Supreme Court

UBS AG v Revenue and Customs Comrs

DB Group Services (UK) Ltd v Revenue and Customs Comrs

[2016] UKSC 13

[2016] WLR (D) 133

2015 Dec 3; 2016 March 9

Lord Neuberger of Abbotsbury PSC, Lord Mance, Lord Reed, Lord Carnwath, Lord Hodge JJSC

Revenue — Income tax — Employment — Earnings — Employment-related restricted securities — Statutory exemption from income tax where employee awarded shares subject to condition providing for forfeiture in event of stated contingency — Taxpayer bank forming company for sole purpose of obtaining statutory exemption — Taxpayer setting up scheme whereby beneficial interests in shares in company allocated to employees in amounts equal in value to cash bonus entitlements — Contingency being remote event within short period of time with no business or commercial purpose — Employees thereafter free to redeem shares for cash — Whether exemption to be construed as limited to conditions having business or commercial purpose — Whether shares purchased as part of scheme restricted securities to which exemption applying — Whether employees liable to income tax on value of shares — Income Tax (Earnings and Pensions) Act 2003 (c 1)(as amended by Finance Act 2003 (c 14), s 140, Sch 22), ss 423(2), 425(2), 429

Facts

In 2004 two banks entered into arrangements designed to take advantage of the provisions of Chapter 2 of Part 7 of the lncome Tax (Earnings and Pensions) Act 2003, as substituted, which created a special regime for employment-related securities whereby “restricted securities” (including, by section 423(2), shares which were subject to a condition providing for their forfeiture in certain circumstances so as to render their market value less than it otherwise would be but for that condition) were, by section 425(2) and 429, exempt from income tax. Each bank invoked a scheme whereby (i) it set up a company merely for the purposes of the scheme, which undertook no activities beyond its participation in the scheme, was to be liquidated upon the termination of the scheme, and the memorandum and articles of which contained conditions designed to comply with Chapter 2, and (ii) the shares of the company were to be allocated to specified employees in lieu of a cash bonus. In the first case there was a condition for an immediate and automatic sale of the shares if, on any date during a specified three week period, the closing value of the FTSE 100 Index exceeded a defined “trigger level”, the probability of which was unlikely but in any event was hedged against so that in the event of a forced sale the employees would not be materially worse off. In the second case there was a provision which, in effect, provided that an employee would forfeit his shares if he voluntarily resigned or was dismissed for misconduct during the first eight weeks after the company was set up. In both cases, once the exemptions from income tax conferred by sections 425(2) and 429 had accrued, the shares were redeemable by the employees for cash. The revenue took the view that the banks were to be treated as having paid the relevant employees cash sums equal to their share allocation and issued PAYE determinations and NIC decisions against each bank, as the body liable to deduct such sums. Each bank appealed. The First-tier Tribunal, in separate decisions, held that Parliament could not have intended that the exemption should apply to arrangements contrived purely in order to obtain the exemption but having no other business or commercial purpose. On appeals heard together the Upper Tribunal held that the scheme in the first case met the requirements of the legislation and so allowed that bank’s appeal, but held that the scheme in the second case did not fully comply with the terms of Chapter 2 in that, on the facts, the company had been set up in a way which did not comply with section 429. On appeal by the revenue in the first case and by the bank in the second case, the Court of Appeal upheld the Upper Tribunal’s decision in the first case on like ground and, having reversed the factual finding in the second case, allowed that bank’s appeal on the ground that its scheme also met the requirements of Chapter 2.

On appeal by the revenue in both cases—

Held

Held, appeals allowed. Tax statutes were concerned with real world transactions with real world economic effects. Parliament could not have intended to encourage by exemption from tax the award of shares to employees where the award of shares had no purpose whatsoever other than the obtaining of the exemption itself, a matter reflected in the fact that the shares were in a company which had been brought into existence merely for the purposes of the scheme, undertook no activities beyond its participation in the scheme and was liquidated upon the termination of the scheme. The encouragement of such schemes, unlike the encouragement of employee share ownership or share incentive schemes, would have no rational purpose. The provision in section 423 conferring the exemption was to be construed as being limited to conditions having a business or commercial purpose and did not apply to commercially irrelevant conditions the only purpose of which was the obtaining of the exemption. It followed that income tax was payable on the bonuses, based on the value of the shares awarded to the employees.

Appellate History

Decision of the Court of Appeal [2014] EWCA Civ 452; [2014] STC 2278 reversed.

Appearances

Paul Lasok QC, Richard Vallat and Anneliese Blackwood (instructed by General Counsel and Solicitor to Revenue and Customs Comrs) for the revenue.

Kevin Prosser QC (instructed by Pinsent Masons LLP) for the bank in the first case.

David Goy QC and Nicola Shaw QC (instructed by Slaughter and May) for the bank in the second case.

Reported by:Colin Beresford, Barrister