“At this stage I must stress that no final decisions on allocations have been made and that this letter does not create any entitlement to any amount. Nevertheless I thought that you would want to know of our current intentions.”
“THE Trustees may appoint the Trust Fund and the income of it (or any share or part of it) upon such trusts in favour of all or any one or more exclusively of the other or others of the Beneficiaries and if more than one in such shares and proportions and with and subject to such powers and provisions and generally in such manner in all respects as the Trustees consider to be in the interests of all or such one or more of the Beneficiaries.”
“10.1 THE Trustees shall exercise the powers and discretions vested in them as they shall think most expedient for the benefit of all or any of the Beneficiaries under this declaration of trust and may exercise or refrain from exercising any power or discretion for the benefit of any one or more of them without being obliged to consider the interests of the others or other of them. … 10.3 SUBJECT to clause 10.1 and Clause 10.2 every discretion vested in the Trustees shall be absolute and uncontrolled as shall every power vested in them and every power so vested shall be exercisable at their absolute and uncontrolled discretion and the Trustees shall have the same discretion in deciding whether or not to exercise any power. 10.4 In the exercise of the powers conferred on them by this declaration of trust the Trustees shall make such enquiries as to the identity of the Beneficiaries as they consider appropriate for the purposes of enabling them to exercise the relevant power and without prejudice to the above the Trustees shall be entitled in the absence of manifest error to rely without further enquiry on information supplied to them by or on behalf of any Group Company as to whether any individual is or is not a Beneficiary”
“The Company will ask the Trustees to consider making appropriate benefits and bonus payments to employees who they feel have shown the necessary commitment to help drive the company forward in the future.”
“I understand that a sub-trust has been created for the benefit of myself and my family. I now wish to make a recommendation regarding an investment opportunity that may be of interest to the trustees. I understand the trustees have complete, independent and unrestricted authority over how to invest the assets in the sub-trust. I would be grateful if you could contact me at the earliest opportunity to discuss the matter.”
“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 capable of being converted into money or something of direct monetary value to the employee. (4) ...”
“…a person is chargeable under income tax…under Schedule E…not what saves his pocket but on what goes into his pocket and the benefit of which the appellant derives from a having a rent-free house provided for him by the bank brings him nothing which can be reckoned upon as a receipt or properly described as income”. 133.While the application of that principle is clear in the case e.g. of a monthly salary paid to an employee, the particular issue which arises in this case is over how any such requirement of receipt in the hands of the employee applies in situations where earnings are redirected to someone else; in particular at the point in time a trust was declared over the sums were they earnings of the director already? 134.HMRC refer to the Court of Session’s decision of Murray Group[2016] STC 468 as an illustration of the principle of “redirection” against a similar but not identical factual backdrop of a scheme involving a declaration of trust and funding of sub-trusts. As a decision of a Scottish court, it is accepted that it is not strictly binding on the FTT sitting in England and Wales. Further, whilst a decision of a notionally superior court in one part of the UK might ordinarily be followed by a tribunal sitting in another part, especially on questions of tax, the appellants submit, further to their detailed, (and in HMRC’s view unjustified), critique of the decision that Murray should not be followed. In order to understand the appellant’s arguments on the receipt principle and to make sense of the appellant’s critique it is necessary to deal with various decisions which preceded Murray and it is convenient to take these chronologically given the later decisions consider and discuss the earlier ones. 135.The common thread running through the various authorities are fact patterns where amounts are transferred to or segregated within a fund or trust in relation to which an employee or director has a contingent right to receive amounts whether that is through the fulfilment of certain conditions or through the exercise of someone else’s discretion. The question in such circumstances which the court must grapple with is whether the amount that is contributed to the fund is to be regarded as paid from “earnings” or whether there are “earnings” only when something is paid out to the employee ? 136.In Smyth v Stretton [1904] 5 TC 36 which was a decision of the High Court, the Board of Governors of Dulwich College established a provident fund for teachers. The Scheme provided “that the following increase of Salaries shall be granted..” subject to various conditions. The scheme provided for 1) a 5% increase payable on retirement or death for whatever reason 2) an extra 5% increase of salaries for assistant masters having between 5 and 15 years’ service but if the assistant master who had less than 10 years resigned for reasons other than ill-health then he was not entitled to it or the accumulations on it. His estate was entitled the sum accumulations if he died in service or in the case of ill health retirement if the governors granted it at their discretion. 137.Channell J held 1) was clearly salary and taxable but as to 2) the position was arguable. However taking account that the extra 5% was put together with 1), that it was stated to be salary, and there being no reason not to treat it as salary just because there was a binding obligation as to what to do with it, and noting that the master would probably get it in certain events but would not get in others, he concluded 2) was additional salary and taxable and was none the less so because there had been a binding obligation created between the assistant masters and governors that they should apply it in a particular way. 138.His judgment referred to Bell v Gribble[1903] 1 KB 517 (a decision of the Court of Appeal) as being very much on point and as establishing : “..that a sum receivable by way of salary or wages is not the less salary or wages taxable because for some reason or another the person who receives it has not got the full right to apply it just as he likes. The fact that income which is income but which has even by the operation of some statute to be devoted compulsorily to some other purpose or another does not prevent it being income.”
'… no more than an illustration of a well-established principle … that for the purposes of taxation of a man's income it matters not what the man has thought fit to do in the way of spending that income or investing it.'
'The Company agreed to pay to the employee during his service his salary at the rate of£425 per annum, but agreed "as an additional inducement to the Employee more effectively to perform his duties and assist in promoting and advancing the interests of the Company" that the Company would in the year 1927 pay him the sum of£1,639 . That being so, it seems to me clear that the£1,639 , though in truth an emolument of the office held by Mr Roberts, was an emolument for the year in respect of the year 1927, and cannot be treated as made up of a series of emoluments for the preceding years.'
