Root 2 Tax Ltd v Revenue & Customs (INCOME TAX : "spread betting" contracts) [2019] UKFTT 744 (TC)

“ it was fundamental that the outcome of the trade could not, in any way, be pre-ordained. Nor could there be any features written into the contracts to depress the open market value. Any individual who undertook the trades would be exposed to the risk of real economic gains and losses. The individuals would have to be prepared to assume real (and potentially sometimes significant) risks when entering into transactions with the aim of generating a potential return.” 31. Mr Forsyth said that the Individuals could not identify counterparties who could devise suitable “trades” by which he meant financial transactions that “would consistently beat market expectations…..where its market value was low, because the market felt that its succeeding was an unlikely outcome”

“It would be possible for clients to adopt a financial investment strategy that was based on the skills of hedge fund managers and profit from their performance”. 32. Mr Forsyth noted that (a) Heronden was established to provide investors with efficient access to the capital markets, primarily through the mechanism of spread betting and (b) its employees included a number of former hedge fund managers. He thought that, on the basis of these factors and, from his discussions with individuals at the firm, Heronden was well placed to identify appropriate hedge funds to be used as the reference index for the Bets and CSOs. 33. He noted that he had started spread betting in 2000 and from 2010 had an account with Sporting Index that he used when he thought that there was an opportunity to make a profit. He believed that “most of the clients of the [a]ppellant either participated directly in spread betting (as a leveraged way of gaining access to the capital markets) or, at least, were aware of the concept”

“[The appellant] provide[s] advice to clients regarding the tax treatment of an investment in an Option. The owner of the Option will be required to estimate the amount the Option would fetch in the open market and may be required to provide evidence that the price paid is determined on this basis. [The appellant] ha[s] asked us to …..Comment on the methodology used by clients to value the Option and confirm whether it would be appropriate to be used by participants in the open market to bid for the contract in question…..Confirm an example calculation of the valuation for a given set of inputs. In undertaking the valuation we have relied on the information and explanations provided to us by you. We have not sought to verify the accuracy of this information for which you are solely responsible.” 39. Having considered the position in detail Ernst & Young concluded as follows: “ The Black-Scholes model is an appropriate model for pricing options of this nature. More sophisticated models may exist but due to uncertainties in the volatility of the underlying funds and the illiquid nature of the instruments, these are unlikely to lead to a more accurate answer and hence are unlikely to be used. The price of the Option obtained by using [the appellant’s] client’s valuation methodology is based upon a historic volatility estimate. Whilst the true volatility of funds of this nature may be higher, we believe it unlikely that a market participant would systematically pay more than the price implied by historic volatility for options of this nature on a consistent basis without a specific offsetting exposure or additional information regarding the funds in question.” 40. On 10 March 2012 Grant Thornton wrote to the board of directors of the appellant as regards the accounting implications of the structure for an employer which took on a novated CSO from an employee (the “ Grant Thornton letter ”). They set out the scope of their advice as follows: “to highlight the key accounting implications…for the proposed transaction to purchase a derivative instrument (ordinarily in a loss position) by the company from an employee. You have specifically asked us to provide advice on how the transaction will be accounted for and disclosed under UK GAAP…. We understand that an individual will be taking out two derivative instruments (predominantly option contracts) that initially offset the risk of each other…..The company would not be party to or have any knowledge of the transaction with the bank….Early in the contract duration (c. 10 days) the employee will determine which option they wish to hold and will novate the other option to a UK Limited company. For the employee the option they wish to hold will give them the potential for a small loss and for a significant fixed profit. For the company owning the option it will potentially be out of the money and lead to a substantial loss if the option reaches maturity in line with that anticipated by the employee, or a small profit if the market moves against the employee’s expectations. In taking on the instrument, the company will be taking it on as if it were onerous with the anticipation that it will be making a loss (the company will seek financial advice on the scope of the loss). The cost of taking this contract will be deemed to be remuneration by the company to the employee…. The commercial substance behind this scheme is to provide an alternative form of remuneration to the employee by acquiring the onerous contract …”

“ The company is taking on a contract that in all likelihood will result in a loss on maturity. As such it should be accounted for as an onerous contract…and a provision included being the lower of the cost to exit or breach the contract and the cost of fulfilling it. Our understanding is that the company taking on the contract will seek financial advice as to the scope of the potential loss and this is likely to be a reasonable measurement for the cost of fulfilling the contract. With the company entering into the scheme to provide an alternative form of remuneration, we deem it appropriate to show the cost of fulfilling the contract as remuneration … With the company knowingly taking on a financial liability in the form of a probable onerous contract, the directors of the company will need to consider if they are adhering to their fiduciary duties under CA 2006. We recommend that legal advice is sought on this matter prior to proceeding with any transaction.”

“you may approach a third party to determine whether they would agree to the novation to them of the CSO. The rationale behind this is to maximise your overall potential profit, as advised by your IFA, because the third party would be agreeing to take on some of the risk. Whilst it is appreciated that you may wish to seek to novate the CSO to a third-party there is no prior agreement or arrangement with any third party The outcome of the Transactions is not a certainty. The financial contracts have several possible outcomes depending on commercial factors, and the decisions you make having undertaken the Transactions yourself will result in the opportunity to make various levels of profit, or indeed losses.” (3) It was noted that (a) the individual proposed to take out a Bet and a CSO with the same counterparty, (b) the CSO “will suffer a loss if a defined reference barrier is hit” and “the Bet will make a profit if the same reference barrier is hit”, (c) “prior to the reference barrier being hit, you may seek to novate one of the contracts (the CSO) to a third party for value” and “you might seek to novate one of the contracts (the CSO) to a third party, possibly to your employer, either for value or no value”. (4) It was noted that the individual’s “ chances of maximising the overall profit” from the transaction “would be enhanced if the CSO could be novated to a third party…because the third party would be agreeing to take on some of the risk ” and: “ Any third party would be likely to require value in return for accepting the novation of the CSO. The valuation of the CSO at novation may be different from, and potentially much less than, the profit that may be derived from the [Bet]. There may be additional benefits to you if your employer would agree to act as the third party accepting the novation of the CSO. You should bear in mind that any benefits provided to you by your employer are taxable as employment income and therefore although your employer might agree to participate…there may be tax charges on you…” (5) It was noted that the events are fully described in a letter of advice that Aston Collie would provide, a draft of which had already been provided to the appellant. (6) The tax advice was, in summary, that (a) a capital gains tax charge would be due on the Initial Premium, (b) if the employer decided to accept the novation without payment, it would provide a taxable benefit based on the market value at the point of novation, (c) any other benefit would come from retaining the Bet, and (d) winnings from Bets are tax free. (7) It was noted that it was important to obtain a valuation of the CSO at the novation date and that Heronden would provide this. (8) The appellant identified certain risks which included that (a) the “barrier that determines the value of the contracts is not nil” which would mean that the individual would suffer a tax charge on the novation but receive no benefit from the Bet and in fact would suffer an overall loss” and (b) that HMRC would enquire into the arrangements. 43.

“Specifically, I would like to undertake one financial contract that would stand to win £393,333 if the chosen reference market moved over an approximate 3 months period… as anticipated. I would also like to hedge that investment with a second contract that stands to lose £393,333 if the same movement in the reference market occurred. The market movement in question should have an approximate probability of success of around 20% but ideally where historical performance has exceeded this level. However, in order to make one of the contracts as attractive as possible to a third-party, the bulk of any premium payable should be structured as a final premium.” (2) On 21 July Heronden wrote to the Mr Forsyth setting out various terms as regards the proposed July transaction and on 22 July 2012 Mr Swallow of Aston Collie replied to Mr Forsyth’s request for advice. Further details of these letters are set out below. (3) On 26 and 27 July 2012 (but in each case with effect from 26 July 2012), Mr Forsyth entered into a Bet and a CSO with Heronden with the expiry and settlement dates falling on 30 November 2012. The CSO documentation was drawn up in accordance with standard market practices, as established by the International Swaps and Derivatives Association (“ ISDA ”). (4) Both the Bet and CSO related to the value of a Basket consisting of five hedge funds which Heronden had identified as suitable on the basis that they had been historically successful and not volatile. (5) Under the Bet, Mr Forsyth made an “up bet” which he would win only if the value of the Basket had grown by more than 1.4% as at the end of the term: (a) The maximum winnings and maximum loss which he could “win” or “lose” were capped at a specific fixed amount if, at the end of the term, the value of the Basket had increased, as regards “winnings”, by more than 1.6% or, as regards a “loss”, by less than 1.4%. If the value of the Basket increased by between 1.4% to 1.6%, the amount of “winnings” or “loss” was determined under a formula. Under these arrangements, the amount that Mr Forsyth could “win” was between £21,224 and £374,400 and the amount that he could “lose” was between £2,321 and £96,502. (b) Mr Forsyth was required to pay a Stake of an amount equal to the maximum loss he stood to “lose”, namely, £96,502. (6) Under the CSO: (a) If the value of the Basket had increased in value by more than 1.4% at the end of the term, Mr Forsyth was required to pay Heronden a “Payoff” with the precise amount varying according to the precise growth in value but capped at a maximum loss of £468,000 if the value of the Basket had grown by more than 1.6% as at the end of the term. (b) Heronden was required to pay to Mr Forsyth (i) an Initial Premium of £11,286 payable on the date on which the CSO was entered into and (ii) a Final Premium of £74,667 on the expiry date. (7) The Initial Premium due from Heronden under the CSO was set off against the Stake due from Mr Forsyth under the Bet, so that when the contracts were entered into Mr Forsyth paid £85,216 to Herondon. (8) On 30 July 2012, Mr Forsyth sent Heronden an email in which he asked for (a) details of the terms on which Heronden would agree to him novating his obligations and rights under the CSO to a third party, (b) a draft novation agreement, and (c) a valuation of the CSO as at 8 August 2012. Mr Forsyth said that he asked for the valuation as at 8 August 2012 as he thought that would allow the appellant sufficient time to consider the request for it to accept a novation. He asked Heronden for the valuation because it was obliged to value assets by reference to the most recent market price and it had itself recently “traded” the CSO. (9) On 3 August 2012: (a) Heronden sent a letter to Mr Forsyth in which it explained that if the novation went ahead, the appellant would take on the liability to pay the Payoff and that it, rather than Mr Forsyth, would receive the Final Premium. Heronden stated that the CSO had a value in favour of Heronden so that, if the Individual did not pay the appellant to take on the contract, it may have provided a benefit to the Individual. Heronden noted that the Individual had asked what they would pay for the CSO (the Bid Price) on the novation date and set out the following: “For clarity if you transact with us after you have novated the original trade, the effect would be to reinstate your original position. If we were to transact, we would pay an initial premium to you equal to the Bid Price in order to receive the Payoff Amount and pay the Final Premium. Currently Heronden would be prepared to pay GBP 74880 in respect of the Payoff Amount less GBP 74667 in respect of the Final Premium due ie a total of GBP 213. Therefore our Bid Price for the [CSO] is GBP 213. Our price is based on the “Black-Scholes” option pricing model and uses inputs derived from historical performance data. The Black-Scholes model is commonly used as a pricing model in the banking markets” (b) Mr Forsyth wrote to the board of directors of the appellant (as attached to an email addressed to Ms Baker and Mr Hughes) to request it, as his employer, to consider taking on his rights and obligations under the CSO by way of novation. He pointed out that (i) under the CSO, the appellant would have a risk of losing up to £393,333 (being the maximum Payoff of £468,000 less the Final Premium of £74,667) but that it could make a significant profit if the funds did not match “the performance hurdle” as set out in the CSO, (ii) he had entered into the Bet with Heronden at the same time as the CSO “to hedge my position, which will profit should the funds achieve the same performance hurdles as the option over the same period as the option”

