“(1) whether contributions made by MDPL (which enabled those funds to pass into Dr Thomas’ hands as loans) are to be regarded as remuneration or a reward for the provision of Dr Thomas’ services as director of MDPL on the basis that that role is the reason why MDPL made the contributions or is a sufficiently substantial case of the contributions for this test to be met; or (2) whether MDPL made the contributions for a different reason such that they have a non-employment source, the only identifiable other reason being that they were made in respect of Dr Thomas’ shareholding in MDPL.”
“(1) There was no contractual obligation on MDPL to pay the sums as a reward for Dr Thomas’ services as director/dentist and there is nothing in any of the documents or evidence to suggest that that was the reason for the extraction of MDPL’s funds into Dr Thomas’ hands. (2) The sums paid to Dr Thomas comprised the totality of the overall profits of MDPL’s business, as computed after the deduction of expenses, such as salaries paid to those employed by MDPL including the relatively small salary paid to Dr Thomas and, accordingly they were paid out sporadically. (3) Dr Thomas’ evidence was that, had those profits not been routed through the RT arrangements, they would have been paid to him by way of dividend and not as salary. It lends support to the credibility of Dr Thomas’s evidence in this respect that: (a) As Mr Firth noted, it is a well-known common practice for a sole owner and director of a company to organise matters such that the relevant company pays him or her a low salary and much more substantial dividend payments (and see the comment in [130] below). (b) That is how Dr Thomas extracts profits from the company he now operates through now he no longer uses the RT arrangements and, as noted, MDPL paid him a small salary during the periods in question. (4) For the reasons set out in full below, we do not accept HMRC’s view that Dr Thomas’ evidence is not relevant. In short, (a) his evidence, as the controlling mind of MDPL, indicates that its purpose, in putting in place steps to extract the funds into the hands of Dr Thomas, was to provide him with a return on his investment in it as shareholder in the same way as if it had formally declared and paid a dividend, and (b) it does not detract from this that Dr Thomas and MDPL did not consider that MDPL was making a dividend or check that in making the relevant contributions MDPL was not making an unlawful distribution for company law purposes.”
“127. …[I]t is plain from the caselaw that sums constitute earnings if they are paid as remuneration or a reward in return for a person’s services as an employee. The courts have consistently recognised that, given the test is centred on why or in return for what a payment is made, establishing the purpose of an employer in making a payment is key to assessing, as it was put in PA Holdings, its character in the hands of the recipient “looking at its substance and not its form”
“43. Mr Ghosh suggested in his submissions that, on the basis of this evidence, Dr Thomas accepted that he would have received 100% of the contributions as loans even if there had been another shareholder such as his wife. However, we do not accept that conclusion can be drawn from this evidence. In cross examination the relevant questions were focussed on whether, if Dr Thomas had not held all the shares in MDPL, that would have made any difference to the sums contributed to MDPL. Dr Thomas was not asked whether if the shareholdings were different he would still have received all the sums contributed by way of loan. … 49. It was put to Dr Thomas that the loans he received had nothing to do with him holding shares in MDPL; it was just a good way of extracting that money tax-free. He said: “That’s what I was told, yes”
“55. In relation to an appeal which is said to involve a point of law of the kind identified in Edwards v Bairstow, we were reminded by HMRC of what was said by Evans LJ in Georgiou v Customs and Excise Commissioners[1996] STC 463 at 476, as follows: “It is right, in my judgment, to strike two cautionary notes at this stage. There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law. That is well seen in arbitration cases and in many others. It is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way. Secondly, the nature of the factual inquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact. The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made? In other words, was the finding one which the tribunal was entitled to make? Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled.” 56. He continued: “... for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make.” “It is right, in my judgment, to strike two cautionary notes at this stage. There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law. That is well seen in arbitration cases and in many others. It is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way. Secondly, the nature of the factual inquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact. The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made? In other words, was the finding one which the tribunal was entitled to make? Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled.” “... for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make.”
“What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal’s conclusion was against the weight of the evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court.””
“67. We note whilst Dr Thomas accepted that looking at the documents now there are statements in them that are untrue, he was not questioned about (a) whether or, the extent to which, he realised that the relevant statements were untrue at the relevant time when the transactions were entered into (other than as regards the fact that, as he accepted, he must have known that he had not prepared the answers in the questionnaire), or (b) whether he had intended to mislead HMRC in entering into the documents with these statements in them (as opposed to being asked whether the documents were designed to be misleading). We do not, therefore, find it appropriate to express any opinion on whether Dr Thomas knowingly intended to mislead HMRC. We note also that given concessions made by MDPL at the hearing, we do not need to make any findings as to whether Dr Thomas/MDPL acted “deliberately” within the meaning of the relevant legislation.”
“(4) [Dr Thomas] agreed that the statements in the questionnaire do not reflect the running of the proposed scheme and that statement in the written resolution that the director made them was untrue when made as he must have known at the time.”
“Those responses continued to accurately reflect the purpose of the company in establishing the proposed scheme.”
“113. Because of the delay in giving judgment, it has been incumbent on us to look with especial care at any finding of fact which is now challenged. In ordinary circumstances where there is a conflict of evidence a judge who has seen and heard the witnesses has an advantage, denied to an appellate court, which is likely to prove decisive on an appeal unless it can be shown that he failed to use, or misused, this advantage. We do not lose sight of the fact that the judge had transcripts of the evidence, as well as very extensive written submissions from counsel. But the very fact of the huge delay in itself weakened the judge’s advantage, and this consideration had to be taken into account when we reviewed the material which was before the judge. In a case as complex as this, it is not uncommon for a judge to form an initial impression of the likely result at the end of the evidence, but when he has come to study the evidence (both oral and written) and the submissions he has received with greater care, he will then go back to consider the effect the witnesses made on him when they gave evidence about the matters that are now troubling him. At a distance of 20 months, Harman J. [the trial judge] denied himself the opportunity of making this further check in any meaningful way.”