“One can hardly say that that case, being merely a question of the construction to be put upon a particular agreement, is any authority which helps us when we are endeavouring to put a proper construction upon an agreement which is totally different from the agreement with which Mr Justice Channell had to deal with.” 143.Maugham LJ also analysed the agreement contrasting the fact that whereas in Smyth it referred to salary, in the present case the agreement distinguished the sums in question from salary. The sums were to be set aside from profit and were conditional on the profit-earning from the point of view of the company, also Mr Roberts only received payment if certain events mentioned in agreement complied with “benefits which he might conditionally become entitled to under agreement not in a true sense part of salary”. 144.Forde v McHugh[2014] UKSC 14 concerned a company which had set up an unapproved retirements benefits scheme for employees by way of trust to which the company made contributions for the benefit of a director, Mr McHugh. The issue as set out at [14] of the Supreme Court’s decision was whether the appellant company had paid earnings to or for the benefit of Mr McHugh when it made the transfer to the trust at a time when Mr McHugh’s interest in the assets was only a contingent one which might have been defeated by his death before the specified retirement age. In particular the question which arose was whether the transfer was a payment of “earnings” under the relevant NICs legislation? HMRC were arguing that both the payments into the trust and out of it were earnings but that double counting was avoided by specific earnings “disregards” in the NICS regulations for pensions / unapproved retirement benefit scheme payments. 145.Lord Hodge (gave the court’s judgment with which Lords Neuberger, Sumption, Reed and Toulson JJSC agreed). 146.At [16] he dealt with HMRC’s position as follows: “On this narrow issue, HMRC’s stance before this court was remarkable. Because of the assumptions on which the subordinate legislation had been framed, Mr Jones had to submit that earnings are paid to an earner both when assets are transferred to a pension scheme to be held on a trust and also when payments are made from the trust fund. HMRC looked to the payment and not to what the earner received. HMRC argued that the payment into the trust fund was earnings because it was a sum paid as the quid pro quo for past or future services. It was part of Mr McHugh’s remuneration. The sum went to a trust fund which was solely for the benefit of Mr McHugh and his wife. Mr McHugh, it was submitted, was immediately better off because he had the hope of receiving the trust fund in the future, and his family would benefit if he did not survive until his retirement age. Payments to him out of the trust fund would as a matter of principle also be earnings when made because they also were payments to him in respect of his employment. On this approach, double-counting was avoided only by Part VI of Schedule 3 to the 2001 Regulations which disregards, among others, payments by way of pension (para 1) and payments by way of relevant benefits pursuant to an unapproved retirement benefits scheme (para 4)”
“Having reached this view on the issue which the parties presented in this appeal, I comment briefly on some of the cases to which counsel referred. This case was presented as a test case on the issue of principle. No argument was advanced as to whether a payment into a pension or bonus fund might properly be analysed as a payment out of the earner’s salary as in Smyth v Stretton (1904) 5 TC 36. Mr Jones stated that HMRC might take that point in an appropriate case. Edwards v Roberts (1935) 19 TC 618 assists in this case not because it is correct to equate “earnings” in NICs legislation with “emoluments” in income tax legislation but because of its application of the general law in relation to a contingent interest and its focus on what an employee receives. In that case an employee received a salary and also, if he remained in employment for more than five years, a right to receive at the end of a subsequent financial year part of the capital of a trust fund into which his employer paid a proportion of its annual profits. [Lord Hodge then quoted the extract at [139] above “under these circumstances there could not said to have been accrued…”] 149.That brings us finally to Murray Group Holdings Ltd and others v HMRC[2016] STC 468 which was a decision of the Court of Session (Inner House). A company within the Murray Group set up an EBT and any company within the group which wished to benefit one of its employees made a cash payment to the trust in respect of that employee. Two types of employees were considered (footballers and non-footballers). The paying company recommended the trustee of the trust to resettle the sum in question on to a sub-trust, and would ask that the income and capital of the sub-trust should be applied in accordance with the wishes of the employee. The beneficiaries of the sub-trust were chosen by the employee, and were generally the members of his family. In practice the trustees of the sub-trusts invariably gave effect to the wishes of the employee. The employee would be appointed protector of the sub-trust, and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust from, ultimately, his employer. HMRC assessed the employers for PAYE income tax and NICs in relation to the foregoing. 150.The FTT by a majority held that the benefit enjoyed by the employee and his family resulted from the exercise of a discretionary power by the trustee of the sub-trust and that the payments made to the trustees were not, and did not become, emoluments or earnings of the employees, and were therefore not subject to income tax. The Upper Tribunal upheld this result but its decision was then reversed by the Court of Session. 151.The Court of Session accepted HMRC’s submission that the scheme involving payments to the various trusts and the application of the moneys so paid amounted to a mere redirection of earnings. At [56] Lord Drummond Young, who gave the opinion of the court, having considered the Privy Council’s decision in Hadlee v IRC[1993] STC 294 , the House of Lords decision in Brumby v Milner[1975] STC 644 and the High Court’s decision in Smyth explained: “The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee's services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party.” 152.At [58] the opinion noted that in assessing the liability of a transaction to tax the imperative was “in every case to determine the true nature of the transaction, viewed realistically.” 153.Applying the above principles to the facts to the two sets of employees in issue. In relation to the employees who were not footballers it was stated at [59]: “…the critical element is that bonuses were paid on the basis of the work performance of the employee in question, qua employee, and the profitability of his employing company. Thus the amount of the bonus was determined by reference to the employee's employment activities. While the bonuses were discretionary, and there was no contractual entitlement to them, it is very obvious that they were derived from and based on the work done by the particular employee.” 154.As regards the footballing employees the court noted at [60] that: “when a contract of employment was concluded, an additional side letter provided for a discretionary trust payment. It seems to us self-evident that the obligations in the side letter were part of the employee’s employment package and provided him with additional remuneration…once it is accepted that the bonus payments represented consideration for a footballer’s services qua employee, it inevitably follows that those payments represented emoluments or earnings of the footballer in question.”
