“On9 March 2016 the Supreme Court gave a ruling the in the cases of UBS AG v Commissioners for Her Majesty’s Revenue and Customs, and DB Group Services (UK) Ltd v Commissioners for Her Majesty’s Revenue and Customs[2016] UKSC 13 , (the “UBS” case and the “DB” case). The ruling was that the arrangements used in those cases do not achieve the intended result for tax and Class 1 National Insurance Contributions (“NICs”). You have used a similar scheme… We consider the ruling in the UBS and DB cases is relevant to you as it relates to earnings and the relevant Class 1 NICs thereon and the ruling is now a final ruling. We also consider that the principles laid down or the reasoning given in that ruling would, if applied to your arrangements, deny the asserted advantage…”
“204 Circumstances in which a follower notice may be given (1) HMRC may give a notice (a “follower notice”) to a person (“P”) if Conditions A to D are met. (2) Condition A is that— (a) a tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or (b) P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax, but that appeal has not yet been— (i) determined by the tribunal or court to which it is addressed, or (ii) abandoned or otherwise disposed of. (3) Condition B is that the return or claim or, as the case may be, appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”). (4) Condition C is that HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements. (5) Condition D is that no previous follower notice has been given to the same person (and not withdrawn) by reference to the same tax advantage, tax arrangements, judicial ruling and tax period. (6) A follower notice may not be given after the end of the period of 12 months beginning with the later of— (a) the day on which the judicial ruling mentioned in Condition C is made, and (b) the day the return or claim to which subsection (2)(a) refers was received by HMRC or (as the case may be) the day the tax appeal to which subsection (2)(b) refers was made. 205 “Judicial ruling” and circumstances in which a ruling is “relevant” (1) This section applies for the purposes of this Chapter. (2) “Judicial ruling” means a ruling of a court or tribunal on one or more issues. (3) A judicial ruling is “relevant” to the chosen arrangements if— (a) it relates to tax arrangements, (b) the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage, and (c) it is a final ruling. (4) A judicial ruling is a “final ruling” if it is— (a) a ruling of the Supreme Court, or (b) a ruling of any other court or tribunal in circumstances where— (i) no appeal may be made against the ruling, (ii) if an appeal may be made against the ruling with permission, the time limit for applications has expired and either no application has been made or permission has been refused, (iii) if such permission to appeal against the ruling has been granted or is not required, no appeal has been made within the time limit for appeals, or (iv) if an appeal was made, it was abandoned or otherwise disposed of before it was determined by the court or tribunal to which it was addressed. (5) Where a judicial ruling is final by virtue of sub-paragraph (ii), (iii) or (iv) of subsection (4)(b), the ruling is treated as made at the time when the sub-paragraph in question is first satisfied. 208 Penalty if corrective action not taken in response to follower notice (1) This section applies where a follower notice is given to P (and not withdrawn). (2) P is liable to pay a penalty if the necessary corrective action is not taken in respect of the denied advantage (if any) before the specified time. (3) In this Chapter “the denied advantage” means so much of the asserted advantage (see section 204(3)) as is denied by the application of the principles laid down, or reasoning given, in the judicial ruling identified in the follower notice under section 206(a). (4) The necessary corrective action is taken in respect of the denied advantage if (and only if) P takes the steps set out in subsections (5) and (6). (5) The first step is that— (a) in the case of a follower notice given by virtue of section 204(2)(a), P amends a return or claim to counteract the denied advantage; (b) in the case of a follower notice given by virtue of section 204(2)(b), P takes all necessary action to enter into an agreement with HMRC (in writing) for the purpose of relinquishing the denied advantage. (6) The second step is that P notifies HMRC— (a) that P has taken the first step, and (b) of the denied advantage and (where different) the additional amount which has or will become due and payable in respect of tax by reason of the first step being taken. (7) In determining the additional amount which has or will become due and payable in respect of tax for the purposes of subsection (6)(b), it is to be assumed that, where P takes the necessary action as mentioned in subsection (5)(b), the agreement is then entered