New Judgment: UBS AG v HMRC; DB Group Services (UK) Ltd v HMRC  UKSC 13
09 Wednesday Mar 2016
On appeal from:  EWCA Civ 452
The Supreme Court unanimously allowed the appeal of HMRC in two cases concerning schemes which were devised to avoid the payment of income tax on bankers’ bonuses. The scheme took advantage of exemptions under the Income Tax (Earnings and Pensions) Act 2003, Pt 7, Ch 2, as amended by the Finance Act 2003, Sch 22. In particular, s 425(2) conferred a tax exemption with respect to ‘restricted securities’ awarded to employees. Restricted securities were defined as shares which are subject to provision for the forfeiture if some contingency occurs.
The banks opted not to pay discretionary bonuses directly to their employees, but instead purchased redeemable shares in offshore companies set up for the purpose of availing of this tax exemption. Conditions were attached to the shares to make them subject to forfeiture if a contingency occurred, to ensure they qualified. In the UBS case, the contingency was a specified rise in the FTSE 100 within the next three weeks, while in the DB case, the contingency was that the employee was dismissed for misconduct or voluntarily resigned within six weeks. In both cases the contingencies were unlikely to occur. Once the exemptions had accrued, the shares were redeemable for cash.
HMRC sought to tax this income as if it had been paid in cash. The First Tier Tribunal dismissed the banks’ challenge to this, but the Upper Tribunal allowed UBS’s appeal. The Court of Appeal affirmed the Upper Tribunal’s finding in respect of UBS, and allowed DB’s appeal.
The lead judgment was given by Lord Reed. He argued that a purposive approach to statutory construction should extend to tax cases. Taxing statutes generally drew their life-blood from real world transactions with real world economic effects. Where a transaction has no purpose other than tax avoidance, it was likely that a purposive interpretation of the statute would result in this being disregarded. Lord Reed found that there were various purposes behind the tax legislation, including the promotion of employee share ownership and to counteract consequent opportunities for tax avoidance. It was unlikely that Parliament intended to provide exemptions where conditions attached to the restricted securities were purely constructed to avoid tax payments. The conditions imposed in both cases had no business or commercial purposes, and thus fell outside s 423.
The Supreme Court held that the bonuses should have been taxed as shares, with the value assessed on the date of their acquisition, taking into account the restrictive conditions.