“In our opinion the payments were, quite simply, bonus payments arising out of the footballer’s employment, but paid to a third party, the Trustee of the Principal Trust. Two facts are critical: payments were made by the employer, albeit through a trust mechanism; and those payments were made because of the services rendered by a particular employee in such a way that they enured for the benefit of persons who were, realistically, chosen by that employee, through trust purposes to which he assented.” 156.At [23] the court mentioned it had been referred to documents in which one of the footballers’ remuneration had been agreed and a schedule which under the heading of annual salary also mentioned a contribution to the trust. The court saw this as demonstrating that the payment to the principal trust was part of the total remuneration package. 157.At [61] it was noted that “the redirection of earnings occurred at the point where the employer paid a sum to the trustee of the Principal Trust, and what happened to the moneys thereafter had no bearing on the liability that arose in consequence of the redirection. At [65] the court went on to state that: “…the critical point when it can be said that an emolument or earnings has been paid is when the employer makes a payment either directly to the employee or in a manner that has been requested or at least acquiesced in by the employee. In the present case the payment to the trustee of the Principal Trust occurred at the point when funds left the employer, and they were made to an entity that had been selected by the employee (through the arrangements in the side letters), or at least acquiesced in by the employee, as the manner in which the funds would be channelled to his own sub-trust.” 158.The court also found it immaterial (at [62]) that there was no contractual entitlement to the sums paid noting that it had long been recognised that gratuities were subject to income tax. It rejected the argument that taxing payments made to the trustees would give rise to double taxation. At [63] regarding the question of whether sums had been placed at the “unreserved disposal of the employee” (as in Aberdeen Asset Management Ltd v HMRC) the court stated: “…In dealing with the redirection of income, however it will not normally be relevant whether or not sums are the employee’s unreserved disposal. The employee chooses to redirect part of the consideration for this employment – emolument or earnings. In so doing he obviously hopes that those trustees will apply the funds in the manner that he has requested, in this case in accordance with the letters of wishes. He nevertheless runs the risk that they will not do so. Whatever happens, the sums paid to the trustees were redirected from income, and that is enough to render them liable to income tax in the ordinary way.” 159.In relation to the question of the application of PAYE the court concluded at [90] that a payment of emoluments or earnings was made at the point where the relevant employer made a payment to the trustee of the Principal Trust. 160.In the section of its decision from [67] onwards where the court considered various decisions it had received submissions on it found that the Supreme Court’s decision in Forde was readily distinguishable because: 1) Forde was primary concerned with NICs, 2) concerns over double taxation did not arise; the funds were trust capital (the situation being no different as if an employee had used part of his post-tax benefit to fund a trust for the benefit of his family) 3) there was no difficult with depriving the words “earnings” or “emoluments” from their relevant meaning 4) the computation of tax was not especially complicated, and 5) Forde was not concerned with arguments advanced in Murray on redirection. 161.At [71] the court rejected an argument that its approach if applied to Edwards v Roberts would generate the opposite result to what the Court of Appeal had decided: “In considering Edwards it is important to bear in mind that a critical feature of the Court of Appeal's reasoning was that the taxpayer was not entitled to anything until the lapse of six years, and his right could have been entirely defeated if he had, for example, left his employment during that period: see Lord Hanworth MR at pages 35-36. In the present case, by contrast, the various trustees became entitled to funds immediately, to hold them as redirected income of the employee in question. The position is the same as that in Smyth v Stretton and Hadlee v IRC, and is distinguishable from Edwards v Roberts.” 162.Considering Heaton v Bell and the principle that emoluments had to be money or money’s worth the court noted at [72] that the sums payable to the trustees of the principal trust and in due course to the trustees of the various sub-trusts took the form of cash and consequently the money / money’s worth principle did preclude the payments in Murray from being treated as emoluments. Heaton v Bell which HMRC depict as a case about redirection, was a decision of the House of Lords. The employee had the option of hiring a car and if he did then a sum was deducted from his wages – the question was whether emoluments was£100 or£95 plus free use of car. The House of Lords held 4:1 (Lord Reed dissenting) the emolument was£100 and that the employee was merely agreeing to£5 of that being deducted by employer as consideration for the car. (It did this on the basis of analysis of contractual arrangement (Lord Morris 747G, Lord Upjohn pg 760). 163.The employers in Murray Group sought and obtained leave to appeal to the Supreme Court. That hearing took place earlier this year in March and a decision is awaited. Parties’ submissions / issues on case-law 164.Having set out the various authorities I return to the parties’ submissions and the particular issues in contention between them. 165.As regards the appellant’s submission that one must look to the position of the employee in question to see what he or she has received, in addition to the statement in Tennant v Smith the appellant relies on Forde v McHugh [17] and Edwards v Roberts (pg638, 640 and 641). Embodied within that principle (and the proposition that earnings must be money or money’s worth) and both those cases is the outcome that there are no earnings when an employer pays into a conditional or contingent fund. 166.HMRC point to Murray as a case which shows that the receipt of money or money’s worth is not necessary in redirection cases. They refer to Murray for elucidation of the principle, long evident in tax law that you can have earnings which are not physically received by the employee but are nevertheless earnings if the correct characterisation is that he or she has agreed or directed the payment by the employer of sum. 167.Contrary to HMRC’s view, the appellant argues Murray should not be followed. It is not as indicated above binding and the FTT should not follow the decision because it overlooks or fails to properly, apply fundamental principles from higher authority decisions. 