs. (3) Relief may be available under section 428A (relief for secondary Class 1 contributions met by employee) against an amount counting as employment income under this section. (5) This section is subject to section 429 (case outside charge under this section). 427 Chargeable events (1) This section applies for the purposes of section 426 (charge on occurrence of chargeable event). (2) Any of the events mentioned in subsection (3) is a “chargeable event” in relation to the employment-related securities. (3) The events are— (a) 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, (b) the variation of any restriction relating to the employment-related securities in such circumstances (without the employment-related securities ceasing to be restricted securities or a restricted interest in securities), and (c) the disposal for consideration of the employment-related securities, or any interest in them, by an associated person otherwise than to another associated person (at a time when they are still restricted securities or a restricted interest in securities). (4) For the purposes of this Chapter there is a variation of a restriction relating to the employment-related securities if any restriction in relation to them is removed or varied.”

“431 Election for full or partial disapplication of this Chapter (1) The employer and the employee may elect in relation to employment-related securities which are restricted securities or a restricted interest in securities that— (a) for the relevant tax purposes their market value at the time of the acquisition is to be calculated as if they were not, and (b) sections 425 to 430 are not to apply to the employment-related securities. (2) Or the employer and the employee may elect in relation to employment-related securities which are restricted securities or a restricted interest in securities that— (a) for the relevant tax purposes their market value at the time of the acquisition is to be calculated, and (b) sections 425 to 430 are to apply to the employment-related securities, as if any specified restriction did not apply to the employment-related securities. (3) For the purposes of subsections (1) and (2) “the relevant tax purposes” are— (a) determining any amount that is to constitute earnings from the employment under Chapter 1 of Part 3 (earnings), (b) determining the amount of any gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(a) (conversion), (c) operating Chapter 3C of this Part (acquisition of securities for less than market value), and (d) determining any amount that counts as employment income of the employee under Chapter 5 of this Part (securities acquired pursuant to securities option). (4) An election under this section— (a) is to be made by agreement by the employer and the employee, and (b) is irrevocable. (5) Such an agreement— (a) must be made in a form approved by the Board of Inland Revenue, and (b) may not be made more than 14 days after the acquisition.”

“431B Securities acquired for purpose of avoidance Where employment-related securities are restricted securities or a restricted interest in securities, the employer and the employee are to be treated as making an election under section 431(1) in relation to the employment-related securities if the main purpose (or one of the main purposes) of the arrangements under which the right or opportunity to acquire the employment-related securities is made available is the avoidance of tax or national insurance contributions.”

“683 PAYE income (1) For the purposes of this Act and any other enactment (whenever passed) “PAYE income” for a tax year consists of— ( a ) any PAYE employment income for the year, ( b ) any PAYE pension income for the year, and ( c ) any PAYE social security income for the year. (2) “PAYE employment income” for a tax year means income which consists of— ( a ) any taxable earnings from an employment in the year (determined in accordance with section 10(2)), and ( b ) any taxable specific income from an employment for the year (determined in accordance with section 10(3)).”

“18 Receipt of money earnings (1) General earnings consisting of money are to be treated for the purposes of this Chapter as received at the earliest of the following times— Rule 1 The time when payment is made of or on account of the earnings. Rule 2 The time when a person becomes entitled to payment of or on account of the earnings. Rule 3 If the employee is a director of a company and the earnings are from employment with the company (whether or not as director), whichever is the earliest of— (a) the time when sums on account of the earnings are credited in the company's accounts or records (whether or not there is any restriction on the right to draw the sums); (b) if the amount of the earnings for a period is determined by the end of the period, the time when the period ends; (c) if the amount of the earnings for a period is not determined until after the period has ended, the time when the amount is determined. (2) Rule 3 applies if the employee is a director of the company at any time in the tax year in which the time mentioned falls. (3) In this section “director” means— (a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body, (b) in relation to a company whose affairs are managed by a single director or similar person, that director or person, and (c) in relation to a company whose affairs are managed by the members themselves, a member of the company, and includes any person in accordance with whose directions or instructions the directors of the company (as defined above) are accustomed to act. (4) For the purposes of subsection (3) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity. (5) Where this section applies— (a) to a payment on account of general earnings, or (b) to sums on account of general earnings, it so applies for the purpose of determining the time when an amount of general earnings corresponding to the amount of that payment or those sums is to be treated as received for the purposes of this Chapter.” “686 Meaning of “payment” (1) For the purposes of PAYE regulations, a payment of, or on account of, PAYE income of a person is treated as made at the earliest of the following times— Rule 1 The time when the payment is made. Rule 2 The time when the person becomes entitled to the payment. Rule 3 If the person is a director of a company and the income is income from employment with the company (whether or not as director), whichever is the earliest of— (a) the time when sums on account of the income are credited in the company's accounts or records (whether or not there is any restriction on the right to draw the sums); (b) if the amount of the income for a period is determined before the period ends, the time when the period ends; (c) if the amount of the income for a period is not determined until after the period has ended, the time when the amount is determined. (2) Rule 3 applies if the person is a director of the company at any time in the tax year in which the time mentioned falls. (3) In this section “director” means— (a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that board or body, (b) in relation to a company whose affairs are managed by a single director or other person, that director or person, and (c) in relation to a company whose affairs are managed by the members themselves, a member of the company, and includes any person in accordance with whose directions or instructions the company's directors (as defined above) are accustomed to act. (4) For the purposes of subsection (3) a person is not regarded as a person in accordance with whose directions or instructions the company's directors are accustomed to act merely because the directors act on advice given by that person in a professional capacity.”

“3 “Earnings” and “earner” (1) In this Part of this Act and Parts II to V below— ( a ) “earnings” includes any remuneration or profit derived from an employment; and ( b ) “earner” shall be construed accordingly. (2) For the purposes of this Part of this Act and of Parts II to V below other than those of Schedule 8— ( a ) the amount of a person's earnings for any period; or ( b ) the amount of his earnings to be treated as comprised in any payment made to him or for his benefit, shall be calculated or estimated in such manner and on such basis as may be prescribed by regulations made by the Treasury with the concurrence of the Secretary of State. …” “6 Liability for Class 1 contributions (1) Where in any tax week earnings are paid to or for the benefit of an earner over the age of 16 in respect of any one employment of his which is employed earner's employment— (a) a primary Class 1 contribution shall be payable in accordance with this section and section 8 below if the amount paid exceeds the current primary threshold (or the prescribed equivalent); and (b) a secondary Class 1 contribution shall be payable in accordance with this section and section 9 below if the amount paid exceeds the current secondary threshold (or the prescribed equivalent). … (4) The primary and secondary Class 1 contributions referred to in subsection (1) above are payable as follows— (a) the primary contribution shall be the liability of the earner; and (b) the secondary contribution shall be the liability of the secondary contributor; but nothing in this subsection shall prejudice the provisions of paragraphs 3 to 3B of Schedule 1 to this Act. ... (7) Regulations under this section shall be made by the Treasury.”