“We have recently been approached by Blair Forsyth asking us as their employer to consider agreeing to the novation of an option contract entered into by Blair and Heronden dated 26 July 2012”

“The best case for the company is that it will not have to pay the [maximum loss of £468,000] in which case it will receive and keep the Final Premium of £74,667; the worst case is that it will have to pay the [maximum loss of £468,000] in which case it receives £74667 but will have to pay up to £468000”. (d) “If this were a stand-alone transaction with no corresponding benefit arising to the employee, it would not be a suitable transaction for the company to enter into.” (e) Mr Forsyth would receive a benefit on the novation of the July CSO in that it would relieve him of a potentially onerous contract that was on broadly equal and opposite terms to the Bet. Mr Swallow set out the figures as set out in the letter to Mr Forsyth. (f) “Heronden stands as counterparty to two separate trades and will require margin payments in order to eliminate its credit risk exposure to these two counterparties”

“they [Aston Collie] are recommending that you enter into a pair of transactions, a [Bet] and a [CSO], which they have advised are suitable investments for you. You will notice that there is a margin requirement of GBP 95502 in respect of this [Bet] but since Heronden will pay you GBP 11286 in respect of the Initial Premium on the [CSO], you will only need to make a payment of GBP 85216; this will be held in Heronden’s Segregated Client account until such time as the trade is agreed…. The cashflows that will arise as a result of you entering into these two transactions simultaneously are as follows: If Barrier B is breached you will win on the [Bet] and Heronden will pay the winnings from the [Bet] of GBP374400 and will also repay the GBP 96502 held on margin. The equivalent position with respect to the [CSO] is that Heronden will pay you the Final Premium of GBP 74667 and receive from you the [maximum loss of] GBP 468000. If Barrier A is not breached, you will lose on the [Bet] and Heronden will keep the GBP 85216 you have paid us, but will then pay you GBP 74667 in respect of the Final Premium due on the [CSO]. For values of the Final Basket Level between Barrier A and Barrier B your potential cash flows are summarised in the table below….. In summary, either you will be down by £7647, or you will lose up to £10544. We are obliged to report to you any losses exceeding a predetermined threshold. Since it is inevitable (by design) that you will suffer a loss on one of the two contracts, these maximum losses will be the predetermined thresholds for the purposes of this reporting requirement.” 50. The letter from Mr Swallow of Aston Collie dated 22 July 2012 (the “ Aston Collie letter ”) contained the main points set out below as regards the BF July transaction. 51. The scope of the advice given was set out to be as follows: “You have asked me to advise on a financial contract that would stand to win approximately £393,333 if a chosen reference market moved as anticipated, hedged by a second contract that stood to lose approximately the same amount of the same movement in the reference market occurred. Only by the use of derivative contracts can these financial objectives be achieved… I refer you to the detailed tax advice you have been given by [the appellant], which in turn refers to advice given by Tax Counsel, and which gives their view of the tax treatment of your undertaking the proposed investments and subsequently novating one of the investments to a third-party. You have been advised of the tax treatment of “selling an option” whilst simultaneously “entering into a spread bet” by [the appellant]. Both of these financial instruments are regulated by [the FSA], hence the requirement for an authorised and regulated firm to advise on their suitability… [Aston Collie was instructed to advise on the CSO and the Bet without receiving details of the Individuals’ financial circumstances]. Aston Collie will therefore limit the scope of its advice solely to the suitability of the [CSO] and [Bet] to achieve the outcome intended by your tax advisers (but not whether the tax outcome will be successful).” 52. Mr Swallow recommended Heronden as the counterparty but explained that he was a shareholder in that company and would therefore benefit from the transactions with Heronden. He said it was his intention to charge a fee in respect of his work through Aston Collie and that it followed that a conflict of interest might arise but he intended to be clear and transparent in all his dealings with Mr Forsyth and “will be explicit about the costs and charges that you will incur in your dealings with Aston Collie, and in your dealings with Heronden”

“in other words apart for a few tweaks…and apart from the detrimental effect of Heronden’s costs, having the two contracts together it is as almost as if you had done nothing…. The terms of the [Bet]…have been constructed by Heronden broadly to oppose the terms of the [CSO]. This means that the worst case liabilities you were exposed to under the terms of the [CSO] are netted off by having (more or less) equal and opposite terms on this [Bet].” (3) Under the Bet, Mr Forsyth would “win” if the value of the Basket grew by more than 1.4% on the expiry date and lose if it did not do so. If the value of the Basket had grown by 1.6% or more by the expiry date he would “win” £374,400. In that scenario, overall Mr Forsyth would make a loss: (a) He would receive £374,400 of winnings under the Bet (and would get his Stake back) plus premiums of £85,953 under the July CSO, making a total of £460,353. (b) He would have to pay Heronden £468,000 under the July CSO. (c) He would have a loss of £7,467 (£468,000 less £460,353). This represented Heronden’s fee for the transactions. (4) Under the Bet, if the Basket grew in value by 1.4% or less on the expiry date Mr Forsyth would lose the Bet. Overall, he would a realise a loss of a slightly larger amount: (a) He would lose £96,502 under the Bet. (b) He would have no obligation to pay the Payoff under the CSO and would receive total premiums of £85,953. (c) He would have a loss of £10,549 (£96,502 less £85,953). This represented Heronden’s fee for the transactions of £7,647 in and its liability to betting duty due at 3% of the profit it made on the Bet (£2,895). (5) If the value of the Basket on the expiry date was between 1.4% and 1.6%, he would win on the Bet and lose on the CSO with the precise amount depending on the precise increase in value as shown in a table. (6) It was noted that the range of possible outcomes under both contracts was that if they were held to term “you will be down by £7,647, or you will lose up to £10,549. This is because, whether you win or lose, Heronden will receive its costs of £7647 in respect of this transaction”. 56. Mr Swallow went on to note however, that if two different parties were on different sides of the trade then “significant benefits and liabilities might arise on one side or the other” and: “ You have been advised therefore that there would be a benefit to you if you were able to “novate” the [CSO] to a third party whilst retaining the [Bet] in your own name….. [in that case the third party would be at risk to pay the Notional of up to £468000….. Although it may be your intention to ask a third-party to accept the novation of the [CSO], you run the risk that it may not agree to it [but if it does] you would be left owning a [Bet], with all the rights and obligations that attach to it. The essence of the tax advice provided to you elsewhere is that if you were to “win” under the [Bet], the payment of winnings would not be taxable”. 57. It was also pointed out that the act of novation confers value for which a payment may need to be made and that Heronden would calculate that value and that if “you do not make a payment to the third-party, then it may be the case that the third-party has conferred a benefit on you which may have a tax consequence”. 58. The effects of the transaction if the CSO was novated was set out to be as follows: (1) If the value of the Basket had grown by 1.6% or more by the end of the term, under the Bet Mr Forsyth would “win” £374,400 and correspondingly, under the CSO, the third party would be liable to pay Heronden the full Payoff of £468,000. In total: (a) Mr Forsyth would receive the Initial Premium under the CSO of £11,286 and the winnings of £374,400 under the July Bet, giving a total of £385,686. (b) Under the CSO, the third party would receive the final premium of £74,667 but would have to pay Heronden £468,000, realising a loss of £393,333. (c) Heronden would receive £7,647 (being the difference between the total amount it paid to Mr Forsyth of £385,686 and the net amount it received from the third party of £393,333). (2) If the value of the Basket grew by 1.4% or less by the end of the term: (a) Mr Forsyth would lose £96,502 under the Bet. However, he would retain the Initial premium paid under the CSO of £11,286, so that his overall loss would be £85,216, (being £96,502 less £11,286). (b) The third party would receive the Final Premium due under the CSO of £74,667 but would have no obligation to pay any Payoff so that it would be “up” by this amount. (c) Heronden would receive £10,549 (being the difference between the net amounts paid to Mr Forsyth of £85,216 and to the third party of £74,667) as its fee plus betting duty. (3) If the value of the Basket was between 1.4% and 1.6 % on the expiry date, Mr Forsyth would “win” on the Bet and the third party would “lose” on the CSO according to a range of possible outcomes as set out in a table. (4) Overall, therefore, in the worst case, Mr Forsyth would be down by £85,216 although the third party would gain £74,667 and, in the best case, he would be up by £385,686 and third party would be down by £393,333. In all cases he would have a capital gains tax liability in respect of the receipt of the Initial Premium and, it was noted if the novation was to his employing company, he may also have an income tax liability in respect of the value of the novated CSO and he was referred to his tax advisers for a detailed explanation of these points. 59. Mr Swallow said that Heronden would require a margin payment (the Stake) in order to eliminate credit risk exposure to its counterparties. Mr Forsyth’s margin required under the Bet was £96,502, being the most that he could lose under the Bet. However, as Heronden would expect to make payments totalling £85,953 in respect of the Premiums due under the CSO, he would only have to pay cash of £10,549 when the contracts were entered into. However, if the CSO were novated: “you would also novate the payment of the Final Premium to the third party, meaning you would only receive the Initial Premium of £11,286 against the Margin requirement of £96,502; at that point therefore you would have to post a further £74,667 as margin. The third-party would have to put up margin of £393,333 at the point of the novation. In practice, and in order to facilitate the novation if you subsequently get agreement from the third-party, you will be required to make an upfront payment of £85,216 to Heronden. In the event that…you won on the [Bet], Heronden would pay you your winnings (of up to £374,400) and also pay back the £96,502 which had been held on margin. In the event that you retained the [CSO], Heronden would not require the additional funds and you would be able to ask for them to be paid back to you before the bet matures.” 60. Mr Swallow explained how the figures were arrived at as follows: “ The option valuation is lower than historical performance would suggest. This is because, in general, option pricing takes no account of past performance. You should understand that the FSA demands that Heronden must always trade “on market” which means that the terms of the [CSO], including its price, will always reflect terms that Heronden expects to be available in the wholesale banking markets, and Heronden’s traders have many years of experience trading derivatives contracts of this kind in the capital markets….. ..when the option is initially traded the market is likely to attach a value to the option of around 20% of the Notional ie the pricing suggests a 20% chance that the Final Basket Level will exceed the Barriers. If you were to express this in the language of betting…you could say that the odds are 4:1, ie that you put down a stake of £1 in the hope that you might win up to £5 if [the Basket] grows between 1.4% and 1.6% and £5 if [the Basket] grows by 1.6% or more. [The Basket] is made up of five hedge funds which have particular characteristics of performance, correlation and volatility to suit this trade. So, although past performance is not guarantee of future performance, had you done this trade in the 3-month periods in the 5 years between November 2006 and November 2011, you would have “won” the maximum 50 time ie 83% of the time, because 50 time out of 60 [the Basket] grew by more than 1.6% over the corresponding 3 month period (and one additional occasion grew by more than 1.4% but less than 1.6%). What you are contemplating doing, on completely commercial terms, is to place “bets”” where the odds are around 4:1 but where historically you would have won many more times than these odds would suggest. You are relying on the ability of the managers of the underlying funds within [the Basket] to continue, on average between them, to “beat the market” as they have done successfully on very many occasions.” 61. He concluded with the following references to the need for tax advice: “I refer you to the detailed analysis of these points provided to you by your tax advisers, and refer you to them particularly to determine exactly the tax consequences of the novation” of the CSO. The actual tax liability that arises on the novation will depend upon the actual value of the [CSO] on the date of novation itself, which obviously cannot be known in advance. Heronden will provide this value to you and your tax advisers once this figure is known. ….I am not in a position to comment on this tax analysis and you must rely on the advice of your tax advisers. I have sought in this letter merely to explain the language, the mechanic, the cash flows, the economic risks and benefits of executing these two contracts, and to establish whether these “investment products” will achieve the cash flows that you might anticipate. As you have seen, it is certainly the case that the contracts proposed meet your stated financial objectives and will (subject to the necessary performance of [the Basket]), provide a mechanism which is likely to deliver the appropriate cash flows, but only if a Novation Agreement is subsequently executed and not otherwise . ”