168.In particular the appellant argues Murray conflicts with Forde and well established principles in Tennant v Smith and Heaton v Bell. It does not recognise, principles on receipt, that payments into conditional funds are not being earnings, and the need for money or money’s worth. It begs the question of whether something is earnings in first place. 169.As can be seen from the extracts above at [160], the Court of Session distinguished Forde on a number of bases which are attacked by the appellant and defended by HMRC. As highlighted by the appellants the view that Forde was restricted to the field of NICs is difficult to sustain given that Supreme Court appeared to have considered that the NICs concept of “earnings” was wider than the equivalent income tax concept. 170.However, a more persuasive ground of distinction, in my view, is that Forde v McHugh did not deal with redirection. Paragraph [20] of the decision is consistent with HMRC’s observation that it had been accepted in Forde that this was an “Edwards v Roberts” case. That being the case it is difficult to see how the Supreme Court would have needed to turn its attention to the question of whether the contribution into the trust amounted to a redirection. I see Lord Hodge’s reference to Edwards v Roberts assisting “in this case” as referring to the Forde facts – it reflected HMRC’s counsel’s submission that it was accepted the facts of Forde were akin to an “Edwards v Roberts” case. I do not read it as having anything to say that if the Respondents took a “Smyth v Stretton” case then that would be answered by Edwards v Roberts. I disagree with the appellant’s opposing argument that what Lord Hodge said at [16] cut across the view that a redirection argument was not put in Forde. (“In each case I would characterise the payment from the trust or escrow fund as deferred earnings and it follows that the payment into the trust or escrow account would not be earnings.”) There was no analysis here of whether the payment into the fund was a redirection of the appellant’s earnings– and if that had in fact been considered it would be conspicuous that no mention of the court’s views on the argument were made when Lord Hodge recited HMRC’s reservation on the point in [20]. 171.While the appellant criticises Murray for not dealing with Brumby v Milner (which, according to the appellants, suggests Murray was wrong on there being no potential taxation on what comes out of a fund) I disagree that that is how Brumby is to be read. The facts of Brumby involved a profit sharing scheme where the company lent money to a trust to buy shares in the company and where the primary purpose was to use the shares to provide income for division amongst the employees. On termination of the scheme any balance was to be distributed among existing and former employees in the trustees’ discretion. The appellant highlights that the key point was that when the scheme was wound up the amounts paid to employees were assessed to income tax under Schedule E not the money paid into the scheme. 172.But, the issue was whether the capital distribution was “from” the employment (it having been accepted that income distributions were from employment) or whether it arose from something else (the company’s decision to wind up the profit-sharing scheme). The case did not consider the taxability of payments into the scheme still less any argument about redirection (Neither Smyth nor Edwards v Roberts were referred to). That addresses the criticisms that the Court of Session was wrong to dismiss concerns about of double taxation. If on a proper analysis what is put into a fund is already earnings – then there would be no question of amounts being taxed on being received. It cannot be assumedthe analysis deployed in Brumby would not have required the sums going into the scheme to be taxed because in Brumby the issue of redirection did not arise. 173.It follows also that the appellant’s criticism that Murray failed to have regard to the principle that payments into contingent funds are not earnings is unmerited. As explained in Murray if the sums are earnings when they go in, then the contingency of money coming out is irrelevant; it is akin to someone choosing to invest their salary in a family trust. In other words while there can be no dispute, as confirmed by Forde v McHugh that a conditional interest does not amount to earnings, that issue is beside the point as we are concerned with the prior question of whether what was directed towards the contingent right was earnings in the first place. 174.However, although I agree the exploration of redirection in Murray can proceed unimpeded by Forde I do accept there is merit in some of the appellant’s other criticisms which mean there are limitations to the extent any wider principles that can be drawn from the decision in terms of identifying when earnings have arisen which have then been redirected. It is notable that in each of the cases where the question of redirection is broached Smyth and Edwards v Roberts and in Heaton v Bell the question of redirection involves an analysis of the particular facts and circumstances of what was agreed between the employer and employee (see [142], [143] and [162] above). 175.Key among these, submits the appellants, is the appellants’ argument that the Court of Session was “blinded by” the source principle and did not consider the necessary element of receipt. Crucially, according to the appellants, the court did not consider the prior question of the basis on which it is established that the taxpayer might be regarded as having earnings which it was in a position to redirect. 176.In so far as the analysis in Murray relies on Smyth then the appellants argue Smyth is hardly a compelling authority noting the preface of Channell J judgment was “..I am not altogether satisfied with the decision I am about to come to in this case. I think it is arguable.”
