Case Preview: UBS AG v HMRC; DB Group Services (UK) Ltd v HMRC
27 Friday Nov 2015
On the 3 December 2015 the Supreme Court will hear HMRC’s appeal of the decision in DB Group Services (UK) Ltd v HMRC and HMRC v UBS AG  EWCA Civ 452.
In early 2004, UBS and DB each devised and instigated similar schemes that were designed to avoid income tax and National Insurance Contributions (“IT & NICs”) on bonuses provided to their employees. The schemes operated by giving employees bonuses in the form of “restricted securities”, under the provisions of the Income Tax (Earnings and Pensions) Act 2003, Pt 7, Chapter 2, in an offshore special purchase vehicle which would be redeemed for cash at a later date. However, HMRC determined that IT & NICs were payable on the value of the restricted securities awarded to the employees as earnings from their employment.
For each scheme to be successful it was necessary for them to fall within both the definition of “restricted securities” as set out in Chapter 2, and also the exemption set out in Income Tax (Earnings and Pensions) Act 2003, Pt 7, Chapter 2, s 429 (the “s 429 exemption”). Whether the schemes fell within the s 429 exemption depended on whether UBS or DB were an “associated company” of the special purchase vehicles to which the restricted securities were being issued (to the employees). In addition it was important that the schemes did not fall foul of the Ramsay principle, which requires the relevant legislation to be construed purposively and the facts to be viewed realistically.
Hearing the cases together, the First-Tier Tribunal held that the shares acquired in the UBS scheme were not restricted securities under Chapter 2 and therefore could not benefit from the s 429 exemption. The First-Tier Tribunal held that the shares acquired in the DB scheme were restricted securities under Chapter 2 and could therefore potentially benefit from the s 429 exemption. The First-Tier Tribunal held that DB was not an associated company of the special purchase vehicle and the s 429 exemption would therefore be available to the DB scheme, in principal. However, the First-Tier Tribunal determined that, by following the Ramsay principle, and applying a purposive interpretation of Chapter 2 to the schemes as a whole, the sole purpose of both schemes was to avoid IT & NICs charges on bonus payments to employees. Consequently, the First-Tier Tribunal decided that both schemes fell outside the scope of Chapter 2 and the s 429 exemption. The First-Tier Tribunal’s decision left both UBS and DB facing large bills for IT and employee and employer NICs, possibly with penalties and interest as well. Consequently, both appealed to the Upper Tribunal.
Upper Tribunal decision
The Upper Tribunal overturned the First-Tier Tribunal’s decision that the shares acquired in the UBS scheme were not restricted securities under Chapter 2. Furthermore, the Upper Tribunal confirmed that the UBS scheme could indeed benefit from the s 429 exemption. Finally, the Upper Tribunal overturned the First-Tier Tribunal’s decision that the Ramsay principle brought the scheme outside the provisions of Chapter 2. The Upper Tribunal noted that the First-Tier Tribunal’s reasoning was very difficult to follow and that, once it was accepted that the shares were restricted securities within the meaning of Chapter 2, it was impossible to argue that the scheme fell outside Chapter 2. The Upper Tribunal therefore concluded that the UBS scheme did benefit from the s 429 exemption.
In relation to the DB scheme, the Upper Tribunal confirmed the First-Tier Tribunal’s decision that the shares were restricted securities under Chapter 2. However, the Upper Tribunal overturned the First-Tier Tribunal’s decision that the DB scheme could benefit from the s 429 exemption; deciding that DB was in fact an associated company as it had control of the special purpose vehicle.
HMRC appealed to the Court of Appeal on the grounds that the Ramsay principle should apply to both schemes and DB also appealed against the Upper Tribunal’s decision that DB had control of the issuing company.
Court of Appeal decision
The Court of Appeal dismissed HRMC’s appeal, finding that there was no argument that the scheme was a tax avoidance scheme and that the Ramsay principle should be applied. The Court of Appeal acknowledged that if the scheme provided an immediate cash redemption of the shares it may be possible to argue that the scheme was an award of money rather than securities and it would therefore come under the Ramsay principle. However, based on the facts there was no suggestion that the scheme was one for the payment of money; the schemes clearly involved the award of restricted securities that fell squarely within the provisions of Chapter 2. The Court of Appeal noted that it is not possible simply to ignore the Chapter 2 provisions just because the scheme was motivated by tax avoidance.
Furthermore, the Court of Appeal held that the Upper Tribunal’s decision that DB controlled the special purpose vehicle was “obviously wrong” and that, although there were pre-existing roles within the scheme, it did not mean that one company therefore controlled the other.
The Supreme Court Appeal
The UKSC is being asked by HMRC to determine whether the Ramsay principle should apply to the UBS and DB schemes. This will be an important decision as it will set the precedent for how the Ramsay principle can be used now that the general anti-abuse rule (GAAR) has been introduced. The decision may confine the Ramsay principle to pre-GAAR arrangements but it might highlight how the Ramsay principle could be applied in a wider range of circumstances than the GAAR. The Ramsay principle could, therefore, affect arrangements that might not necessarily be classed as abusive and would otherwise fall outside the scope of the GAAR.
The Supreme Court appeal will be heard by a panel of five, comprised of Lord Neuberger, Lady Hale, Lord Reed, Lord Carnwath and Lord Hodge. A full case comment on the decision will be provided on this blog once judgment has been handed down.