into. (8) In this Chapter— “the specified time” means— (a) if no representations objecting to the follower notice were made by P in accordance with subsection (1) of section 207, the end of the 90 day post-notice period; (b) if such representations were made and the notice is confirmed under that section (with or without amendment), the later of— (i) the end of the 90 day post-notice period, and (ii) the end of the 30 day post-representations period; “the 90 day post-notice period” means the period of 90 days beginning with the day on which the follower notice is given; “the 30 day post-representations period” means the period of 30 days beginning with the day on which P is notified of HMRC's determination under section 207. (9) No enactment limiting the time during which amendments may be made to returns or claims operates to prevent P taking the first step mentioned in subsection (5)(a) before the tax enquiry is closed (whether or not before the specified time). (10) No appeal may be brought, by virtue of a provision mentioned in subsection (11), against an amendment made by a closure notice in respect of a tax enquiry to the extent that the amendment takes into account an amendment made by P to a return or claim in taking the first step mentioned in subsection (5)(a) (whether or not that amendment was made before the specified time). (11) The provisions are— (a) section 31(1)(b) or (c) of TMA 1970, (b) paragraph 9 of Schedule 1A to TMA 1970, (c) paragraph 34(3) of Schedule 18 to FA 1998, (d) paragraph 35(1)(b) of Schedule 10 to FA 2003, and (e) paragraph 35(1)(b) of Schedule 33 to FA 2013. 209 Amount of a section 208 penalty (1) The penalty under section 208 is 50% of the value of the denied advantage. (2) Schedule 30 contains provision about how the denied advantage is valued for the purposes of calculating penalties under this section. (3) Where P before the specified time— (a) amends a return or claim to counteract part of the denied advantage only, or (b) takes all necessary action to enter into an agreement with HMRC (in writing) for the purposes of relinquishing part of the denied advantage only, in subsections (1) and (2) the references to the denied advantage are to be read as references to the remainder of the denied advantage 210 Reduction of a section 208 penalty for co-operation (1) Where— (a) P is liable to pay a penalty under section 208 of the amount specified in section 209(1), (b) the penalty has not yet been assessed, and (c) P has co-operated with HMRC, HMRC may reduce the amount of that penalty to reflect the quality of that cooperation. (2) In relation to co-operation, “quality” includes timing, nature and extent. (3) P has co-operated with HMRC only if P has done one or more of the following— (a) provided reasonable assistance to HMRC in quantifying the tax advantage; (b) counteracted the denied advantage; (c) provided HMRC with information enabling corrective action to be taken by HMRC; (d) provided HMRC with information enabling HMRC to enter an agreement with P for the purpose of counteracting the denied advantage; (e) allowed HMRC to access tax records for the purpose of ensuring that the denied advantage is fully counteracted. (4) But nothing in this section permits HMRC to reduce a penalty to less than 10% of the value of the denied advantage 213 Alteration of assessment of a section 208 penalty (1) After notification of an assessment has been given to a person under section 211(2), the assessment may not be altered except in accordance with this section or on appeal. (2) A supplementary assessment may be made in respect of a penalty if an earlier assessment operated by reference to an underestimate of the value of the denied advantage. (3) An assessment or supplementary assessment may be revised as necessary if it operated by reference to an overestimate of the denied advantage; and, where more than the resulting assessed penalty has already been paid by the person to HMRC, the excess must be repaid. 214 Appeal against a section 208 penalty (1) P may appeal against a decision of HMRC that a penalty is payable by P under section 208. (2) P may appeal against a decision of HMRC as to the amount of a penalty payable by P under section 208. (3) The grounds on which an appeal under subsection (1) may be made include in particular– (a) that Condition A, B or D in section 204 was not met in relation to the follower notice, (b) that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements, (c) that the notice was not given within the period specified in subsection (6) of that section, or (d) that it was reasonable in all the circumstances for P not to have taken the necessary corrective action (see section 208(4)) in respect of the denied advantage. … (9) On an appeal under subsection (2), the tribunal may– (a) affirm HMRCʼs decision, or (b) substitute for HMRCʼs decision another decision that HMRC had power to make.”