“…could be seen in all the relevant circumstances to be repugnant to the true purpose of the agreement. No-one could have supposed those provisions were ever intended to be acted on. They were introduced into the agreement for no other purpose than as an attempt to disguise the true character of the agreement which it was hoped would deceive the court and prevent the appellants enjoying the protection of the Rent Acts…” 196.In his judgment Lord Templeman noted the background to the Rent Acts, the significance of whether something was a lease or license and that the parties could not contract out of the Acts. In his view (pg 458 at G): “…the court must consider the surrounding circumstances, including any relationship between the prospective occupiers, the course of the negotiations and the nature and extent of the accommodation and the intended and actual mode of occupation of the accommodation.” 197.He went on to find that the clause in issue was not a genuine reservation – Mr Antoniades did not genuinely intend to exercise the powers – it was only intended to deprive the cohabitees of the protection of the Acts. The facts had to prevail over language in order that the parties could not contract out of Rent Acts. It was apparent that the clause was a pretence from its terms and negotiations. 198.Lord Ackner’s judgment summarised the issue as being: What was the substance and reality of the transaction? In reality the agreements created a tenancy although the landlord sought “vigorously to disguise them as mere licences to occupy the flat”. 199.Lord Oliver prefaced his speech with commentary around reconciling the objective of keeping property gainfully occupied and avoiding application of Rent Acts. The critical question was not how the arrangement was presented in documents but what is the true nature of the arrangement. In his view (at Pg 467H) was there was an “air of total unreality about these documents…”
“consideration of whether and in what circumstances the ET may disregard terms which were included in a written agreement between parties and instead base its decision on a finding that the documents did not reflect what was actually agreed between the parties or the true intentions or expectations of the parties”
“I would accept the submission made on behalf of the claimants that, although the case [Snook] is authority for the proposition that if two parties conspire to misrepresent their true contract to a third party, the court is free to disregard the false arrangement, it is not authority for the proposition that this form of misrepresentation is the only circumstance in which the court may disregard a written term which is not part of the true agreement. That can be seen in the context of landlord and tenant from Street v Mountford[1985] AC 809 and Antoniades v Villiers[1990] 1 AC 417 , especially per Lord Bridge at p 454, Lord Ackner at p 466, Lord Oliver at p 467 and Lord Jauncey at p 477. See also in the housing context Bankway Properties Ltd v Pensfold-Dunsford[2001] 1 WLR 1369 per Arden LJ at paras 42 to 44.” 207.Having identified at [28] that as regards Kalwak that the reasoning of Rimer LJ in the Court of Appeal and Elias J (as he then was) who was sitting in the EAT, was inconsistent he rejected the application of the approach of Diplock LJ in Snook (that to find a contract was in a part a sham required a finding that both parties intended to paint a false picture as to the true nature of the obligations). In Lord Clarke’s view this was “too narrow an approach to an employment relationship of this kind”
“…In practice, in this area of law, it may be more common for a court or tribunal to have to investigate allegations that the written contract does not represent the actual terms agreed and the court or tribunal must be realistic and worldly wise when it does so.” 209.He concluded at [35]: “So the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part. This may be described as a purposive approach to the problem. If so, I am content with that description.”
“57. The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work, in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship….”
“However… there is a variant …where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract” 219.I note this case was described in Lord Clarke’s judgment in Autoclenz as a case arising out of the housing context but in so far as it is relied on by HMRC to evince a wider principle this was not elaborated on and it was not clear to me in any event that the variant referred to encompassed all statutes or to particular statutes in which case it was then not then clear to me that ITEPA, as regards tax, or SSCBA, as regards NICs, were statutes which the parties were unable to contract out of. 220.Summarising the relevant legal propositions to be applied I conclude: (1) It is possible to disregard the terms of a written agreement following an analysis of what the true agreement is. (2) In so doing it is not necessary to establish dishonesty, an intention to deceive or disguise, or a subjective intention that the term was not intended to apply for the provision to be disregarded (although those matters may be relevant); the task is one of identifying what the true agreement is. (3) The principle is not restricted to employment or landlord and tenant situations but does not affect the construction of arms’ length commercial contracts. (4) The tribunal should take inequality of bargaining power into account. The greater the disparity, the more astute the tribunal should be in investigating whether the written contract represents the actual terms agreed. (5) There are no special rules for agreements drafted by lawyers or accountants. 3) The Ramsay approach 221.HMRC’s next line of attack rests on the Ramsay approach which is set out in more detail in the section below. The essence of Ramsay as described in later cases and as HMRC point out is to apply a purposive construction of the statutory provision in question to a realistic view of the facts. 222.HMRC’s submission is that even if the payments to the EBTs were not payments to the director, and even if the powers conferred on the trustees of the EBT were discretionary, nevertheless construing the word “earnings” in the legislation purposively, payments to the EBT or the application of monies to sub-trusts were earnings because on the facts there was no realistic prospect of the discretion being exercised other than at the direction of the relevant director. Referring to UBS/Deutsche Bank - a realistic view of the facts may where appropriate require the tribunal to disregard elements that have been inserted into a transaction without any business or commercial purpose. Referring to Scottish Provident their submission is that, at most the risk the discretion would not be exercised towards the director was a low one and is to be disregarded. Further or alternatively, given the trustees invariably followed the relevant directors’ instructions the payment of money into the EBTs and/or sub funds should be viewed as a payment to the directors (by analogy with Aberdeen Asset Management Plc a case which is discussed later). HMRC argue the above principles apply equally to terms of the loan agreements purporting to confer on trustees a right to demand repayment on one month’s written notice. 223.It did not appear to me that the appellants took issue with the general principles underlying the Ramsay approach, rather their case was that the approach did not work in the way HMRC suggested it when applied to the facts of these appeals, and that the cases where the approach was applied successfully by HMRC could be distinguished on the facts. Ramsay, UBS and BMBF 224.The so-called Ramsay approach was most recently discussed in the Supreme Court’s decision in UBS and Deutsche Bank v RCC[2016] UKSC 13 . The judgment was given by Lord Reed JSC with whom Lord Neuberger PSC and Lord Mance, Lord Carnwarth and Lodge Hodge JJSC agreed. 225.At the section [61] to [68] dealing with The Ramsay approach Lord Reed set out the evolution of the approach in the Ramsay decision and in subsequent House of Lords decisions. He noted the significance of Ramsay being in firstly its extension of a purposive approach to statutory construction to tax cases and secondly in establishing that the analysis of the facts depended on that purposive construction of the statute. 226.In BMBF the House of Lords summarised the position at [32] as: “…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…” 227.As regards statutory construction, Lord Reed noted at [64] a statement of Carnwath LJ in the Court of Appeal in BMBF that taxing statutes “generally draw their life-blood from real world transactions with real world economic effects”
“Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.”