“You could choose a different length of trade periods…a particular hurdle rate…a split between the Initial and Final Premium. And weighing those up, we decided that a three-month trade which would last 120 days…; the affordability of the stake that was required and the hurdle rate, the likelihood of success, the historical chance of success, which would be factored into the option price. So weighing all those up, that was why we were determined to go with that bet structure at that particular time.” 71. It was put to Mr Forsyth that the position under the Bets and CSOs were “matched” save for an amount equal to Heronden’s fees. Mr Forsyth accepted this but was somewhat laboured in his responses in getting to that position: (1) When initially asked this question Mr Forsyth said that “it’s not true to say that they [the financial outcomes under the CSO and the Bet] were exactly matched” on the basis that: “There was different losses possible, depending on…the outcome of the transactions and they weren’t always equal. I mean, the financial advice letter lays out a sort of matrix of what would happen if you novated, what would happen if you didn’t novate, then outlines all the potential financial consequences and…if you look at the ones where you hold and where you retain, they aren’t always equal, depending on what you do.” (2) He agreed, however, that in the context of the July transactions and generally as regards those who had entered into the Alchemy structure, the relevant employee always entered into both the Bet and the CSO. He later agreed that the financial outcomes under the Bet and the CSO are “broadly equal and opposite” although he maintained that they were not “precisely” so. (3) He accepted, using the BF July transaction as an example, that if a person held both the Bet and the CSO to the expiry of the term, whether the person won or lost on the Bet, he would incur a loss. He said that that “was one of the reasons” that “it’s not quite true to say they precisely match and always inevitably lead to a loss” of the same amount. He said again that there can be different outcomes depending on what happens and how the funds perform and that to his mind “if something is precisely matched” he would “expect all the losses to be the same all the way through”. (4) He agreed, however, that if both contracts were held to term there would be a guaranteed loss attributable to the fee earned by Heronden. He said “there’s a spread that Heronden or any market maker operates….so if you were to….buy an equity and then sell it immediately, you would inevitably make a loss because of the spread that they charge”

“ No, that’s not quite right, actually. I think if you look at the….table [being the table set out in the Aston Collie advice letter], you’ll see that the spread bet payouts are different from the payouts under the premium, so I… wouldn’t regard those two as exactly - I would expect those to be exactly the same - when you talk about matched contracts I would expect the numbers to be exactly the same and they aren’t.” (6) It was put to him that it is the net position that is relevant, after all the fees and premiums. He said: “Yes, but that's a different question to are the contracts matched……And my view is that the contracts are not matched, as this table makes perfectly clear”. 72. I find it baffling that Mr Forsyth insisted at (5) and (6) above that the term “matched” as used by counsel meant something different from “matched” in terms of the overall net result under the Bets and CSOs. In any event this does not detract from the fact that the overall net position was “matched” in that sense, barring the position as regards Heronden’s fees, and that Mr Forsyth accepted that was the case. 73. Mr Forsyth agreed that all three sets of the transactions had “a very similar structure” with differences only in the precise details: “there might be a difference in one of the fund managers or the margins might be different but the basic structure would be the same..”

“the whole transaction is based on an arbitrage between the option price, the market value of the option when it’s novated, and your confidence in - and the managers beating market expectations and delivering market-beating performance. So arbitrage is central to the… whole transaction”. 76. When it was put to him that due to the fact that the contracts only ever produced a loss if held to term there was only a trading strategy if the CSO was novated, he initially did not really answer this but said that he “made a profit on the transaction” and so “the trading strategy was successful”

“what clients presented us with was a similar set of contracts but where the market was pricing, the option price, as opposed to the example of 20% we just looked at, might be 95% or 96% or 99%, so virtually guaranteed. And when they were novated there was a cancellation feature, so that the novatee could effectively extricate themselves from…the contract. Now, because of that cancellation feature, when the novation occurred…the market value would be low because the third party could just cancel…the contracts, and we felt that that omission to act conferred a further value on…the individual in question and therefore we couldn’t advise on those transactions and…what became clear from those discussions was that if you wanted to move away from that and have a purely commercial transaction, you’d need to find transactions which the market said were unlikely to be successful, so gave it a very small chance of success. An option price of, say, 10 or 20%. And when we first had…those discussions with the entities mentioned there, they said "Well, you know, if we could beat the market we wouldn’t…be helping you with this transaction. We can’t do that". And then it became clear that actually you might be able to piggyback on someone else’s ability to beat the market, hence the - the fund managers. So when I described an investment strategy here, what I’m talking about is identifying fund managers that can consistently beat market expectations and for you to benefit from their ability to… do that.” 78. When it was put to him in effect that he could not be saying that in entering into the Bet and the CSO together a person could be viewed as adopting an “investment strategy”, because in doing so the person was inevitably going to make a loss. He said again that it was a “trading strategy” and suggested it was feasible for the individuals to divest themselves of the Bet in the market (although that is not what happened) and that “if you held them both….to the end [it] would have inevitably resulted in what I would describe as modest loss .” 79. It was put to him that by getting rid of the CSO a few days after entering into it, the individual merely put himself back in the position he would have been in by taking out the Bet only; he was then exposed to the risk of losing the Bet and having to pay out a significant amount. He said he disagreed with that and said that there were benefits as he had set out in his witness statement (see [68(5)]: “ the reason for that is it would be much more expensive just to take the Bet out on its own. The risk would have been much greater, so you would have had to put up a significant more margin. I had discussions with Heronden, for example, and they said "Well, you could undertake a spread bet on its own but the minimum margin that would be required would be £300,000", for example….So by taking them out both at the same time, you’re providing Heronden with….a hedge, so for them it effectively becomes an opportunity to run a spread. So they require much less margin in taking out the transactions. So it’s a significant….advantage that you’re going to have to risk a lot less in…taking them both out together.” 80. It was put to him that entering into the two transactions meant that the individual had to put up less Stake but the outcome is the same and the ultimate risk is the same. He was insistent that this was not right: “No, the ultimate risk is much higher if you just take out the Bet because you’re risking a much greater amount of margin. So, for example, when we lost our Bets I would have lost a minimum of £300,000 as opposed to £85,000 in this example. So it’s a way… for the individual to minimise the amount that….he needs to put up….. when I had a discussion with Heronden about taking out the Bet on its own, the sort of margin they were talking about was three/four times the amount of margin that….we’d put up because they would have to go and hedge their position in the market itself and by taking them both out simultaneously you’re providing them with an automatic hedge and, therefore, they don’t require as much margin. They are just governed by their client money rules……. ….by taking them both out at the same time, it was a way to reduce my risk but still gain exposure to the performance of the funds…. if I had just taken the Bet out and not the option, my losses would have been much - potentially much higher”. 81. Mr Forsyth was asked a number of questions on the pricing and his expectation of success under the Bet. Overall he accepted that he divested himself of the CSOs because he expected the Bets to win (or at least to have more than a 50% chance of winning) according to the Basket’s historical performance: (1) He agreed that the Basket was picked as the reference index for the transactions on the basis that the market viewed the Bet as having a 20% probability of succeeding but that, on the basis of the Basket’s historical performance, he hoped that those odds would be beaten as Aston Collie had advised. He noted, however, that: “of course it’s axiomatic that you don’t… rely on historical performance but…if you believe you’ve identified a basket of fund managers that truly can beat the market and deliver…. alpha, which is returns in excess of the market, then, yes, that’s what you would be achieving by undertaking these transactions.” (2) It was put to him that this expectation of beating the market under the Bet was the reason why he kept the Bet and divested himself of the CSO. He said: “ precisely, but with the very large proviso, as the figures in 2013 were - 75% of the time the Bet failed, the barrier failed to be met but…. There’s a real commercial risk attached to the transaction”. (3) Initially he did not accept that he entered into the transactions on the basis that the chances of the Bet winning were far greater than the chances of him winning under the CSO. He said “the market pricing suggests only a 20% chance of success. So we were doing it here with… what the market believed would be a very small chance of success..”

