The Commissioners for HM Revenue and Customs v Andreas Rialas [2020] UKUT 0367 (TCC) [2020] UKUT 0367 (TCC)

UPPER TRIBUNAL

TAX AND CHANCERY CHAMBER

[2020] UKUT 0367 (TCC)

Case No UT/2019/0140

Between

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMSAppellant

ANDREAS RIALASRespondent

Before

MR JUSTICE MEADE

JUDGE JONATHAN RICHARDS

Sadiya Choudhury (instructed by the General Counsel and Solicitor for Her Majesty’s Revenue & Customs for the Appellants Alastair Wilson and Menna Bowen, of Gunnercooke LLP) for Respondent

Date 18 December 2020

Category: Tax

[71]If this argument were correct then it would mean that the establishment of any non-resident trust by a UK resident individual, with however small an initial contribution, could lead to that individual being taxable on the income from any investments which such a trust might acquire, directly or indirectly, from anywhere in the world, even though the whole of the funds required in order to acquire those investments had been borrowed. We do not believe that this is a consequence which could have been in the mind of Parliament or indeed the draftsman of this legislation. This is simply going too far.

[72]The objective of s739 and its successor provisions is to deter a UK resident individual from transferring abroad income producing assets which he already owns or controls, such that he might avoid future UK taxation on the income from those assets. This suggested interpretation extends s739 way beyond that objective and cannot therefore be correct. In its appeal to this Tribunal, HMRC effectively re-present their primary and secondary arguments set out at [17]. We will consider the detail of those submissions in the next section. However, the core of HMRC’s arguments on the non-EU law issue can be summarised as follows:(1) The FTT misunderstood the true effect of the House of Lords’ judgment in Vestey by proceeding on the basis that an individual who had not actually 8 effected a “transfer of assets” could be assessed under s739 only if he or she had “procured” the transfer. In fact, Vestey established that “procuring” a transfer was just one basis on which such a “non-transferring” individual could be made liable. There were other bases as well and, given Mr Rialas’s close involvement with the structuring and financing of the transaction, he could have been liable to tax under s739 even though he did not actually “procure” Mr Cressman to sell his Argo shares to Farkland.