“In considering what amounts to payment for the purposes of the PAYE legislation, it is important in my opinion to bear in mind that money is a medium of exchange. In practical terms, therefore, the crucial question is whether funds have been placed in a position where as a practical matter they may be spent by the employee as he wishes; it is at that point that the employee can be said to obtain the benefit of those funds. If the PAYE legislation is construed purposively it is in my view obvious that it is such a benefit that is to be taxed. For this purpose it is not appropriate to deconstruct the precise legal nature of the employee's rights, drawing fine distinctions according to the methods that he must adopt in order to use the funds for his benefit. The fact that the employee has practical control over the disposal of the funds is sufficient to constitute a payment for the purposes of the legislation.” 239.Lord Glennie agreed with the reasons of the other judges on the panel. 240.As with Murray the decision in Aberdeen Asset Management is not strictly binding on this tribunal but in my judgment its treatment of the relevant legislation and the test it puts forward of whether the employee has practical control over the funds is correct and should be followed. 241.As regards Garforth, as Lord Drummond Young explained the judge in Garforth could be understood as being concerned with the practical ability to use funds. As regards the example given by Walton J of a sum being paid out only as and when a board of directors or subject to some other qualification of that nature not being unreservedly at the director’s disposal to do with as he liked and thus being a “long way away from payment”
“By consideration I think we knew who the key directors were, so the consideration was basically: is this what they expected? Are these people key employees? Is in accordance with the settlor’s wishes? Basically does everything appear as it should be?” 270.The trustee recognised that the Settlor had created the EBT as part of its wider reward strategy for their employees and that the EBT was only part of that strategy as other employees would have rewards delivered in different ways. Mr Schofield could not identify a situation where the trustee did not comply with the company's wishes. He understood the trustee had the same fiduciary duties in respect of all beneficiaries and that these duties were not solely derived from the trust deed, but were duties such as to act in the best interest of beneficiaries derived from trust law. The trustees did not regard each of the directors as a Settlor. If the trustee had any questions or needed further clarity in respect of any recommendations made, the trustee referred solely to the settlor company who was the UK company that created the EBT.The trustees saw no reason not to comply with reasonable requests made by the settlor of the EBT. As the trustee, Mr Schofield accepted the appropriateness of the recommendation; it came from the Settlor. 271.The trustees were typically already familiar with who the beneficiaries were, typically being the directors, as a result of their due diligence process. Following the execution of the Deed of Appointment which resulted in the creation of the sub-fund, a new bank account was opened for the sub-fund. From the trustees’ point of view this was both administratively a lot easier and also seemed appropriate. This was, therefore, part of the process of creating the sub-funds and the result was that the cash appointed to the subfund was transferred to and held in the sub-fund's own bank account. At the time, the trustee's principal bankers in relation to this type of EBT planning were the Royal Bank of Scotland International and that was generally where the sub-fund accounts were opened. In certain cases, the Settlor had decided to use a different bank when opening its bank account and expressed a view that any further bank accounts opened in relation to the trust should be opened with the same bank. This did present its administrative challenges to the trustee but generally, the trustee would try to comply with the expressed wish of the Settlor. The loans which were made to beneficiaries 272.Loan were generally but not always made from a particular sub-fund immediately. In some cases, (as was the case for some of the directors in the current appeals) the money was held in a bank account for a period of time and in other cases, the money was invested. There were differences in the amount of input from the settlor or beneficiaries. If any beneficiary wanted a loan it was rare for there to be a dialogue between the beneficiary and the trustee by way of persuasion. Rather, the trustee received a request for a loan from the beneficiary which it then considered independently. In response to the Tribunal’s question as to what the independent question involved, Mr Schofield elaborated on the questions he posed himself as follows: “– is the beneficiary a beneficiary of that particular sub-fund? Are they entitled to an interest-free loan? I think that’s probably as far as the consideration went” 273.Mr Schofield’s evidence was that repayment of the loans or the situations that might give rise to repayment of the loans were not generally discussed with the beneficiaries at the time of making the loans. His mind set when a beneficiary asked for a loan was not to look at it as a bank manager might. His view was that as a trustee, he did not necessarily want security and he was not overly concerned at the beneficiary's ability to repay; if he had a request from the principal beneficiary of the sub-fund for a loan, this would confer tax efficient benefits for the rest of the beneficial class of the sub-fund as they would generally be family or dependants of the principal beneficiary. He could not recall anyone other than the principal beneficiary requesting a benefit such as a loan. What happened to loans thereafter, including payment of interest by beneficiaries 274.All of the loans were month-demand loans. Most had not as at the date of the hearing been repaid, although a number of loans were repaid prior to5 April 2012 . None of the loans for the appellants and years at issue in the current appeals had been repaid. There was no evidence as to the circumstances of the loans which had been repaid to suggest the action had been initiated by the trustees or someone other than the borrower. For those loans that have not been repaid, Mr Schofield’s view was that they remained repayable. The trusts were ongoing as at the date of the hearing save for a few that had settled with HMRC. Benefits arising otherwise than by way of loan 275.The trustees also received requests to benefit beneficiaries otherwise than through interest free loans. For example, OCO requested on28 February 2008 that the trustee consider an award for the staff party in lieu of the annual Christmas party. A further example of such a circumstance was on27 October 2004 when the directors of Toughglaze requested that a loan of£48,000 to be paid into Circle Investments Limited in order to invest in commercial properties, mainly located in Germany. 276.Although as indicated above the repayment of loans or the situations that might give rise to repayment were not generally discussed there was more dialogue when beneficiaries wanted to leave some or all of the money in the trust and invest through the trust structure rather than borrow the money from the trustees. For example, in the case of OCO as detailed above at [58] on23 March 2009 , one of the directors of OCO requested that the trustee consider making an investment of£58,500 into the Aria Absolute Income Protected Fund as he did not require further loans and as Mr Schofield put it “he chose to leave the rest of the funds in his family trust”