“a large part of my job was to liaise with Heronden and Aston Collie to discuss the type of investment strategies that were available to discuss the funds and understand their thinking. So….yes, there were other options out there. In 2011 we’d opted for this and it had been successful and we repeated it again in 2012, basically because…of the success of 2011 and the actual performance of the trades in 2011 had been relatively successful, you know, 80%…but if it had been unsuccessful, it was for example in 2013, we didn’t…use that trade again because it had been unsuccessful, we didn't have any faith in it. So there was lots of discussion around what the possibilities were, what funds could be used.” 83. It was put to him that within the two thresholds under the Bets and CSOs there is a range of outcomes but looking at the historic position the outcome had only been within that range once out of 60 iterations. He said: “Yes, and I think in actual fact there was only one or two…iterations where it fell within that range”

“iterations on which we advised, it did fall within that range….Once or twice…there was only ever 12 transactions a year, so in that year once or twice out of 12….the way the transactions worked, hedge funds only report on a monthly basis……So there could only be 12 a year, that’s what I mean, yes. So that’s what those success rates are based on is those baskets, were they successful or not, could only be 12 a year”. 84. He agreed that, in practice, in the great majority of cases, the result was either that the transaction was below the lower threshold or that it was above the higher threshold. It was put to him that you cannot have a limit on the downside without accepting the limit on the upside. He said that: “the whole point about the way the transactions are structured is it allows the individual to control, to a fair degree of certainty, the amount of risk that he takes on. So it’s a very good mechanism to…allow them to do that..” 85. He agreed that in referring to the amount of risk, one element is the limit on the downside. It was put to him that the disappointing performance of Heronden in 2013, led the appellant to switch all or most of the transactions to using Capital Financial Markets as the counterparty in 2014. He said that: “ there was a period where clients effectively had a choice and some traded with Heronden, and some traded with Capital Financial Markets, but…..until Capital had proved their track record, because again history is no good, only a fool believes history is a guide to the future, a lot of clients either basically gave up actually and said I’m not trading again and I think in 2013 that’s probably true of about 10% of the clients, and a number decided to wait and see what happened and then didn’t trade with Heronden again and then traded with Capital Markets and we put ourselves in that basket as well.” 86. It was put to him that the reason the three Individuals did not trade for a period was because they wanted to wait and see that they had found someone who could deliver the results that they wanted. He said: “Yes, and then, of course, Garry didn’t trade again because he’d left the company”

“in practice that’s what happened but realistically….you would obviously go to the person that would agree…..to the novation for no consideration first. So someone who would have an interest in agreeing the novation. I think you could have gone into the marketplace and divested it to a third party. It would have been a more expensive option. You could in theory find a rich uncle to take it off your hands if he wanted to do you a favour, but in practice, yes, I only would have divested to a trust of which I was a beneficiary and my employer but there would be no reason why one couldn’t do it to someone else. It made sense to go to those places first, because they hopefully wouldn’t charge me any consideration for doing so.” 88. It was put to him that the reason it would have to be a rich uncle or someone else who wanted do a favour is that the CSO was likely to lose. He said that: “the market said not, but - the pricing said not, but there was…obviously a significant risk, a serious risk that it would lose. That’s what in practice happened…. not of course in 2013, where there was…as it transpired an excellent chance the CSO would have made a profit.” 89. It was put to him that he was viewing the chance of making a profit under the CSO with hindsight and that the advice received before the novation was that the CSO was likely to lose. He said: “ We went through the kind of advice earlier, which said that….you’re relying on the ability of the fund managers to continue the past performance…So if they continued - if you believed past performance is a good guide to future performance, then, yes, the CSO would lose….Yes, so the advice to the company is different to the advice I received, I agree with that.” 90. He was shown the section in the advice letter sent by Aston Collie to the appellant where it was stated that if this were a stand-alone transaction with no corresponding benefit arising to the employee, it would not be a suitable transaction for the company to enter into. He said that was not the advice he received but the advice given to the appellant and noted that it was addressed to Garry Hughes. He said: “we absolutely would have considered that advice..[and]…would not have agreed to the novation without having reviewed the…advice…I’m just pointing out this is not the advice that I received on undertaking the transactions, the advice that the company received following my request”. 91. He accepted that in all the Alchemy transactions of which he was aware barring a mistake “to all intents and purposes” novation was only ever to an EBT or an employer. 92. Mr Forsyth said that he would have only known of the details of Mr Hughes’ trades when he approached the appellant but he was aware he had an intention to enter into them and that Ms Baker also had such an intention. He said he had a “greater knowledge” of Ms Baker’s transactions than he did of Mr Hughes. He confirmed that he was “almost certainly” aware that she entered into trades in exactly the same amount as him prior to her approaching the appellant as regards a novation. 93. It was put to him that the appellant knew all of this as the Individuals were all directors of it. He said that was not right and “in entering those transactions we were always acting in our personal capacity in a completely separate way from the appellant”

“the whole point about establishing a company was it’s a separate legal entity and we were all very aware of our duties qua shareholder, qua director, qua employer and I think given our background and training,….we were very, very assiduous in demarcating those duties as individuals and as directors and employers. So in my opinion, I do not believe that the company had the knowledge of what I was doing as an individual at that time until I had approached it .” 94. He did not agree that because the Individuals controlled the appellant they could ensure that the novation took place. He said that: “ I couldn’t ensure that the novation took place, no….Provided certain hurdles were met, there were certain contingencies that we would have to be seen to be doing, but we couldn’t just, for example, agree to any old novation, but if we felt it was the right thing to do, yes, we could approve the novation, that’s right.” 95. It was put to him that it was always intended that the novation would take place because that is how the tax advantage is gained. He said that it “was always intended, I think, that we would approach our employer or… certainly in these 2012 transactions it was my intention to approach my employer first, yes” but he did not agree that it was the intention of all those undertaking the Alchemy scheme, including the appellant, that this is what would happen: “ I don’t believe that the company had anything to do with me taking out these transactions in the first place….The company agreed to the novation, yes. When I took out the spread bet and the option, I was absolutely acting in my own personal capacity and completely separate from the company.” 96. It was put to him that the appellant knew in advance that, if it were asked to novate a CSO or similar financial contract in these circumstances, it would be doing so on the basis that the novation was a benefit to him. He said that he disagreed in respect of the July 2012 transactions because the appellant had never been approached, so it would be the first time it had been asked to consider the novation. But: “once July had happened, maybe because it had gone through the process previously, it may have… had a different view of what it’s gone through but in respect of the July transaction, it didn’t know anything about it……until I had been approached the request. It couldn’t have known what it was going to do about something it didn’t know about, if that makes sense.” 97. It was put to him that all the directors knew what was going on and the appellant had taken advice. He was taken to the Grant Thornton letter. He said that this was: “ different and separate to the transactions which I undertook. It was… not in respect of the transactions I undertook, it was in respect of giving advice to clients on what the accounting treatment of the novation might be and - but it was not requested in respect of transactions that its own employees may or may not have undertaken or go on to undertake.” 98. He said that “the company” referred to in the advice is not the appellant. Grant Thornton were not “talking about specifically [the appellant]” but “about a generic company” and : “It is pertinent to any company that undertakes the transactions, yes…Including [the appellant], yes….. but it had nothing to do with whether or not it agreed to the novations that [it] may or may not have been approached to buy it by its employees. It’s having agreed to that, how would I account for it? So it’s got nothing to do with whether or not the novation should occur… I mean when we transact, we’re talking the first transaction in July, and this was obtained in March. We weren’t - this had zero impact, I think, on whether or not I was going to undertake the transaction.” 99. He confirmed that Ms Baker and Mr Hughes novated their CSOs to the appellants on the same day as he did in respect of each iteration of the scheme but said that their employee, Ms Jane Donoghue, carried it out “maybe three times in total, possibly” and she did not novate at the same time, and: “then Jane traded again way before any of us were even considering another trade. So I don’t think….I traded again until December 2014, I think, from that failure in 2013. So Jane would have already traded again and won before I’d even considered…… taking other trades.” 100. He accepted that she used the scheme not just once but several times between 2012 and 2016 and that she was successful on all these occasions bar one in 2013. 101. It was put to him that the level of remuneration the Individuals took from the appellant was small disregarding the winnings from the Bets. It was put to him that, when he said in his witness statement that the appellant retained flexibility to pay bonuses to employees as and when the company was profitable, this meant that there was flexibility to link the level of the directors’ remuneration to the profitability of the company. He said: “I think it means generally that we wanted to reward good performance across all employees and have the flexibility to do that. So we would pay what I would regard as fairly substantial bonuses, discretionary bonuses to employees for good….performance and for the company performing well.….we didn’t pay bonuses to ourselves but….we discussed in 2014, for example, after the failed trade…. we thought there was a real risk there wouldn’t be any possibility of having a successful trade. We did discuss the possibility of paying larger salaries or paying a discretionary bonus but we didn’t agree on that at the end. ” 102. It was put to him that they did not agree on bonuses because they wanted the funds in the appellant to enable it to undertake the novation of other CSOs without risking bankruptcy. He said: “No,… that’s not right. One of the reasons that we didn’t actually undertake the transaction in 2014 is there was a bit of a debate about what we should do with those funds. So, for example, we wanted to put a larger pool aside to pay for contingencies and, you know, that was the kind of main priority, plus there was also…..the very real risk that the trade simply wouldn’t work, so I don’t think any of us individually were that keen on undertaking another trade under….those circumstances. And then, of course, what happened was in that 12-month period the ownership and the employees changed. So Garry left in December 2014.” 103. It was put to him that in fact in 2012/13 the appellant accepted the novation of CSOs that were likely to lose as part of its remuneration strategy. He said: “So the company agreed to the novations to reward its employees and it took that into account, so it wouldn’t be appropriate to pay out a significant bonus to an employee where the company already stood to lose, you know, a potentially large sum. And - yes, and of course what happened was the individuals, they stood - the company might have made a profit, as it did in 2013, but there was certainly no agreement, for example, that the individuals would rerun again or if the company won a significant sum of money under the option, as it did do, that would then be paid out in the bonus, for example, if it failed.” 104. It was put to him that, in order for that approach to work, the level of potential gains and losses on the Bet and the CSO had to be set at an appropriate level. He said: “ Yes. It would be inappropriate for the company, as you said earlier, to accept the novation which would bankrupt it and the directors couldn’t - simply - well, I wouldn’t have agreed to a novation that would do that, absolutely”. 105. It was put to him that the maximum winnings and loss under the Bet and the CSO had to be set at the right level because the CSO is what the appellant is asked to novate. He agreed that was correct. He did not explicitly agree that the maximum loss under the CSO depended on the likely level of available resources within the appellant but said he would put it a different way: “I would say that one would need to be mindful of what you were asking the company to do. So, for example, if I turned around and said to the company in July 2012, "I'd like you to agree to the novation where you might stand to lose £2 million", for example, that would be a foolish thing to do because I wouldn’t imagine the circumstances in which it would agree to that. So when we undertook the transactions, yes, we… would have been mindful about what level we thought the company might be able to….agree to, yes.” 106. It was put to him that that was why in each case the level is pretty much the same. He said that he effectively “mirrored what Shelley did certainly for the first two transactions in July and October” and when asked if he copied her he said: “ No….I would have would have wanted to know personally what it would cost me to undertake the transaction and I wanted to know that she would have thought that the - the company could have afforded to agree to that type of novation….. once I’d confirmed those two facts, then yes, I was happy to mirror what she did.. I wasn’t just blindly saying I will do what you will do. There was some kind of sense check.” 107. He agreed that Ms Baker picked the figure and, subject to sense checks, he followed. He said “there might have been some kind of discussion, a bit of to and fro, but that’s basically what happened”