(2) The FTT dismissed HMRC’s alternative argument simply because it thought that the C£10 was too small a sum of money to support it. The FTT’s conclusion was also vitiated by a misunderstanding of the purpose of s739 (as set out at [72] of the Decision) and of the consequences of HMRC’s argument (at [71]). Discussion Previous authorities Given the way in which HMRC advance their arguments, we will start with our own analysis of relevant authorities dealing with s739 and its predecessors. We start with the case of Congreve. In that case, the relevant “transfer of assets” was actually made by a company. The taxpayer (Mrs Congreve) held a controlling shareholding in the company that effected the transfer and her father (Mr Glasgow) was a director of that company. The transfer of assets resulted in Mrs Congreve having “power to enjoy” income received by a non-resident person and HMRC sought to assess her under a predecessor to s739. Mrs Congreve s argued that she could not be assessed because she had not herself effected the transfer. The House of Lords rejected that argument with Lord Simonds saying, at 205: The language of the Section is plain. If there has been such a transfer as is mentioned in the introductory words, and if an individual has by means of such transfer (either alone or in conjunction with associated operations) acquired the rights referred to in the Section, then the prescribed consequences follow. In the present case, such a transfer was made, though not by Mrs Congreve personally; she did acquire the rights in question; the assessment was therefore correctly made. The Court of Appeal in Congreve had set out an alternative basis on which the assessment on Mrs Congreve could have been upheld, namely that, although she did not herself effect the transfer of assets, she procured that transfer, with Cohen LJ saying, at 197: … it is, we think, in the present case, a reasonable inference from the facts found that the execution and performance of the transfers and associated operations in question by all the companies concerned were procured by Mrs Congreve acting through her agent Mr Glasgow. We should have been prepared, if it had been necessary, on this alternative ground to uphold the decision of the Commissioners. 9 It was common ground between the parties that the main ratio of Congreve, set out at [26] above was reversed by the subsequent decision of the House of Lords in Vestey. It was also common ground that the Court of Appeal’s alternative ratio, set out at [27] was not overruled and remains good law. Vestey concerned a situation where there was a large number of beneficiaries, and potential beneficiaries, with “power to enjoy” income arising in consequence of a transfer of assets. However, despite the fact that those beneficiaries had no involvement at all with the transfer of assets, the then Inland Revenue was claiming that the predecessor provision to s739 gave them power to assess each beneficiary to income tax on the whole of the trust’s income with a broad administrative discretion as to which beneficiaries to assess and in what amounts. The Inland Revenue’s approach was supported by the decision in Congreve. All members of the judicial panel agreed that the Inland Revenue’s interpretation of the law could not be supported. As Ms Choudhury pointed out in her skilful submissions, however, their reasoning differed. Lord Wilberforce (with whom Lord Salmon and Lord Keith expressed themselves to agree) approached the matter by concluding that the ratio of Congreve set out at [26] was the “main ratio” of that decision and led to the result for which the Inland Revenue argued. Lord Wilberforce characterised that result, as “arbitrary, unjust, and in my opinion unconstitutional”. Since it produced such a result, he considered that doubt was cast on the decision in Congreve. Lord Wilberforce then set out a different interpretation of the provision that avoided the unjust result as follows: There are undoubtedly two possible interpretations of s412, particularly having regard to the preamble. The first is to regard it as having a limited effect: to be directed against persons who transfer assets abroad; who by means of such transfers avoid tax, and who yet manage when resident in the United Kingdom to obtain or be in a position to obtain benefits from those assets. For myself I regard this as being the natural meaning of the section. This avoids all the difficulties discussed above. No difficulty arises from cases of multiple transfers. The second is to give the whole section an extended meaning, so as to embrace all persons, born or unborn, who in any way may benefit from assets transferred abroad by others. This is or follows from the Congreve interpretation. This I regard as a possible but less natural meaning of the section. Having canvassed arguments in favour of, and against, the competing interpretations, Lord Wilberforce said: My Lords, these and other arguments, together with the linguistic, persuade me that the better interpretation of the section is not that accepted in [Congreve] but is one limiting its operation and charging effect to the transferors of assets. He then reflected on whether it was right to overrule Congreve, expressing his overall conclusion as follows: 10 My Lords, we have not, I hope, in recent years become so habituated to fiscal severities or to “overkill” sections as to be insensitive to those proprieties which were so eloquently stressed by Walton J in his judgments. It is respect for these and for the fabric of our fiscal law which persuade me that Congreve, as to its principal ratio, and the following cases, should be departed from or overruled and the section as applying only where the person sought to be charged made, or may be, was associated with, the transfer. Viscount Dilhorne agreed that Congreve should be overruled but set out a slightly different approach that focused on the correct construction of the term “such an individual” in what is now s739(2). By focusing on this term, Viscount Dilhorne determined that: The choice lies between the section having a limited application, applying only to the individual who has sought to avoid income tax and his or her spouse and a wide application to all individuals who have rights bringing them within subs (1) or who have received a capital sum within subs (2), however, innocent of tax avoidance an individual might be… Having expressed the question in those terms, Viscount Dilhorne determined that: …the section only applies to the individual who has sought to avoid tax and to his or her spouse. Therefore, whereas Lord Wilberforce had concluded that a person could only be charged if he or