“…there is no obligation on the trustees to do more than consider…from time to time, I suppose the merits of such person of the specified class as are known to them and if they think fit to give them something….I cannot see here that there is such a duty as makes it essential for these trustees before parting with any income or capital, to survey the whole field, and to consider whether A is more deserving of bounty than B.” 285.The appellant also submitted by reference to Gestetner the trustees are only obliged to consider such requests as are actually made by the objects. Principles to be derived from trust cases: 286.It is clear from the face of the trust document that the power to appoint it conferred on the trustees was discretionary. 287.As set out in the Law of Trusts 2nd Edition: 11.03: “Powers of appointment…conferred on trustees qua trustees…carry with a duty to consider periodically whether or not the power should be exercised.” 288.As regards the nature of the duty to consider this was explained as follows by Megarry VC in Re Hay’s Settlement Trusts[1982] 1 WLR 202 pg 210 (extracted at 11.04 : “He must first consider what persons or classes of persons are objects of the power within the definition in the settlement or will. In doing this, there is no need to compile a complete list of the objects, or even to make an accurate assessment of the numbers of them: what is needed is an appreciation of the width of the field…Only when the trustee has applied his mind to “the size of the problem” should he then consider in individual cases whether, in relation to other possible claimants, a particular grant is appropriate. In doing this, no doubt he should not prefer the underserving to the deserving; but he is not required to make an exact calculation whether, as between deserving claimants A is more deserving that B…” 289.At 11.08 the text mentions that: “The nature and extent of the trustee’s “duty to consider” in relation to a power of appointment conferred on him qua trustee clearly varies with the circumstances of each case and with the nature of the power (be it special, hybrid or general). Every power must be exercised only for the purpose for which it is conferred, or at least, in accordance with what the trustees honestly considered to have been the purpose…”. 290.At 11.10 it is explained that : “Even where the class of objects is large and comprises different categories, the terms of the power may sometimes imply an order of priority or preference, as was the case in Re Gulbenkian’s Settlement, for example, where it was clear that the trustees were expected to have regard to the best interests of one named beneficiary…In yet other cases the relevant purpose may be ascertainable only be a process of construction. As Templeman J pointed out in Re Manisty’s Settlement, the trustees will endeavour to give effect to the wishes and intentions of the donor, and they “will derived that intention not from the terms of the power necessarily or exclusively, but from all the terms of the settlement, the surrounding circumstances and their individual knowledge acquired or inherited”
“…no, because by the time we were appointed as trustee the [settlor] company itself, as far as we were concerned, had considered its overall remuneration strategy, and we were---and the---it had chosen to reward its key employees, particularly its directors, by appointment of assets on to a sub-fund. So what I’m trying to say is at the time we got involved with it, it had effectively been earmarked as to what the ---certain the settlor company decided what they would like to see happen.” 296.The trustees’ obligations against this backdrop would not, in my view, extend to examining what other employees might be deserving of an award, or in the context of the sub-trust having to ascertain who the family /other members of the director were to see whether an appointment should be made to them. The clear purpose of the trust was to provide a means to benefit certain individuals connected through employment or persons connected to such individuals. Given that connection it was also not unreasonable for the trustee to take account of the views of the settlor. 297.As to HMRC’s submission that Mr Schofield who followed the recommendations put to him without question this was not borne out by the evidence. Mr Schofield explained in answer a question in cross-examination as to his understanding of the difference between a bare trust and a discretionary power of appointment that as regards the latter“…the trustees had the power not to comply with a request received from the beneficiary”
“…In certain circumstance a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action”. 311.There was an exception per Lord Sumption in the Prest v Prest case[2013] 2 AC 415 at [44]:: “If the silent party’s failure to give evidence or the necessary evidence can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified.”
“(1) Subject to the provisions of the Corporation Tax Acts, in computing the amount of the profits to be charged to corporation tax under Case I or Case II of Schedule D, no sum shall be deducted in respect of- (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession; … (f) any capital withdrawn from, or any sum employed or intended to be employed as capital in, the trade or profession, but so that this paragraph shall not be treated as disallowing the deduction of any interest.”
“(1) This Schedule applies where— (a) a calculation is required to be made for [corporation tax purposes] of a person's profits for any period, and (b) a deduction would (but for this Schedule) be allowed for that period in respect of employee benefit contributions made, or to be made, by that person (“the employer”). But it does not apply to a deduction of a kind mentioned in paragraph 8. (2) For the purposes of this Schedule an employer makes an “employee benefit contribution” if— (a) the employer pays money or transfers an asset to another person (“the third party”), and (b) the third party is entitled or required, under the terms of an employee benefit scheme, to hold or use the money or asset for or in connection with the provision of benefits to or in respect of present or former employees of the employer. (3) The deduction in respect of employee benefit contributions mentioned in sub-paragraph (1) is allowed only to the extent that— (a) during the period in question or within nine months from the end of it - (i) qualifying benefits are provided out of the contributions, or (ii) qualifying expenses are paid out of the contributions, or (b) where the making of the contributions is itself the provision of qualifying benefits, the contributions are made during that period or within those nine months. (4) An amount disallowed under sub-paragraph (3) is allowed as a deduction for a subsequent period to the extent that— (a) qualifying benefits are provided out of the employee benefit contributions in question before the end of that subsequent period, or (b) where the making of the contributions is itself the provision of qualifying benefits, the contributions are made before the end of that subsequent period. 359.An “employee benefit scheme” was defined in para 9(1) of Schedule 24, FA 2003 as “a trust, scheme or other arrangement for the benefit of persons who are, or include employees of the employer”. 