“ Garry and Shelley had a greater degree of discussions about what level of transaction than I did. We…weren’t always in the office together very much. It was difficult to kind of sit down. That’s where we kind of said, you know, for the board meeting let's sit down and we’ll all be together and we can discuss this properly and agree what the company agree to. Now, of course there was an understanding that if we all did something sensible, there would be - it wasn’t an agreement, it was a kind of tacit recognition that if we all did something similar, then we might – the company might be minded to agree to it, but there wasn’t an agreement beforehand as to what we would do and what the company would do…I think it’s true to say that we each individually undertook a transaction of our own volition, and we had outline discussions around what that transaction would look like, yes.” 108. However, he did not consider any such “tacit understanding” was made in their capacity as directors: “I don’t believe we were doing it in our…capacity as directors. Do I believe that we used our knowledge about what we thought the company might be able to agree to? Yes, of course we did. But we weren’t doing it…we certainly wasn’t - I wasn’t doing it qua director, definitely not…I mean, I guess the point is when we were - when we sat down, for example, to consider, you know, what’s the appropriate amount of dividend to pay, we did think hard about that because the fully paid-up share capital of the business was I think £3…and we felt it would have been inappropriate to pay significant dividends to shareholders because they weren't really all that involved in the business…You’ll see in the board minutes, for example, we did actually sit, have a break and then go off and have a discussion qua shareholder and say as shareholders do we agree to this. Now you may think that is an unimportant distinction, but for us it was important. We…took our duties very seriously and, of course, we advised clients on the same matters and we advised them to take…care in demarcating their roles. So, yes, we did. We stopped - had a board meeting, we would stop and then have a break and then reconvene after that, having voted on it qua shareholder. That literally did happen”. 109. He said that Garry probably decided to “do a little bit more” than him and Ms Baker because: “ he thought he probably could…..I suppose it may have been in the back of his mind that you would be raising the argument precisely that three of us are equal shareholders and if we’d all done exactly the same thing, it's clearly in line with shareholdings so maybe that was at the back of his mind, I don't know…” 110. It was put to him that he was saying that Mr Hughes was wondering what HMRC might be arguing five years later. He said: “Yes, absolutely, yes, he probably was”

“No, I am just speculating that was in his mind, that’s all”. 111. He confirmed that there was no difference between the baskets or the strikes or the barriers between the transactions undertaken by him and Mr Hughes in 2012. The 2012 transactions were all the same as the Individuals had done in 2011 except that in 2012 the CSO was novated to the EBT and in 2012 it was novated to the appellant. He thought that in 2013 the Basket would have changed as well. 112. Mr Forsyth was taken to the figures in the accounts as set out above. It was put to him that the Individuals took all their remuneration from the appellant by means of the novation mechanism. He said that in this scenario: “ I didn’t take anything out of the company. What the company was affording me the opportunity to do was make a profit on the Bet that I took out. So….the whole genesis of this process was me not taking anything out of the company, the company was affording me the opportunity to profit from a Bet that I’d taken out and of course by doing that it was taking on the risk that it might lose money under the CSO. And so what these figures here represent are effectively….the potential loss I might have suffered under the CSO which it – which…I novated to it. So none of that money is money that I’ve taken out of the company.” 113. It was noted that in the advice letter the company was told that the novation was likely to be onerous and effectively could only be justified because it was a benefit to people that the company was entitled to benefit. He said: “Yes. …one of the principal reasons would be that it was doing so to benefit its employees, yes. Yes…., the company did ultimately suffer a loss as a result of those novations and then subsequently went on to make a profit as a result of certain novations but, yes.” 114. He agreed essentially that the result under the Bet and the CSO when novation took place was as set out above and in each iteration where he won that result would be the same except as regards any change in the underlying amounts. He said that: “Yes, absolutely, yes, and in the same token when - you know, when you lost…..the stake as well, so you’d lose the initial premium and the cash that you’d put up….It’s gone……I mean, even those figures are - it is a significant risk - well, for me at the time it was a significant amount of money to…. risk, so I didn’t - one wouldn't have taken it lightly and I didn't take it lightly.” 115. It was put to him that he wanted to win the Bet. He agreed because: “ otherwise - I mean, that was the only way you were going to make money -and otherwise you would have lost quite a lot money, you say. Precisely, yes. So I definitely wanted the bet to win”. 116. It was put to him that on the basis of the advice he received from Aston Collie, he not only wanted it to win but expected it to win. He said: “ Yes, I hoped that…it would win. In 2013 did I expect the bet to win? I don’t know, I’m speculating. I probably would have had a much greater concern for the bet succeeding in December 2013, but I probably thought it was worth a go…because I had seen this catalogue of failures….All those clients had received the same advice but their bets kept failing and they kept suffering losses, because it’s… a very difficult thing to achieve, that market-beating performance. So always at the back of my mind there was a little nagging - you know, that something…warning me that past performance cannot…be a guide to future performance. And every time you flip that coin it's a 50/50 chance. It doesn’t matter if it's been ten times out of ten come up heads, when you come to flip it again it is 50/50…yes, I always I hoped the bet was going to win. Did I expect it to win? Maybe not so much in - certainly not so much in December 2013.” 117. It was put to him that he would not have undertaken these transactions unless he thought there was more than a 50% chance he would win the Bet. He said: “Yes. I mean, I think that’s probably right, yes..”

“it was significant - I suffered a significant financial loss and it was not easy to take that loss on the chin. I mean, I certainly wouldn’t have regarded the company’s money as my money and the company's money is not mine to do with what I want. So I lost and the company won, yes. I think, you know, Garry had that….issue because he lost in December 2013 and left employment before he even had a chance to benefit from another transaction. And, of course, he would have lost potentially more than I would have lost because he’d done a slightly higher amount….So, yes, I took - and I was very, very conscious that life gets in the way of things. So something large could have happened. So say, for example, in January 2014 we got hit with a - I don’t know, a large, unexpected bill or someone sued us or, I don’t know, something like that, there’s no way we would have undertaken a transaction again under those circumstances.” 118. It was put to him that barring unforeseen events of the sort he referred to, the failure of the Bet would be mirrored by a success on the CSO that would increase the funds available in the appellant to pay remuneration or dividends, or whatever, to the Individuals. He said: “Yes, but not in precise proportion to shareholdings but, yes, that’s right, yes”. 119. It was put to him that such funds could be available to him if he wanted to run the scheme again or that the next time the scheme was run he could increase the amounts involved. He said that the prospect of losing the Bet: “was cushioned by the fact that the company benefited from that, but there was absolutely kind of no agreement or any kind of - even an understanding we would automatically just run the transaction again. We would have to consider the circumstances, you know, at the time and determine whether that was appropriate or not”. 120. He agreed that Mr Hughes’ loss in 2013 was cushioned by the fact that he was paid a significant sum of money when he left the business in the order of £2 million to acquire his shares. 121. He was questioned as regards his statement that he was not aware of the amounts that Mr Hughes had staked on the first or second iteration. He said that he “wouldn’t have been aware of the….amounts until I’d seen the contracts”

“Exactly, and that’s why we had a board meeting to determine whether it was - we were to agree to the novation or not”. 123. It was noted that under the July transaction he and Ms Baker took out £393,333, being the amount it cost the company when it lost on the CSO and that for Mr Hughes it was exactly £20,000 more, £413,333 (and similarly on the second iteration). It was put to him that this clearly indicated that there was co-ordination. He agreed that there was “co-ordination probably on Garry’s part, yes”