“64. Whether HMRC can reasonably form the opinion that an earlier ruling is relevant to the taxpayer’s asserted advantage will depend on a number of factors. First, it may depend on how fact sensitive the application of the relevant ruling is; in other words, whether a small difference in the fact pattern of the taxpayer’s arrangements or circumstances as compared with the fact pattern described in the earlier ruling would prevent the principles or reasoning applying. A follower notice may be issued at different stages of the investigation into the taxpayer’s affairs. According to Condition A in section 204(2), it may be given as soon as a tax enquiry has been opened into the tax return made by P or it may be given during the course of a tax appeal. If the application of the earlier ruling is very fact dependent, then it may be more difficult for HMRC to form the opinion that the relevant ruling would deny the advantage where HMRC is considering Condition C at the earlier stage. If the follower notice is being considered when the tax appeal is already underway it may be clearer whether the fact patterns are sufficiently similar. 65. Secondly, the relevance of the earlier ruling may turn on HMRC’s rejection of the taxpayer’s evidence as being untruthful. HMRC will have to consider carefully whether it is satisfied that the untruthfulness of those factual assertions is so clear that it can reasonably form the opinion that the earlier ruling is relevant, despite that contrary evidence. 66. Other cases may be less fact sensitive, for example where the taxpayer has entered into the same mass marketed tax avoidance scheme as the taxpayer in the earlier ruling so that the provisions applicable in his case are identical to those held to be ineffective by the earlier ruling. If it is clear that there is no material difference between the chosen arrangements and the arrangements considered in the earlier ruling, it will be easier in such a case for HMRC to form the opinion that Condition C is satisfied. 67 Thirdly, HMRC will need to consider the legal arguments put forward by the taxpayer. The taxpayer may rely on an argument that was not raised in the earlier ruling. This is what happened in R (Locke) v Revenue and Customs Comrs[2019] EWCA Civ 1909 ;[2020] 1 All ER 459 ;[2019] STC 2543 . In that case, the taxpayer Mr Locke relied on a different statutory provision as entitling him to the tax advantage he asserted as compared to the statutory provision that had been considered and rejected in the earlier case on which HMRC sought to rely as the relevant ruling. The novel argument he made had not been put forward by the other taxpayers who had entered into the same arrangements as Mr Locke. It had not therefore been determined by the earlier ruling so that earlier ruling did not satisfy Condition C. A similar situation might arise where the earlier ruling was based on a concession by a party to those proceedings as to some aspect of the legal framework, but the taxpayer whose asserted tax advantage is being considered has made clear that he does not make that same concession and wishes to argue the point. 68. Fourthly, HMRC should also consider the nature of the earlier ruling. As Mr Stone pointed out, a ruling by the FTT can be a relevant ruling for the purposes of Condition C even though it has no precedential value. However, a ruling arrived at after a hearing where, for example, the taxpayer did not appear or was not legally represented or where the reasoning in the decision is brief or unclear is less likely to be capable of forming the basis for the necessary opinion required in Condition C.”
“[19] Section 426 imposes a tax charge in relation to the securities if a chargeable event occurs. For present purposes, the relevant chargeable event is the securities ceasing to be restricted securities. Section 429, however, allows an exemption from the charge under s 426 where, put shortly, a whole class of shares in a company is affected by the same restriction, all the shares of the class are affected in the same way by the chargeable event, and either (a) the company is employee-controlled by virtue of holdings of shares of the class, or (b) the majority of the company’s shares of the class are held by persons unrelated to the company. It follows that where s 429 applies (as, for example, where the company is owned by its employees, or where most of the shares of the class awarded to the employees are held by members of the public, and the other requirements of the section are met), the recipient of the shares is given the same favourable income tax treatment as the recipient of shares under an approved share option scheme. Subsequent to the date of the schemes with which these appeals are concerned, s 429 was amended by para 6 of Sch 2 to theFinance (No 2) Act 2005 so as to exclude its application to tax avoidance schemes.” (2) Lord Reed then outlined the scheme: “[24] Before considering in detail the facts of the individual appeals, it may be helpful to explain briefly how, in broad terms, schemes of the kind in issue were designed to work. The modus operandi can be summarised as follows. The bank decided to award discretionary bonuses to certain of its employees, but to pay the amount of the bonuses into a scheme designed to take advantage of the provisions of Ch 2, so that the employees would avoid liability to income tax. Rather than paying the bonuses directly to the employees, the bank instead used the amount of the bonuses to pay for redeemable shares in a special purpose offshore company set up solely for the purpose of the scheme. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares which were intended to enable them to benefit from the exemptions from income tax conferred by ss 425(2) and 429. Once the exemptions had accrued, the shares were redeemable by the employees for cash. Employees resident and domiciled in the United Kingdom, who were liable to capital gains tax, could however defer the redemption of their shares until they had held them for two years, by which time the rate of tax chargeable, with the benefit of business taper relief, was only 10%. [25] A typical scheme therefore involved carrying out the following pre-ordained steps: (1) The bank decided which of its employees would receive discretionary bonuses, and the amount of those bonuses. (2) Company Z was created in an offshore jurisdiction. Care was taken that Company Z was not an associated company of the bank for the purposes of s 429. (3) A special class of redeemable shares in Company Z was created. As shares, these were ‘securities’ as defined in s 420(1)(a). The shares were subject to a short-term restriction designed to satisfy the requirements of s 423(2). (4) The restriction involved a contingency which was unlikely to occur but might conceivably do so. In cases where the occurrence of the contingency lay beyond the control of those involved in the scheme, hedging arrangements were entered into so that the employees were compensated in the event of the restriction being activated. (5) Directly or indirectly, the bank paid the aggregate amount of the bonuses to Company Z as the price of the shares. (6) The purchaser received the shares and allocated beneficial interests to the employees identified at step (1) in amounts equal to the amounts that the bank had decided to award them as bonuses. Exemption from a charge to income tax on the employees’ acquisition of the shares was asserted under s 425(2), on the basis that the shares were restricted securities by virtue of s 423(2). (7) A short time later, the restriction was removed from the shares. Exemption from a charge to tax on this event was asserted under s 429. (8) A short time after that, the employees became entitled to redeem their shares, and many did so. No liability to income tax arose by reason of the redemption. (9) Some employees who were resident and domiciled in the UK continued to hold their shares for the two years necessary to mitigate a charge to capital gains tax using taper relief. They then redeemed their shares. (10) In due course Company Z was wound up.” (3) Having set out these outlines, Lord Reed went on to consider in greater detail the facts of each of the appeals. (4) Describing the UBS scheme: (a) Lord Reed said at [27] that UBS designed an employee bonus scheme to take advantage of Chapter 2. It had no purpose other than tax avoidance, and such consequential advantages as would flow from tax avoidance. (b) The share rights provided for an immediate and automatic sale of the shares to the UBS employee benefit trust if on any date during the three-week period from 29 January to19 February 2004 the closing value of the FTSE 100 Index exceeded a “trigger level”, defined as 6.5% above its closing value on28 January 2004 . In that event, the shares were to be sold for a price equal to 90% of their market value on the date of the sale “if no restrictions (including for the avoidance of doubt under [article 2(14)]) applied to those shares”. (c) It was not likely that the FTSE 100 would exceed the trigger level during the relevant period, but there was a genuine possibility that it might: the trigger level was set so as to create a probability of between 6 and 12%. It was a matter of agreement that the forced sale provision had the effect of reducing the market value of the shares when they were acquired by the employees by an amount which was more than de minimis. The only purpose of the forced sale provision was to make the shares “restricted securities”. (d) There were call options that hedged the risk of the trigger event occurring, such that employees would not be materially worse off. (5) The DB scheme was described at [49] and involved the group using an off-the-shelf scheme devised by Deloitte. That scheme was described as being “generically similar to the UBS scheme, but differed from it in some respects”: (a) The shares were to be forfeited if, before2 April 2004 , the person who held or was beneficially entitled to them ceased to be employed by DB, or notice was given to or by that individual of termination of employment, for any reason other than redundancy, death or disability, or without cause. The shares could not be transferred during that period. (b) For practical purposes, therefore, an employee would forfeit his shares if he voluntarily resigned or was dismissed for misconduct during a period of about eight weeks. Neither contingency was likely to occur, not least because its occurrence lay largely within the control of the employee, for whom it would have significant financial consequences. Furthermore, by virtue of s424(b) ITEPA 2003, shares are not restricted securities by reason only of a provision for forfeiture in the event of dismissal for misconduct. (c) In the event, there was no employee to whom the provision applied. (6) Having considered both schemes, and the approach taken by the FTT, Upper Tribunal and the Court of Appeal, Lord Reed then considered the Ramsay approach, noting at [61]: “As the House of Lords explained in Barclays Mercantile Business Finance Ltd v Mawson, in a single opinion of the Appellate Committee delivered by Lord Nicholls, 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 the way which best gives effect to that purpose.” (7) Lord Reed considered the arguments as to a purposive construction of ITEPA 2003 and reached this conclusion at [85]: “85. In summary, therefore, the reference in section 423(1) to “any contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies” is to be construed as being limited to provision having a business or commercial purpose, and not to commercially irrelevant conditions whose only purpose is the obtaining of the exemption.” (8) Lord Reed then went on to apply this principle to the facts: “86. In the UBS case, the condition — whether the FTSE 100 rose by a specified amount during a three week period — was completely arbitrary. It had no business or commercial rationale beyond tax avoidance. Such a condition is simply not relevant to the application of section 423, if, for the reasons already explained, that section is concerned with “provision” having a genuine business or commercial purpose. Applying section 423 to the facts, viewed from a commercially realistic perspective, it follows that the condition to which the UBS shares were subject should be disregarded, with the consequence that the shares are not “restricted securities” within the meaning of that section. 