New figures indicate increased tax receipts from the banking sector. HMRC continues to pursue avoidance transactions through the courts, narrowly missing out on victory in Lloyds TSB Equipment Leasing but successfully challenging yet another PAYE and NICs scheme in Tower Radio. High risk promoters of these sorts of schemes face tougher sanctions under new proposals.

1. www.taxjournal.com ~ 13 September 2013
Bank taxation
Statistics published by HMRC on 30 August 2013
reveal that the banking sector generated more
in the way of PAYE receipts in 2012/13 than in
any previous year. No doubt, this will be taken as
confirmation that bankers have not been paying
themselves any less since the financial crisis,
regardless of what other factors may be in play.
Corporation tax receipts were greater than in
2011/12 – notwithstanding the 2% drop in the
rate – but are still some way off pre-crisis levels.
The bank levy makes up some of the difference.
HMRC may wish to take some of the credit for
increasing receipts by pointing to its continued
efforts to combat avoidance and ‘encourage’
compliance, including through the banking code
of practice.
Lloyds TSB Equipment Leasing
The taxpayer only just managed to hang on
to victory before the Upper Tribunal (UT)
in HMRC v Lloyds TSB Equipment Leasing
(No. 1) Ltd [2013] UKUT 0368 (TCC), a case
which involved leasing arrangements designed
to sidestep now repealed rules denying an
equipment lessor capital allowances where the
equipment was leased to a non-resident. In
particular, the arrangements were designed to
take advantage of the protected leasing let-out,
which applied where the relevant equipment was
a ship and used by a UK taxpayer in the course of
a trade of time chartering.
Statoil, a Norwegian energy company, had
agreed terms with a Japanese shipping company,
K-Line, for the commission and time charter of
two ships. Having explored a number of funding
options, the parties settled on a structure which
involved Lloyds Leasing taking a novation of the
shipbuilding contracts, with a view to becoming
(capital allowances) owner of the ships upon
completion, and entering into finance leases
with two Statoil/K-Line joint venture companies
based in the Cayman Islands. The joint venture
companies in turn granted bareboat charters of
the ships to K-Euro, a UK resident subsidiary of
K-Line with an existing container ship operation
business (albeit that business was transferred
out of K-Euro, and K-Euro’s role in the leasing
arrangements themselves somewhat diminished,
prior to commencement of the leases). In order to
complete the final link in the leasing chain, K-Line
novated the time charters it had already agreed
with Statoil to K-Euro. So K-Euro was intended to
be the UK taxpayer using the ships in the course
of a trade time chartering, thereby preventing a
denial of capital allowances at the Lloyd Leasing
level. But the exemption applied only if obtaining
capital allowances was not one of the main
objects of the transactions. HMRC challenged the
availability of allowances on a number of bases,
including that K-Euro was not trading and/or that
a main object of the transactions was to obtain the
allowances.
At the First-tier Tribunal (FTT) Judge Edward
Sadler, a leasing expert, found in favour of the
taxpayer on all key points, including on trade
and main object – conclusions on these issues
are typically treated as findings of fact and so
are difficult to overturn on appeal. Nevertheless,
HMRC did appeal, arguing that no person could
reasonably have come to the conclusions that
the FTT did on the facts and that in relation to
main object the FTT had misdirected itself on the
correct legal test.
The UT – Mr Justice Newey and Howard
Nowlan – held that there was sufficient basis
for the FTT’s view that K-Euro was trading. Mr
Justice Newey also found (by a hair’s breadth)
that the FTT had applied the correct legal test for
determining main object – an examination of the
possible range of objectives and their assessment
in some sort of hierarchy – and that he could not
go so far as to call its factual conclusion one that
no reasonable tribunal could have reached. Judge
Nowlan disagreed on both counts, however. He
thought the FTT had quoted the correct legal test
but then failed to apply it, treating the fact that the
transactions had achieved a commercial objective
as some sort of panacea. As for the facts, those
cited by Judge Nowlan paint a rather different
picture – seemingly of the parties and advisers
scrabbling to ensure that K-Euro was respected
as having commercial substance – from those on
which the FTT chose to focus. As chairman of
the tribunal, Mr Justice Newey’s view prevailed
and HMRC’s appeal was dismissed, but the split
decision on main object will almost certainly
result in a further HMRC appeal.
Tower Radio
Tower Radio Ltd and Total Property Support
Services Ltd v HMRC [2013] UKFTT 387
(TC) were joined cases (referred to below for
convenience as Tower/Total) involving taxpayers
who had bought the same scheme from a firm
of London accountants. Both companies had
significant reserves, which the persons who
were both the main founder shareholders and
the key directors/employees of the respective
Analysis
The tax and the City
briefing for September
SPEED READ New figures indicate increased tax receipts
from the banking sector. HMRC continues to pursue
avoidance transactions through the courts, narrowly
missing out on victory in Lloyds TSB Equipment Leasing
but successfully challenging yet another PAYE and NICs
scheme in Tower Radio. High risk promoters of these sorts
of schemes face tougher sanctions under new proposals.
Helen Lethaby has been a tax partner at Freshfields
Bruckhaus Deringer for seven years. She has experience
across the corporate tax spectrum, with a particular
emphasis on tax structured finance, leasing and funds
structuring, and advises a number of clients in the
banking and asset management sector. Email: helen.
lethaby@freshfields.com; tel: 020 7427 3506.