“Yes, there was a - yes, I agree there was a… better understanding - I think I regard the December transaction as different from the July and October transactions, and I say that because there was a closer - it was the end of the year, so we would have had discussions around, you know, paying employees' bonuses, profitability of the company, things like that. So there would have been….more discussions around the financial state of the company around that time, so it was….a different set of circumstances in which we found ourselves at that period of time than we did earlier in the year….different in that…we would have spent time to sit down and discuss the profitability of the company, discuss paying bonuses to employees, so we would have had a greater understanding of what the profitability of the company was.” 124. He agreed that he meant that he would have had a greater understanding of the amounts available in respect of the December iterations. He confirmed that the appellant never refused a request for a novation of a CSO. 125. It was put to him that the intended tax outcome was ultimately to deliver cash into the hands of the employee. He said: “No, the intention was to provide the employee the opportunity to profit from the spread bet. That was the whole genesis and nexus of these transactions. We…went through a very difficult time when we thought there just wasn’t a way. I mean, the way in which that would be achieved would be by having a cancellation feature which the company could just…execute whenever they wanted. This transaction was a very, very different thing. So I would say it was precisely the opposite of that intention.” 126. It was put to him that it is obvious that the intended end result of the transaction was that the employee who had taken out the Bet and the CSO would end up with cash in his or her hands of a significant amount. He said: “Oh, I agree. I would refine that by saying hopefully by way of profiting from the spread bet which he had taken out. That was the - and the company did that by agreeing to the helping the individual divest itself of… the CSO which was in the employee’s view potentially onerous and - so, yes. So I agreed with what you said and I would just refine it by adding that…the intended outcome was the individual received cash from the spread bet, yes” 127. It was put to him that the intended tax consequence so far as the individual was concerned was that there would be a relatively small CGT charge on the Initial Premium received under the CSO and a very small income tax charge on the asserted value of the novation of the CSO. He said: “ I don’t think that was the intended outcome but that was the outcome that we believed arose as a result of the transactions….spread bets are tax-free, like wins, so we would have thought that winnings received would have been tax-free and we would have thought - we agreed that the novation would benefit only the individual and they were taxed on the market value of the benefit when it was… provided.” 128. It was put to him that anyone entering into these transactions would, on the basis of his advice, expect that tax outcome. He agreed that was the case if the person won the Bet but said that the “big proviso, though, was the considerable risk of loss”

“Not in 2013, so, I mean, as I say, many clients just gave up. I mean, they’d lost - when 75% of these things are failing it does test your faith that this thing is going to be successful and going to work”. 129. He was asked if he was saying that people would have undertaken this Bet expecting to lose. He said that he thought that: “I tend to be an optimistic person but I think some people did undertake the bet with the belief that they were probably going to fail again, after failing, you know, three times and that’s why they gave up. That’s why a significant number of clients just threw in the towel and said "That's it, I'm not going to trade again"”. 130. It was put to him that the intention was that the employing company who accepted the novation would be able to claim a deduction, not just for the cost of novation but for the total amount paid if it lost the CSO. He said that followed on from the Grant Thornton advice. The appellant claimed that deduction which was why its profits were reduced to almost nil. Role of Heronden and Aston Collie 131. It was put to him that Heronden’s position was that come what may it was guaranteed what was described as its fee. He said: “I agree, and that’s…exactly the reason that we could put up such a small amount of margin, because it was structured in that way….we provided them with a hedge, precisely”. 132. It was put to him that there was not even a credit risk to Heronden. He agreed that was the case at the outset and broadly speaking that was correct at any stage in these transactions. 133. It was put to him that there was a change as regards the transactions after the July transactions to introduce the restrike mechanism but that just reduced the Margin or Stake requirements. He said: “yes, I think that’s right…. Let’s just say, for example, Heronden had its money in Santander, okay, and Santander went bust. Heronden would still be liable to pay out on its transactions and things like that. But…. I agree that…the restrike was introduced as a credit mechanism to protect their credit risk, yes”. 134. He agreed that the restrike position was to protect Heronden because, following novation, it would only be liable to pay the winner on the Bet once it had received the payment from the company that had lost the CSO. 135. It was noted that he said that Heronden would only have become aware that the appellant was the potential “novatee” after the individuals had executed the transactions but put to him that Heronden was involved at the design stage of the planning. He agreed but noted that as regards the transactions in 2011 the CSOs were not novated to the appellant: “So there was no discussion or conversation with Heronden about, "Oh, I'm going to take this transaction and novate it to this company". It was more, "I'm taking these transactions out, that I've got - one will be novated", but there was no discussion about their identity or anything like that…. Yes, they weren’t aware of precisely what's going to happen, yes.” 136. He agreed that whilst Heronden were not aware of precisely what was going to happen, of course Heronden knew how the transactions were generally going to play out. 137. It was put to him that when he asked Aston Collie to advise a suitable counterpart, he knew they would put forward Heronden. He said: “ Yes. I mean, the reason that we transacted with Aston Collie providing financial advice is (a) we certainly would have wanted Aston Collie to provide financial advice to the company, and (b) I got extra protections, because I was treated as a retail client, so….it made sense to take financial advice on the transactions. He thought it would be very unlikely for them to recommend someone else given Mr Swallow was involved in them both and as and the two work closely together, so it would have been…a great surprise if John had recommended a different counterparty, yes”. 138. It was put to him that he wanted Aston Collie to confirm the details of the contracts but he knew the shape of it. He thought that was right and added that he wanted them to liaise with Heronden on his behalf, check the contracts, provide advice to him and then act as a go-between between him and Heronden in order to execute the contracts. 139. He agreed that Aston Collie essentially gave the same advice each time to all those who undertook the transactions with the only differences being in some of the details and the credit mechanism. “So the details of the contracts might change, the -- but, yes, that’s right. I mean, the structure of the advice letter was very similar depending on the iteration…. [although] there might have been other changes that would have affected it. So basket type, trade length, the split of the initial premium to final premium, things like that, so -- but, yes, taking into account all those changes…the advice would have taken into account the changes and details of contracts.”

“these are all glosses, and they are all of value as illustrating the idea which is expressed by the words of the statute. But it is perhaps worth observing that they do not displace those words. For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee .”

“denote something acquired which the acquirer becomes possessed of and can dispose of to his advantage - in other words, money - or that which can be turned to pecuniary account.” 166. He continued that it could not then be said that an option to take up shares at a certain price is not a valuable, or at least a potentially valuable, right: “ Its genesis is in the desire of the company to give a benefit to its employees, and at the same time, no doubt, to enhance their interest in its prosperity. It is something which the employee thinks it worth his while to pay for: not a large sum, truly, but £20 deserves a second thought. And it is something which can assuredly be turned to pecuniary account…” 167. At page 366, he rejected a number of arguments that the option could not be turned to pecuniary account; in his view, the point was that the option holder had “a right which is of its nature valuable and can be turned to pecuniary account”

“The taxable perquisite must be something arising “therefrom”, i.e., from the office, in the year of assessment. I do not want to embark on the notoriously difficult problem as to the year to which, for the purpose of tax, a payment should be ascribed if it is not expressly ascribed to any particular year. But I do not find it easy to say that the increased difference between the option price and the market price in 1956 or, it might be, in 1964, in any sense arises from the office. It will be due to numerous factors which have no relation to the office of the employee, or to his employment in it. The contrast is plain between the realised value, as it has been called, of the option when the shares are taken up (though the realisation falls short of money in hand) and the value of the option when it is granted. For the latter is nothing else than the reward for services rendered or, it may be, an incentive to future services. Unlike the realised value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the Crown.” 168. The other members of the majority, Lord Reid and Lord Radcliffe, agreed with Viscount Simmonds that the option was a taxable “perquisite” in the year of assessment in which it was granted. Lord Radcliffe agreed that in any event there could be no taxable event when the option was exercised and Lord Reid thought it was highly doubtful that there was but did not want to express a conclusive view on the point. 169. Lord Reid noted, at page 372, that a person exercising an employment is taxable on, amongst other items, “perquisites” therefrom for the year of assessment. He said that it may be difficult to relate a “perquisite” strictly to a particular year but said that if the option is itself the “perquisite” it would generally be sufficiently related to the year in which it is given properly to be such for that year but if there is no perquisite until the option is exercised and shares issued possibly many years later: “- in what sense would the shares be a perquisite for the year when they were issued? There would be no relation whatever between the service during that year and the giving of the option many years earlier, or the exercise of the option during the later year. I do not wish to express any concluded opinion on this point, but it does seem to lend support to the conclusion which I have reached on other grounds.” 170. Lord Radcliffe expressed his more definitive view as follows, at page 379: “The advantage which arose by the exercise of the option, say £166, was not a perquisite or profit from the office during the year of assessment: it was an advantage which accrued to the appellant as the holder of a legal right which he had obtained in an earlier year, and which he exercised as option holder against the company. The quantum of the benefit, which is the alleged taxable receipt, is not in such circumstances the profit of the service: it is the profit of his exploitation of a valuable right. Of course, in this case the year of acquiring the option was only the year immediately preceding the year in which, pro tanto, it was exercised. But supposing that he holds the option for, say, nine years before exercise? The current market value of the company’s shares may have changed out of all recognition in that time, through retention of profits, expansion of business, changes in the nature of the business, even changes in the market conditions or the current rate of interest or yield. I think that it would be quite wrong to tax whatever advantages the option holder may obtain through the judicious exercise of his option rights in this way as if they were profits or perquisites from his office arising in the year when he calls the shares …” 171. In Tyrer v Smart the House of Lords held that an employee received a taxable employment “perquisite or profit” when he was given the right to subscribe for shares in the parent company of his employer when the parent decided to “go public” at what was expected to be (and in fact turned out to be) a preferential rate. At page 114, Lord Diplock described it as well established that the relevant test is “whether the benefit represents a reward or return for the employee’s services, whether past, current or future, or whether it was bestowed upon him for some other reason”

“Where the benefit is granted by and at the expense of the employer or its parent company, as distinct from benefits derived from third parties, such as a huntsman’s field money or a taxi driver’s tips, the purpose of the employer in granting the benefit to the employee is an important factor in determining whether it is properly to be regarded as a reward or return for the employee’s services. The employer’s motives in conferring the benefit may be mixed and the determination of what constitutes his dominant purpose is a question of fact for the Commissioners to determine.” 172. Lord Diplock said, at page 116, that the crucial finding of fact was that the company’s purpose in making the shares available to employees was “to encourage established employees of the company and of companies within the group to become shareholders in the parent company” with its aim being “to achieve a better relationship with the employees so that they would become and continue to be loyal employees, having an understanding of and a sense of involvement in the affairs and fortunes of [the group]”

“the offer was made as a reward for past (since he had to have served five years to qualify for the offer) and more particularly for future services and accordingly was made to him in return for acting as or being an employee.” 174. In Shilton v Wilmhurst the House of Lords held that an amount of £75,000 paid to Mr Shilton by the football club he was then employed with (Nottingham Forest) as an inducement to take a contract with a new club (Southampton) was an emolument of employment with the new club. In giving the judgement, with which the other Lords agreed, that it was an emolument Lord Templeman in effect endorsed the approach taken by Lord Radcliffe in the earlier Hochstrasser case. 175. He said, at page 91d to e, that because the relevant provision embraces all “emoluments from employment” it must therefore comprehend an emolument provided by a third party. He said that the term applies: “ first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, second, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument “from employment” means an emolument “from being or becoming an employee .”