1a) Did sums represent money wholly and exclusively laid out or expended for the purposes of appellant’s trade? Wholly and Exclusively 360.HMRC assert in each case that the expense was not incurred wholly and exclusively for the purposes of the appellant’s trade. HMRC invite the tribunal take the approach taken by the FTT in Scotts Atlantic Management Ltd v RCC[2013] UKFTT 299 (TC) ; there the artificial steps in first making a declaration of trust before appointing professional trustees then retiring as trustees were found to be part of a pre-planned scheme designed to avoid the operation of Schedule 24 – and it was found that was not merely incidental but an all-pervading object. 361.The appellant argues however the expense was incurred, in each case, as a means of incentivising the key employees of the appellants (this was something which was clearly wholly and exclusively for the purposes of the appellant’s trade: see E Bott Ltd v Price (Inspector of Taxes)[1986] STC 100 , at 106; and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062, at [74]-[79]). 362.As regards Scotts Atlantic the appellants reserve right to argue the case wrongly decided but for present purposes point to the room left in that case by UT for someone to choose one method over another and not be found to have a dual purpose [55]: if that is to mean anything they say it would apply in a situation such as the one here where there is a comparison between two simple methods – one being a contribution to a third party to be held on trust the other being a declaration of trust. There are not all of the “fancy intricate steps” that there were in Scotts Atlantic. 363.It appears clear to me that if the contribution made had not had the hoped for effect of avoiding Schedule 24 the appellants would not have made the contribution in the way they did. However the means by which the contribution were made is not conclusive – the question is not why did appellants make the contribution in the way that they did but why did they make the contribution? In my view the clear purpose of the contribution was to remunerate the directors; it was not made to avoid corporation tax. 1c) s43 FA 1989 364.The appellant argues s43(1) is not triggered as no cost is recorded in the accounts in respect of the employee’s remuneration. i) sums represent “amount[s] for which provision is made in the accounts? 365.As regards s43(2) the appellant argues that “provision” means provision in the ordinary accounting sense (a provision, or where there is more certainty an accrual, interpreted in line with GAAP). This particular argument is, given the facts, only relevant to OCO Ltd for y/e 2006. Findings of fact in relation to accounts: 366.Details of how the sums were treated in the accounts for the various years are set out as follows: OCO Ltd 367.OCO y/e30 June 2005 : A sum of£400,000 was recognised as an expense in OCO’s profit and loss account for the year ending30 June 2005 and recorded in the notes to the accounts under the heading “Director’s emoluments” (note 6). 368.OCO y/e30 June 2006 :£416,000 was recognised by OCO as an expense in the profit and loss account for the year ending30 June 2006 and recorded in the notes to the accounts under the heading “Directors’ emoluments” (note 8). The remaining£4000 was included as a “current investment” in OCO’s balance sheet (note 15). 369.Under the heading “Administrative expenses for the year ended20 June 2006 ” a figure of£1,002,872 appears in respect of “Directors’ remuneration”
“The company has established trusts for the benefit of the employees and certain of their dependants. Monies held in these trusts are held by independent trustees and managed at their discretion. Where the company retains future economic benefit from, and has de facto control of the assets and liabilities of the trust, they are accounted for as assets and liabilities of the company until the earlier of the date that an allocation of trust funds to employees in respect of past services is declared and the date that assets of the trust vest in identified individuals. Where monies held in trust are determined by the company on the basis of employees’ past services to the business and the company can obtain no future economic benefit from those monies, such monies, whether in the trust or accrued for by the company are charged to the profit and loss account in the period to which they relate.” 372.The tribunal received expert evidence which was not challenged by HMRC, in the form of a written report from Mr Steven Brice. Mr Brice is a Chartered Accountant and Fellow (FCA) of the Institute of Chartered Accountants in England and Wales (ICAEW) and a Partner in the Financial Reporting Advisory Group at Mazars LLP who has specialised for the last 20 years in financial reporting and who has held a number of offices with various accounting and financial reporting bodies and technical committees. He was instructed by the appellants to consider, against the backdrop of the facts that had been agreed between the parties, whether in relation to each of the years the expenses recognised in the appellants’ financial statements, and in relation to UK GAAP (Generally Accepted Accounting Practice) applicable at the time were 1) properly taken, 2) if so what the expense was taken in respect of (the declaration of trust, the appointment of the sum to sub-trusts or in respect of something else) and 3) whether the expense could be said to have been in respect of a provision and if so what the provision was in respect of. Mr Brice’s report explained the relevant statutory and accounting framework setting out that UK GAAP consisted of accounting standards and other guidance published by the UK’s Financial Reporting Council and that the relevant standards were Financial Reporting Standards (“FRSs”) and in particular FRS 5 (“Reporting the Substance of Transactions”) FRS 12 (“Provisions, Contingent Liabilities and Contingent Assets” and FRS 18 (“Accounting Policies”). His report considered the relevant accounting requirements in respect of accounting for the initial recognition of payments into an EBT and subsequently. For present purposes it is sufficient to note that Mr Brice set out the definition of “Provisions” as defined in FRS 12 as: “a liability of uncertain timing or amount”
“accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example amounts relating to accrued holiday pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. Accruals are often reported as part of trade and other creditors, whereas provisions are reported separately.” 374.Mr Brice’s conclusion was that no provisions had been recognised in any of the years for either of the appellants. There were however accruals in each of the years except as regards the accounts of OCO for 2006. (For that year the EBT was created, and amounts were allocated to the sub-trusts prior to the year end. In Mr Brice’s opinion when the EBT was established this would have created an EBT asset for OCO but which then had to be de-recognised once sums were transferred to the sub-trusts because in substance OCO no longer had control of the rights or other access to any future economic benefit from those funds. Thus the expense was not recognised in respect of a provision but in respect of de-recognition of the EBT asset. 375.I accept Mr Brice’s evidence that no provisions were made in accounting sense in any year, but that accruals were made in every year except OCO y/e 2006. 376.HMRC argue that if Parliament wanted the term “provision” to bear a technical accounting meaning then the wording would have referred to “a provision”
“(i) Did the Sums constitute (a) amounts paid for the employee’s benefit; and/or (b) any remuneration or profit? (ii) In the light of the answer to the foregoing issue, did allocation of those Sums to sub-trusts constitute a payment of “earnings” within the meaning of s.6(1) of the SSCBA”