she “made, or may be, was associated with, the transfer”, for Viscount Dilhorne, the relevant question was whether that individual had “sought to avoid tax”. As we have noted, both Lord Keith and Lord Salmon expressed agreement with Lord Wilberforce. However, that might not itself fix the ratio of the case as being that set out in Lord Wilberforce’s speech because Lord Keith also expressed agreement with the speech of Viscount Dilhorne, in the following terms: I consider that the natural and intended meaning of the words “such an individual” in section 412 (1) is that they indicate not merely an individual ordinarily resident in the United Kingdom, but an individual so resident who has sought to avoid liability to income tax by means of such transfers of assets as are mentioned in the preamble. And Lord Edmund-Davies, in his speech, appeared to echo the approach of Viscount Dilhorne (in slightly different terms from Lord Keith), saying: In my judgment, the words “such an individual” appearing in subs (1) and (2) hark back to the opening words of the preamble, namely to individuals whose purpose is the avoidance of liability to tax, and do not refer simply to any individual “ordinarily resident in the United Kingdom”. If, therefore, we were the first court of record to consider the judgment in Vestey, our task in determining the ratio of that judgment might not have been entirely straightforward. Three of their Lordships agreed with an approach that focused on 11 whether an individual had made, or “may be” had been associated with, a transfer and up to three (depending on the view to be taken of Lord Keith’s opinion) agreed with an approach that invited an analysis of whether the individual had sought to avoid tax. Had we had to decide the point entirely ourselves we would have preferred the view that Lord Keith associated himself with Lord Wilberforce’s analysis, by his use of the words “by means of such transfers of assets”, although admittedly this is not the strongest pointer. There is no inconsistency between this and Lord Keith’s general agreement with Lord Dilhorne’s conclusions as to the overall result, and that Congreve should be overruled. However, this issue has in any event previously been considered by courts whose superiority is co-ordinate with that of this Tribunal. In Pratt, Walton J approached matters on the basis that the ratio of Vestey on the relevant issue appeared in Lord Wilberforce’s speech saying, at 791b: … the House of Lords, in [Vestey], decided that the astonishingly rigorous provisions of the section only applied to persons who themselves transfer assets abroad. It does not in any way apply to persons who may benefit from such transfer if they themselves have not made the relevant transfer… As we therefore now know, strictly, of course the question in relation to an individual sought to be taxed under s412 is is that person ‘such an individual’ as is mentioned in sub-ss (1) and (2) of s412, that is to say, a person who has sought to avoid liability to income tax by means of a transfer of assets, which, being reduced to its simplest element, means that the individual in question must, as the first step, be a transferor of assets. This is hereafter the form in which the question will be posed. Therefore, in Pratt, Walton J perceived his task as being to decide whether the individuals whom the Inland Revenue were seeking to tax were “transferors”, a term which he introduced as part of his application of Lord Wilberforce’s approach. In setting about that task, Walton J noted that the alternative ratio in Congreve remained undisturbed and so concluded at 792b: So here we have it established that a person who is not a transferor may nevertheless be liable as if he were a transferor, if he ‘procured’ the transfer. It is convenient to use the phrase of junior counsel for the Crown and call such a person a ‘quasi transferor’. Pausing there, Walton J was not purporting to determine that individuals who had not themselves made a transfer could only face a liability to tax under s739 by “procuring” a transfer. The conclusion was more limited: persons who “procured” transfers could be taxed under s739 in the same way as persons who effected transfers themselves. Put another way, Walton J was concluding that, for individuals who were not themselves transferors, ‘procuring’ a transfer was a sufficient condition for liability under s739. He did not purport to decide that it was a necessary condition. He did, however, determine, at 796j that, “having a hand in” or being “associated with” a transfer was not sufficient to make an individual a “transferor”. 12 The decision of the Upper Tribunal in Fisher took matters further by offering more guidance on the circumstances in which an individual could be made liable under s739 despite not having made a transfer himself or herself. At [70] of its decision, the Upper Tribunal held that the relevant question in such a case was “who was the real transferor?”. At [72], the Upper Tribunal amplified this point saying that the question could not be answered by posing general questions such as whether a person “organised”, “brought about”, “engineered”, “caused” or even “procured” the transfer: … if any of those expressions is used to describe a situation in which the actual transferor is not in any sense acting for, or induced by, or under the control of, the individual taxpayer in making the transfer of assets. There must be some proper basis for ascribing the acts of the person transferring the assets to the individual concerned and treating him as being responsible for the transfer as if he had carried it out himself. If the individual has no influence over what the actual transferor does with the assets, there is no good reason why he should be treated as the “real” Transferor. It does not follow that in all cases in which the individual plays some part in the actual transferor’s decision-making, he should be treated as having made the transfer himself. HMRC’s first argument set out at [17(1)] Before we address the detail of HMRC’s submissions, we will address Ms Choudhury’s argument, developed in her oral submissions, that the true ratio of Vestey might not be found in the speech of Lord Wilberforce. As we have observed, it is not entirely straightforward to discern the ratio of Vestey. However, Walton J in Pratt determined that Lord Wilberforce’s speech did set out the ratio and indeed, in the light of that speech, coined the expression “transferor” to describe the individuals who could, provided other conditions were met, be made liable to tax under s739. We are not bound by the High Court’s judgment in Pratt (see Gilchrist v HMRC