“whether…. the loss of rights under the share option scheme is “intimately connected with the employment” in the same way as the union rights in Hamblett v Godfrey ; or alternatively whether it is to be treated as something distinct, such as the loss incurred on the sale of a house in Hochstrasser v Mayes ”. 181. He had earlier set out that in Hamblett v Godfrey [1987] STC 60 a payment made by the Crown to an employee for the loss of trade union rights was held to be taxable as employment income, in his view, on the basis that it was “for the loss of rights which were in effect part of the employment” (page 25f to j). He noted that in that case Knox J drew a distinction with the Hochstrasser case on the basis that the House of Lords there found “a separate source for the payment in question, namely the housing agreement” which dealt with the taxpayer’s position as householder” whereas in the Hamblett case “there is no such independent source other than the Crown’s desire to recognise the loss of rights intimately linked with employment.” 182. He continued, at 27e, that he would have found this a more borderline case but for the decision in Abbott v Philbin and he cited and referred to the passages from that case set out above. He said, at 28d, that (a) that case demonstrates that, apart from specific statutory provisions, the value realised by the exercise of the taxpayer’s option right, had it been exercised at the relevant time, would not have been a taxable emolument and (b) that the Commissioners found that the payment was made in recognition of the loss of that benefit and, therefore, “for tax purposes it should have the same character as that for which it was being given”. 183. He also considered whether a different statutory provision applied which was based on different wording “by reason of” employment. Overall, he concluded that there was little difference between the two formulations. He noted, at page 30b, the formulation of the “therefrom test” set out by Neill LJ in Hamblett v Godfrey [1987] STC 60 at 71 that: “The question is, was the payment of an emolument from the employment? In other words, was the employment the source of the emolument?”

“it is accepted that it is not enough merely to show that the payment was received as an employee and would not have been received if the individual had not been an employee. Something more must be established. This has been expressed in terms of the difference between causa sine qua non and causa causans but it does, on any view, require a sufficient causal link to be established between the payment and the employment .”

“that the question of taxability involves one being able to characterise the payment as one "from employment" if it derives "from being or becoming an employee" and is not attributable to something else such as a mark of esteem or a desire to relieve distress. I take this formulation from Lord Templeman in Shilton v Wilmshurst ….” 188. He said, at [52,] that it must follow from this that, in order to satisfy the test, one must be able to say that the payment is from employment rather than from a non-employment source. He said that this has certainly been the approach of the courts in most of the decided cases referring to the comments of Viscount Simmonds in Hochstrasser, Lord Wilberforce in Brumby v Milner [1976] STC 534 at 536 (where he said this is “not an easy question to answer”), Lord Diplock in Tyrer v Smart at 36: (as regards the “determination of what constitutes his dominant purpose”;) and Carnwath J in Wilcock v Eve at page 25 (where he said that where there is more than one operative cause “there is an element of value judgment in deciding on which side of the statutory line the payment falls”). 189. At [53] he said that this process of evaluation requires the judge to make findings of fact “based on the evidence as to the reasons and background to the payment and then to apply a judgment as to whether the payment was from the employment rather than from something else..”

“Employment does not have to be the sole cause but it does have to be sufficiently substantial as to characterise the payment as one from employment.” 190. He added at [59]: “If the employment is a substantial and equal cause of the payment, it becomes open to the judge to say that the statutory test is satisfied. The payment is then from the employment even if it also substantially attributable to a non-employment cause.”

“to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose”. 193. He noted that until the Ramsay case, however, revenue statutes were “remarkably resistant to the new non-formalist methods of interpretation”

“ What are ‘clear words’ is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.” (2) Secondly at pages 323-324: “ It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.”

“ led to the conclusion, as a matter of construction, that the statutory provision with which the court was concerned, namely that imposing capital gains tax on chargeable gains less allowable losses was referring to gains and losses having a commercial reality (“The capital gains tax was created to operate in the real world, not that of make belief’) and that therefore (p 326): “To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.” 196. Lord Nicholls commented, at [32], that 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 … however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 , 320, para 8: "The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case."”

“ On the true construction of the relevant provisions of the statute, the elements inserted into the transactions without any commercial purpose were treated as having no significance.” 200. At [35] he said that cases such as these gave rise to a view that, in the application of “ any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded”

“It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 , para 35: "The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."”

“the need to focus carefully upon the particular statutory provision and to identify its requirements before one can decide whether circular payments or elements inserted for the purpose of tax avoidance should be disregarded or treated as irrelevant for the purposes of the statute.” 202. In the same passage he noted that in MacNiven Lord Hoffman drew a distinction between cases where was “a statute laid down requirements by reference to some commercial concept such as gain or loss”, where “it would usually follow that elements inserted into a composite transaction without any commercial purpose could be disregarded” and those made “purely by reference to its legal nature” (in MacNiven , the discharge of a debt) in which case “an act having that legal effect would suffice, whatever its commercial purpose may have been”

“ As he explained (para 28), the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. In the past, the courts had interpreted taxing statutes in a literalist and formalistic way when applying the legislation to a composite scheme by treating every transaction which had an individual legal identity as having its own tax consequences. Lord Nicholls described this approach as “blinkered” (para 29). Instead, he removed the interpretation of taxing statutes from its literalist enclave and incorporated it into the modern approach to statutory interpretation which the court otherwise adopts.” [He cited [32] as set out above] 208. He continued to explain, at [13], that Lord Nicholls (at [34]) recognised two features which were characteristic of tax law. “ First, tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said (in W T Ramsay , 326) “in the real world”

“It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge.”

“ extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it.”

“the gloss is no basis for establishing a general rule or “principle” that a payment is made for the purposes of PAYE only if the money is paid to or at least placed unreservedly at the disposal of the employee. Yet it has been so used.”

“In applying a purposive interpretation of a taxing provision in the context of a tax avoidance scheme it is legitimate to look to the composite effect of the scheme as it was intended to operate. In Inland Revenue Comrs v Scottish Provident Institution [2004] 1 WLR 3172 Lord Nicholls stated (para 23): “The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.”

“ Since the decision of this House in WT Ramsay Ltd . v. Inland Revenue Commissioners [1982] A C 300 it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the Court to have regard to the whole of a series of transactions which were intended to have a commercial unity. Indeed, it is conceded by SPI that the Court is not confined to looking at the Citibank option in isolation. If the scheme amounted in practice to a single transaction, the Court should look at the scheme as a whole. Mr. Aaronson Q.C., who appeared for SPI, accepted before the Special Commissioners that if there was “no genuine commercial possibility” of the two options not being exercised together, then the scheme must fail.” 226. Lord Nicolls continued, at [20] and [21], that: (1) The taxpayer’s counsel submitted that “even if the parties intended that both options should be exercised together…the Court could treat them as a single transaction only if there was “no practical likelihood” that this would not happen”. (2) SPI had the benefit of the findings of fact by the Special Commissioners who adopted (at para 24) the analogy of horserace betting as follows: “If the chance of the price movement occurring was similar to an outsider winning a horse race we consider that this, while it is small, is not so small that there is no reasonable or practical likelihood of its occurring; outsiders do sometimes win horse races.” (3) The test of “no practical likelihood” derived from the speech of Lord Oliver of Aylmerton in Craven v White [1989] A C 398, at p 514. In that case, however, “important parts of what was claimed by the Revenue to be a single composite scheme did not exist at the relevant date” (see Lord Oliver (at p 498)). 227. Lord Nicholls continued at [22] to note that in Craven v White “thus there was an uncertainty about whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together” whereas in the present case: “…the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the [option granted to SPI] at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. From the point of view of the money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.” 228. At [23] Lord Nicholls held that: “We think that it would destroy the value of the Ramsay principle of construing provisions such as [the relevant provisions in the Finance Act 1994] as referring to the effect of composite transactions if their composite effect had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. We would be back in the world of artificial tax schemes, now equipped with anti -Ramsay devices. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.” 229. At [24] he concluded that it follows that the Special Commissioners erred in law in finding that there was a realistic possibility of the options not being exercised simultaneously meant, without more, that the scheme could not be regarded as a single composite transaction. He said: “We think that it was and that, so viewed, it created no entitlement to gilts and that there was therefore no qualifying contract”