87. That conclusion is fortified by another aspect of the facts of the UBS case. The economic effect of the restrictive condition was in any event nullified by the hedging arrangements, except to an insignificant and pre-determined extent (namely 0.8% at most — see para 32 above). The fact that what the First-tier Tribunal described as “a deliberate near miss” was designed into the scheme, rather than a complete offsetting of the risk, is immaterial. Paras 22 and 23 of the opinion in Scottish Provident, cited at para 70 above, are in point. As the Committee stated, the effect of the scheme should be considered as it was intended to operate. So considered, the benefit to the employee was not truly dependent on the contingency set out in the condition. 88. The restrictive condition in the DB case was simpler but equally artificial. “Leaver” provisions in employee benefit arrangements often serve a genuine business or commercial purpose. But that cannot be said of the condition attached to the Dark Blue shares. The forfeiture provision operated for only a very short period, during which the possibility that it might be triggered lay largely within the control of the employee who would be adversely affected. It had no business or commercial purpose, and existed solely to bring the securities within the scope of section 423(2). Paras 22 and 23 of the opinion in Scottish Provident are again in point. DB deliberately included a contingency which created a minor risk, but one which the parties were willing to accept in the interests of the scheme. The scheme should therefore be considered as it was intended to operate, without regard to the possibility that it might not work as planned. 89. The appeals thus belong to the line of cases mentioned in Barclays Mercantile, where it was decided that “elements which have been inserted into a transaction without any business or commercial purpose did not, as the case might be, prevent the composite transaction from falling within a charge to tax or bring it within an exemption from tax” (para 35). That was the approach adopted, for example, in Inland Revenue Comrs v Burmah Oil Co Ltd in relation to what Lord Diplock described as “a pre-ordained series of transactions … into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable”
“35. ...We will say only that we consider that it may be possible, in some limited circumstances, for events taking place after the deadline for taking corrective action to have some bearing on the question whether it was “reasonable in all the circumstances” for a taxpayer not to take that action. The only example we have been able to think of, though it may be that with the benefit of full legal submissions from the Company we might have found more, is that of a taxpayer who, having received a follower notice, decides to continue to contest the underlying appeal considering that the “final judicial ruling” on which HMRC rely was either wrongly decided, or not determinative of the taxpayer’s appeal. Such a taxpayer could be assessed to a penalty as soon as the deadline is missed. The question whether it was “reasonable in all the circumstances” for the taxpayer to continue to 12 contest the appeal could, in our judgment, be informed by an analysis of how that appeal ultimately fares. For example, if it is struck out as having no prospect of success, that might suggest that it was not “reasonable in all the circumstances” not to take corrective action; the conclusion might be otherwise if the taxpayer is ultimately successful.”
“51. …We have seen some decisions from the FTT that have approached this as a largely arithmetic exercise: for example allocating a notional 20% amount of maximum mitigation to each of the five categories of “co-operation” specified in s210(3) and then deciding how much mitigation to award in each of those five categories in order to reach an overall penalty total. We consider that such an approach risks losing sight of the holistic nature of the exercise and also the fact that, given the overall purpose of the follower notice legislation to which we have referred, “counteraction” of the tax advantage should in most cases tend to attract greater credit than the other categories. It also gives rise to conceptual difficulties. To take an example, in some cases the “tax advantage” at issue might be so straightforward to quantify that HMRC have no real need of assistance that could constitute co-operation falling within s210(3)(a). If a notional 20% of maximum mitigation was available for that category, the question would arise whether the taxpayer should obtain no credit at all (which might operate harshly since if it provided all necessary co-operation in other categories it could still not obtain maximum mitigation) or whether it should obtain the full 20% of maximum mitigation (which might appear generous when HMRC in fact needed no assistance). 52. We will, therefore, apply the following approach when deciding what level of penalty to impose: (1) We will approach the question holistically. Recognising that not all of the categories of “co-operation” set out in s210(3) are relevant in this case, we will not seek to allocate an overall level of discount to each of those categories, but rather will seek to give the Company credit for the overall level of “co-operation” afforded. (2) We will recognise that the overall purpose of the regime is to discourage taxpayers from pursuing, without good reason, disputes about tax advantages which HMRC reasonably consider to have been determined in their favour in other final decided cases. Co-operation that comes closest to addressing that purpose should, accordingly, attract the greatest credit and conversely, if the Company’s actions, even if technically meeting the definition of “co-operation”, have done relatively little to meet the statutory purpose, correspondingly lower credit should be given. (3) Where the Company took steps falling within s210(3), we will consider the overall effectiveness of those steps in meeting the purpose of the provisions, recognising that even if those steps were not fully effective, and more could reasonably have been done, some partial credit may still be appropriate.”
“During the FN process period we did not ask your client for any information to enable the tax advantage to be quantified because all parties already knew what the quantum of the tax advantage was and had known that quantum for many years. There was nothing therefore for your client to co-operate with in that context.”