[2014] UKUT 0169 (TCC)

) although we will follow that judgment unless we are satisfied that it is wrong (paragraph 94 of Gilchrist). We are not satisfied that the decision in Pratt on this issue is wrong, and on the contrary, for the reasons we set out above we would have reached the same conclusion. HMRC criticise the FTT’s rejection of their first argument, set out at [17(1)] as being unduly concerned with the question whether Mr Rialas “procured” the transfer of Mr Cressman’s shares, which was simply a gloss on the legislation and no substitute for a consideration of its terms. HMRC make a similar point about the FTT’s use of the words “transferor” and “quasi-transferor”. The FTT could, perhaps, usefully have emphasised that the words “transferor” and “quasi-transferor” were glosses on the legislation derived from the judgment of Walton J in Pratt. It could also perhaps have made it clear that the concept of “procuring” a transfer was also a judicial gloss and, moreover, did not set out a necessary condition for Mr Rialas to face a liability to s739 in relation to a transfer of assets consisting of the Argo shares. But those are minor criticisms of the way that the FTT expressed itself. In evaluating HMRC’s first argument, the FTT foreshadowed the approach of the Upper Tribunal in Fisher. In effect, it asked itself whether Mr Rialas was the “real transferor”. 13 Moreover, the FTT clearly considered, consistent with the approach set out at [72] of Fisher, that since Mr Rialas had no influence over what Mr Cressman did with his assets, he could not be treated as the “real transferor”. HMRC argue that following the approach in Fisher could not save the FTT from falling into error because the facts of Fisher were different. For example, in Fisher, the transfer in question was made by a company in which none of the individuals whom HMRC were seeking to tax had a controlling interest. Moreover, in Fisher, the FTT had found that the avoidance of income tax or corporation tax was not a purpose of the transaction. We do not accept that submission. There were factual differences between this appeal and the case of Fisher. However, as we think Ms Choudhury ultimately accepted in response to questions from the Tribunal, the FTT was following the same approach as that applied by the Upper Tribunal in Fisher. It follows that we can only conclude that the FTT’s approach is wrong in law if we conclude that the Upper Tribunal’s approach in Fisher was similarly wrong. As with Pratt and for essentially the same reasons, we are not so satisfied. HMRC’s next criticism was that the FTT had found (at [63] of the Decision) that Mr Rialas was the “only game in town” in the sense that, realistically, there was no-one else to whom Mr Cressman could realistically hope to sell his shares for some $15m. Therefore, they argue that it was only because of Mr Rialas’s efforts, particularly in relation to obtaining finance from Magnetic, that any transfer of those shares was possible. The difficulty with this submission is that it flies in the face of the Upper Tribunal’s decision in Fisher quoted at [42] above. Crucial though Mr Rialas’s involvement was, the FTT’s finding, which HMRC do not challenge, was that Mr Rialas had no control over whether Mr Cressman sold his shares. There is certainly no support in any of the FTT’s findings that Mr Rialas was so responsible for Mr Cressman’s transfer of shares so that he should be treated as if he had carried it out himself. In a similar vein, we dismiss HMRC’s argument that the FTT erred by approaching the issue, based on the decision of the Special Commissioners in Carvill, that it would only be in an “exceptional case” that Mr Rialas could be made liable to tax under s739, on the basis of a transfer of assets consisting of Mr Cressman’s Argo shares, without himself having transferred those shares. “Exceptional” or not, the FTT approached the matter in the way mandated by Fisher, by asking whether Mr Rialas should be treated as the “real transferor” of those shares. Accordingly, before we could conclude that the FTT erred in rejecting HMRC’s first argument, we would need to decide that either or both of the decisions in Pratt and Fisher were wrong, and we do not do so, for reasons given above. If either of those decisions is to be overruled, that will be a matter for the Court of Appeal which is hearing an appeal against the Upper Tribunal’s decision in Fisher next year. We dismiss HMRC’s appeal on the basis of their first argument. 14 HMRC’s secondary argument set out at [17(2)] HMRC’s secondary argument proceeds by reference to the following line of reasoning: (1) The payment of C£10 to the Rialco Trust was a transfer of assets that was unquestionably made by Mr Rialas. (2) The Rialco Trust used that C£10 to purchase the subscriber shares in Farkland. That was an “associated operation” in relation to the C£10 “transfer of assets”.