“(1) Chapter 2 applies if - (a) a person (“A”) is an employee, or a former or prospective employee, of another person (“B”), (b) there is an arrangement (“the relevant arrangement”) to which A is a party or which otherwise (wholly or partly) covers or relates to A, (c) it is reasonable to suppose that, in essence - (i) the relevant arrangement, or (ii) the relevant arrangement so far as it covers or relates to A, is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A’s employment, or former or prospective employment, with B, (d) a relevant step is taken by a relevant third person, and (e) it is reasonable to suppose that, in essence— (i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or (ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement . (2) In this Part “relevant step” means a step within section 554B, 554C or 554D. (3) Subsection (1) is subject to subsection (4) and sections 554E to 554Y… ….. (5) In subsection (1)(b) and (c)(ii) references to A include references to any person linked with A. (6) For the purposes of subsection (1)(c) it does not matter if the relevant arrangement does not include details of the steps which will or may be taken in connection with providing, in essence, rewards or recognition or loans as mentioned (for example, details of any sums of money or assets which will or may be involved or details of how or when or by whom or in whose favour any step will or may be taken). (7) In subsection (1)(d) “relevant third person” means - (a) A acting as a trustee, (b) B acting as a trustee, or (c) any person other than A and B….. …….. (11) For the purposes of subsection (1)(e)— (a) the relevant step is connected with the relevant arrangement if (for example) the relevant step is taken (wholly or partly) in pursuance of an arrangement at one end of a series of arrangements with the relevant arrangement being at the other end, and (b) it does not matter if the person taking the relevant step is unaware of the relevant arrangement. (12) For the purposes of subsection (1)(c) and (e) in particular, all relevant circumstances are to be taken into account in order to get to the essence of the matter. 311. For the purposes of s 554A, an “arrangement” includes any “agreement, scheme, settlement, transaction, trust or understanding (whether or not it is legally enforceable)”. 312. HMRC argued that the for the purposes of the above provisions there was a relevant step under s 554C(1)(a) which provides as follows: ( 1) A person (“P”) takes a step within this section if P— (a) pays a sum of money to a relevant person…. (2) In subsection (1) “relevant person”— (a) means A or a person chosen by A or within a class of person chosen by A, and (b) includes, if P is taking a step on A’s behalf or otherwise at A’s direction or request, any other person. (3) In subsection (2) references to A include references to any person linked with A….. ” 313. Where these provisions apply: (1) The value of the relevant step identified counts as employment income of A in respect of A’s employment with B (where the step is taken during A’s employment) for the tax year in which the relevant step is taken (s 554Z2(1)). In this case, therefore, if the provisions apply, the value of the relevant steps would count as the Individuals’ employment income in the tax year in which the relevant step was taken. (2) When the value of a relevant step counts as employment income under Part 7A, and that relevant step is the payment of a sum of money, an employer is treated as making a payment of PAYE income (s 687A). It did not appear to be disputed, therefore, that if Part 7A applies the appellant would be liable to account for income tax and Class 1 NICs under the PAYE system (under ss 687A and 710 and regulation 22B of the Social Security (Contributions) Regulations 2001/1004 (the “ Social Security Regulations ”) 314. Mr Vallat noted, as also did not appear to be disputed, that if Part 7A applies, there would be additional income tax and NICs charges as a result of the application of s 222. This applies where (a) an employer has made a notional payment which includes a payment of earnings under Part 7A (under s 710), (b) the employer is required, by virtue of s 710(4), to account to HMRC for an amount of income tax in respect of that notional payment; and (c) the employee does not, before the end of the period of 90 days from the date on which the employer is treated as making the notional payment, make good the due amount of income tax to the employer. The due amount of income tax is treated as earnings from the employment for the tax year in which the notional payment is treated as having been made. 315. To the extent that an amount counts as employment income under s 554Z2, that would produce a “due amount” of income tax within s 222 which the Individuals have not made good. The additional income tax arising would be due from the Individuals. However, any such amounts are also treated as earnings for NICs purposes so that the appellant would be liable to class 1 NICs in respect of the relevant amount (under regulation 22(4) of the Social Security Regulations). Submissions 316. Mr Vallat argued that : (1) On the basis that factual conclusions drawn from the evidence are as set out in HMRC’s submissions in relation to the Ramsay issue, all the transactions, which form the Alchemy structure together constitute an “arrangement” within the meaning of s 554A. He noted that, even on the appellant’s own case, the Alchemy transactions are concerned with remuneration albeit that the appellant only accepts that there was a limited employment related benefit arising on the novation of the CSOs. (2) Heronden, as a “relevant third party” took relevant steps in paying (a) the Initial Premium and the maximum winnings to the Individuals under the Bets, (b) the Stakes to the Individuals when returned on the Individuals “winning” under the Bets, and (c) the Final Premium to the appellant (as a linked party) (within the meaning s 554(C)). (I note that it was not disputed that the appellant is a linked party.) The relevant steps were taken in pursuance of the relevant arrangement (within the meaning of s 554A(1)(e)). Each of these steps was taken by Heronden in pursuance of the relevant arrangement; they were all part of the pre-ordained series of transactions undertaken in order to implement the Alchemy scheme. Mr Vallatt noted that this requirement is satisfied even if Heronden was not aware of the relevant arrangement (due to s 554A(11)) (although he thought the evidence confirmed that Heronden was aware of the plan). 317. Mr Bremner submitted that Part 7A does not apply on the basis that the threshold requirements in s 554A are not met. He made similar points to those raised in relation to the other issues in this appeal: (1) There was only one discrete transaction, the novation of the CSOs, which involved the provision of an employment-related reward; only that transaction could be a “relevant arrangement”

“We note that no reference is made to [the Rangers argument] either in HMRC’s Statement of Case or in your statement….There is no doubt that the Tribunal is the appropriate forum for the matter to be determined”. (4) On 16 March 2018, HMRC sent the appellant determinations and decisions in relation to further iterations of the Alchemy structure in respect of the tax years 2013/14, 2014/15 and 2015/16. (5) On 5 April 2018, HMRC issued a “follower notice” to the appellant relating to the 2012/13 tax year. (6) On 12 April 2018, the appellant submitted a notice of appeal to HMRC in respect of the decisions and determinations issued in respect of the later tax years. (7) On 1 May 2018, HMRC wrote to the appellant stating that they wished to rely on the Rangers argument. (8) On 14 May 2018, the appellant responded to HMRC’s letter stating that HMRC would have to make a formal application to the tribunal to amend its statement of case and that the appellant would resist it. 324. It was common ground that, to the extent that the tribunal has to consider whether the application should be allowed under the overriding objective governing the tribunal, of dealing with matters fairly and justly, the tribunal should follow the approach set out by Carr J in Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 at [38]: “(a) whether to allow an amendment is a matter for the discretion of the court. In exercising that discretion, the overriding objective is of the greatest importance. Applications always involve the court striking a balance between injustice to the applicant if the amendment is refused, and injustice to the opposing party and other litigants in general, if the amendment is permitted; (b) where a very late application to amend is made the correct approach is not that the amendments ought, in general, to be allowed so that the real dispute between the parties can be adjudicated upon. Rather, a heavy burden lies on a party seeking a very late amendment to show the strength of the new case and why justice to him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission; (c) a very late amendment is one made when the trial date has been fixed and where permitting the amendments would cause the trial date to be lost. Parties and the court have a legitimate expectation that trial fixtures will be kept; (d) lateness is not an absolute, but a relative concept. It depends on a review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done; (e) gone are the days when it was sufficient for the amending party to argue that no prejudice had been suffered, save as to costs. In the modern era it is more readily recognised that the payment of costs may not be adequate compensation; (f) it is incumbent on a party seeking the indulgence of the court to be allowed to raise a late claim to provide a good explanation for the delay; (g) a much stricter view is taken nowadays of non-compliance with the Civil Procedure Rules and directions of the Court. The achievement of justice means something different now. Parties can no longer expect indulgence if they fail to comply with their procedural obligations because those obligations not only serve the purpose of ensuring that they conduct the litigation proportionately in order to ensure their own costs are kept within proportionate bounds but also the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately, and that the courts enable them to do so.” 325. HMRC said that the tribunal plainly has jurisdiction to hear the Rangers argument and it is in the interests of justice and fairness for it to be heard. The appellant disputed both of these points. Jurisdiction Submissions 326. It is common ground that determinations are treated as assessments which the tribunal can, on an appeal made to it, reduce the amount of or increase under the provisions of s 50 of the Taxes Management Act 1970 (“ TMA ”). The dispute was whether the Rangers argument falls within the scope of the conclusions made on issue of the determinations and thereby within the scope of the appeal proceedings and the tribunal’s powers under s 50 TMA. HMRC referred to the leading authority on this topic, namely, Tower MCashback LLP 1 and Another v Revenue and Customs Commissioners [2011] 2 AC 457 , [2011] STC 1143 as the decision in that case was interpreted by the Court of Appeal in Fidex Ltd v HMRC [ 2016] EWCA Civ 385 , [2016] STC 1920 . Whilst those cases are concerned with the scope of closure notices rather than specifically determinations, it was not disputed that the same considerations apply. 327. In Fidex , Kitchen LJ set out, at [45], that the principles to be applied as regards the scope of a closure notice are those set out by Henderson J in Tower MCashback as approved by and elaborated upon by the Supreme Court which, so far as material to that appeal, he thought could be summarised in four propositions: “i) The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions. ii) What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions. iii) The closure notice must be read in context in order properly to understand its meaning. iv) Subject always to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice.” 328. Mr Vallat said that it is entirely in accordance with these principles for HMRC to be permitted to raise the Rangers argument. HMRC are seeking to include a legal argument which further supports HMRC’s existing position, namely, that on a purposive construction of the employment tax provisions each iteration of the transactions constituted a composite scheme to deliver taxable employment earnings into the hands of the Individuals. This simply involves the application of the principle in Rangers to the particular facts of this case which, in any event, the tribunal will have to consider in detail. The current appeal necessarily involves the question whether the payments made by the appellant to Heronden under the CSOs are tax-free. Broadly, the appellant’s stance rests on the assertion that the sequence of steps results only in minimal tax charges and necessarily that the Heronden Payments (as well as the Bet Profits) are not liable to tax as employment earnings for any reason. 329. Mr Vallat said that the broad scope of the determinations is clear from the covering letter accompanying them, which described them as being “in respect of the spread betting/option arrangements under the [Alchemy] scheme”

“…We have taken this step now to protect tax and national insurance contributions in relation to payments for the services of an individual or number of individuals. We anticipate that the company will have some knowledge of the transactions to which the liability relates. Whatever the level of knowledge of the officers of the company has been before now, you need to know that HMRC believes that the payments are within the Income Tax (Earnings and Pensions) Act 2003 and that PAYE and NICs should have been deducted . Without prejudice to any other arguments HMRC may wish to advance, we think the payments are either employment income on first principles or are brought within the charge to employment income by Part 7A of the Act referred to above.”