“(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,…”
“137. We agree with MDPL’s view that, reading s 554A(1)(c) in context, for there to be a “connection” of the required kind with Dr Thomas’ employment, the employment must be part of the reason for the reward, recognition or loan. On that basis, an assessment of whether [it] is reasonable to suppose that, in essence the RT arrangement so far as it relates to Dr Thomas 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 Dr Thomas’ employment requires essentially the same analysis as that set out in relation to whether the relevant sums constitute earnings. Accordingly, we have concluded that this test is not met as regards the connection test for all the same reasons as are set out above.”
“[38] The words 'in connection with' are probably as broad a formulation as will be found in statutory provisions for linking A with B. It is a question of fact whether a connection exists within the meaning of the statutory provision in question. In s 612(1) nothing more is required than the payment should be given in connection with past service. The relevant facts are not here in dispute. Where, as here, the free tax service was provided to retired employees and their spouses, because they had been employees or were married to retired employees, it is to my mind clear that the service was provided in connection with past service.”
“[69] These cases show that the meaning of "on, or in connection with" is heavily dependent both on context and policy. The phrase might require what Robert Walker LJ in Coventry Waste referred to as "a strong and close nexus" or it might require "a weak and loose one". Ben-Odeco v Powlson introduces the concept of remoteness, which is another way of considering the same question.”
“The June 2010 Budget announced that legislation would be introduced from April 2011 to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities.” introduced from April 2011 to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities.”
“23. Lord Steyn’s speech in R (Westminster City Council) v National Asylum Support Service[2002] UKHL 38 establishes that Explanatory Notes to Finance Bills can in principle be relied on as an aid to construction as they may: ‘…cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed…’ Moreover, the statute does not have to be ambiguous before a court or tribunal can have regard to evidence of the contextual scene set out in the Explanatory Notes. 24. However, the relevance of Explanatory Notes should not be overstated. It is important to bear in mind that Explanatory Notes might simply reflect the views of the Government (as distinct from Parliament) and, moreover, that Explanatory Notes will often include summaries of statutory provisions prepared by people who are unskilled in statute law. 25. Thus, in R (Westminster City Council) v National Asylum Support Service Lord Steyn said at [6] of his speech: ‘What is impermissible is to treat the wishes and desires of the Government about the scope of the statutory language as reflecting the will of Parliament. The aims of the Government in respect of the meaning of clauses as revealed in Explanatory Notes cannot be attributed to Parliament. The object is to see what is the intention expressed by the words enacted.’ 26. The 7th edition of Bennion on Statutory Interpretation summarises the position as follows at [24.14]: ‘Although explanatory notes may therefore be useful as an aid construction, the courts will resist attempts to elevate the notes to a status where they supplant the language of the legislation itself. There is also always a risk that the notes will be wrong or misleading.’” ‘…cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed…’ ‘What is impermissible is to treat the wishes and desires of the Government about the scope of the statutory language as reflecting the will of Parliament. The aims of the Government in respect of the meaning of clauses as revealed in Explanatory Notes cannot be attributed to Parliament. The object is to see what is the intention expressed by the words enacted.’ ‘Although explanatory notes may therefore be useful as an aid construction, the courts will resist attempts to elevate the notes to a status where they supplant the language of the legislation itself. There is also always a risk that the notes will be wrong or misleading.’”
“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.” (Emphasis added)
“We anticipate that the company will have some knowledge of the transactions to which the liability relates. Whatever the level of knowledge of officers of the company has been before now, you need to know that HMRC believes that the payments are arguably within theIncome 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.”
“All employees and officers of the company who are liable for tax on 'employmentIncome' (as defined by Section 7, Income Tax (Earnings and Pensions) Act 2003 ) arising in connection with the company's Remuneration Trust arrangements.”
“[65] Thus, on one interpretation of its decision, the FTT appears to have found that SAML and SFML had incurred expenditure for the purposes of their trade, but that because those companies then decided to incur that expenditure in a particular way, their objects in incurring it came to include in addition the object of avoiding corporation tax. [66] If that was the FTT's reasoning we do not agree with it. That reasoning would be to confuse the object of the expenditure with the reasons for incurring it in the way in which it was in fact incurred. As we have already noted at para [55], above, a taxpayer is entitled to order its affairs in a way which incurs the least tax liability and the mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose. It does not, therefore, necessarily follow that the adoption of the scheme by SAML and SFML results in a duality of purpose (although it may do so as a matter of fact) unless this is one of those cases referred to by Lord Oliver in MacKinlay v Arthur Young[1989] STC 898 at 905,[1990] 2 AC 239 at 255 (see para [53], above) where the results (in the present case, the securing of deductions) are so inevitably and inextricably involved in particular activities (in the present case, the making of the contribution and the effecting of the scheme) that they cannot but be said to be a purpose of those activities.”
“[71] Thus we conclude that the FTT's decision contains a finding that one of the purposes of the contributions, in contrast with the purpose of the method of effecting the expenditure by way of the scheme, was to obtain a corporation tax deduction which would not have been available if the contribution had been made by more conventional means, and that in these particular circumstances such purpose was not an incidental consequence of the expense. Whatever else, the FTT did not conclude that because the tax benefit was a consequence of the contribution, it was a purpose of the expense.”