The FTT’s
decision in
Tower/Total
is difficult
to reconcile
with the
other
authorities
in this area
12

2. 13 September 2013 ~ www.taxjournal.com
companies wished to extract in as tax-efficient
manner as possible. It is worth pausing here, for
the case largely proceeds on the basis that the tax
avoidance at issue in the case was the avoidance
of employment income (including PAYE and
NIC); however, given the ‘business owner’ status
of the protagonists and the fact that they could
have paid themselves dividends, the case might
more naturally be seen as one of avoidance of
income tax on distributions. (Admittedly, in
Tower Radio at least, a dividend would have
accrued to the benefit of certain family member
shareholders as well, but presumably they could
have waived their dividend rights as easily as
they voted through the bonus proposal.)
The planning was designed to secure CGT
treatment (CGT then being chargeable at 18%,
or 10% with business asset taper relief) for
the extracted funds, as opposed to income tax
treatment (40% for employment income, plus
employee and employer NICs, or an effective
tax rate of 25% for dividends). It involved each
employer company using its reserves to subscribe
for two classes of shares in a new special purpose
company (SPC), and awarding the class carrying
the majority of the economic rights to the key
individual as a bonus, on terms that a cessation
of office or employment otherwise than by reason
of death would result in the individual being
required to sell the shares for 95% of their market
value. This restriction was intended to confer
‘restricted securities’ status on the SPC shares,
such that their award escaped an upfront income
tax charge by virtue of ITEPA 2003 s 425. The
plan was then that, sooner or later, the SPC would
be liquidated and its assets distributed to the
individual pursuant to his shareholder rights. As a
liquidation does not constitute a ‘chargeable event’
for the purposes of the restricted securities code,
no further income tax charge would arise and
instead the individual would be subject to CGT.
The FTT heard the case shortly after
publication of the UT’s decision in UBS AG and
DB Group Services (UK) Ltd v HMRC [2013] STC
68 (the UBS/DB case). These cases also involved
planning designed to exploit the restricted
securities code (originally conceived of as a means
to prevent vesting and transfer restrictions from
depressing a day one income tax charge). The
UT held in the UBS/DB case that the prescriptive
nature of the code did not lend itself to a broad-
brush Ramsay approach and that the cases stood
or fell on their technical merits.
The FTT in Tower/Total also had to take into
account the Court of Appeal’s decision in PA
Holdings Ltd v HMRC [2012] STC 582, which
considered that the essential nature of certain
dividends as employment income meant that the
employment income rules took precedence over
any other head of charge.
Cutting a long and complex story short, the
FTT considered that the Tower/Total facts were
different from those in UBS/DB, predominantly
because the employee beneficiaries in Tower/Total
controlled the relevant companies, whereas the
employees in UBS/DB, being employees of large
international banks, did not. Because the Tower/
Total individuals could effectively control the flow
of funds from start to finish, Ramsay did apply
to recharacterise the liquidation proceeds as a de
facto cash bonus, following the line of authorities
including DTE Financial Services Ltd v Wilson
[2001] STC 777. Interestingly, the FTT did not
apply PA Holdings (or even more recently Sloane
Robinson Investment Services Ltd v HMRC [2012]
SFTD 1181) to hold that the entitlement to bonuses
had crystallised before the mechanics were put in
motion, but rather treated the arrangements as the
mode of delivery on Ramsay grounds.
The FTT’s decision in Tower/Total is difficult
to reconcile with the other authorities in this
area, but it was arguably operating on a false
premise – that the case was about avoiding tax on
employment income. It would perhaps have made
for a more coherent decision had HMRC treated
the scheme as one of dividend tax avoidance
and challenged it under, say, the transaction in
securities rules.
High risk promoters
HMRC remains committed to tackling the
‘dodgy’ tax advisers who resist information
requests and fail to inform their clients of the
risks of entering into tax avoidance schemes. A
consultation document entitled Raising the stakes
on tax avoidance, published on 12 August 2013
(available via www.lexisurl.com/hx677), seeks
views on a number of new measures, including:
„ the criteria for identifying ‘high risk
promoters’, including a mixture of objective
and subjective criteria;
„ graduated procedures for dealing with high
risk promoters, including informal enquiries,
voluntary undertakings, designations and
appeals;
„ the sanctions to be attached to high risk
promoter status, including beefed-up
information powers, naming and shaming
(including mandatory self-naming as part of
the marketing process), and obligations on
intermediaries and users;
„ a statutory override of any contractual
obligations with respect to confidentiality
and/or disclosure to HMRC; and
„ further penalties for non-compliance.
HMRC is also investigating ways of tackling
rogue advisers accused of ‘misselling’ tax
schemes, and is proposing penalties for taxpayers
who fail to amend their tax returns following
an HMRC win in a case on a mass-marketed
scheme.
The disclosure of tax avoidance schemes
regime (DOTAS) generally remains under review,
with HMRC seeking informal feedback on the
effectiveness of the regime and HMRC’s new
approach to communications. „
For related
reading, visit
www.taxjournal.com
News: Corporation
tax and PAYE
stats published for
2012/13 (5.9.13)
Cases: HMRC
v Lloyds TSB
Equipment Leasing
(Alan Dolton, 28.8.13)
Tower Radio: PAYE
and NIC mitigation
schemes (Philip
Fisher, 2.8.13)
Raising the stakes
on tax avoidance
(Heather Self, Ray
McCann, Michael
Avient & Jonathan
Levy, 30.8.13)
HMRC
remains
committed
to tackling
the ‘dodgy’
tax advisers
13