(3) Without Farkland being held by the Rialco Trust, there would be no vehicle available to acquire Mr Cressman’s shares and so no vehicle to receive dividends paid on those shares. Moreover, without the Rialco Trust being constituted, with Mr Rialas as a beneficiary, Mr Rialas would have no “power to enjoy” income received by Farkland.

(4) Therefore, the relevant requirements of s739 were met such that Mr Rialas could be assessed to tax on dividends received by Farkland. That argument can be dismissed briefly. The statutory requirement is that the receipt of income by non-residents must be “by virtue or in consequence of” the transfer of assets and associated operations. No doubt the establishment of the Rialco Trust and that trust’s acquisition of the subscriber shares in Farkland were necessary preconditions to the transfer of Mr Cressman’s shares as those steps were important to the acquisition structure that Mr Rialas put in place. However, that is not the same thing as saying that Argo paid dividends to Farkland in “by virtue or in consequence of” the establishment of the Rialco Trust or that trust’s acquisition of the subscriber shares, or a combination of both. Put another way, the establishment of the Rialco Trust, and the acquisition of the subscriber shares in Farkland, did not themselves enable Farkland to receive dividends on the Argo shares. The receipt of such dividends could only be guaranteed once Mr Cressman had, additionally, agreed to sell those shares and Farkland had funds to pay the purchase price due. Perhaps with an eye on that objection, Ms Choudhury sought, in passages in her submission, to expand the scope of the relevant “associated operations” to include Farkland’s borrowing of $15.3m from Magnetic and its acquisition of the Argo shares themselves. However, the FTT was correct to note, at [70], that these transactions could not be relevant in the context of HMRC’s second argument since they were not operations “in relation to”, the transfer of the C£10 as required by s742(1). The FTT perhaps exaggerated at [71] of the Decision when it said that, if HMRC’s argument was correct, any establishment of any non-resident trust would inevitably lead to a charge under s739. At the very least, a charge would only arise if the exemption in s741 was not available. In addition, we agree with HMRC that the statute does not provide that s739 is to apply only in the context of assets which an individual already owns (see [72] of the Decision). However, these are relatively minor quibbles with the Decision. The FTT’s core conclusion, that HMRC’s secondary argument should be rejected, was correct. 15 Disposition For reasons we have given, HMRC’s appeal against the FTT’s conclusion that Mr Rialas could not be assessed under s739 fails. In those circumstances, it is not necessary for us to decide whether the FTT was correct in its conclusion to the effect that a charge under s739 would infringe his EU right to free movement of capital. We told the parties this at the conclusion of the hearing. We also thought that limiting this decision to the first point would enable our reasons to be given more quickly, and without prejudging the right course or the position of any party, that may allow better co-ordination of any appeal with the appeal in Fisher. MR JUSTICE MEADE JUDGE JONATHAN RICHARDS Signed on original RELEASE DATE: 18 December 2020