JTI Acquisition Company (2011) Limited v The Commissioners for HMRC
[2024] EWCA Civ 652
Lynx Forecourt Limited v The Commissioners for HMRC
27 March 2024
[2024] UKFTT 278 (TC)
First-tier Tribunal
A company paid its director bonuses in loan notes, hoping to avoid tax. The clever plan involved a condition that the money would be lost if the director died within a year. The tax court decided the plan was just a tax dodge, and the company had to pay the taxes.
Key Facts
- •Appeal against income tax (£800,000) and NICs (£153,400) determination for bonuses paid to a director in loan notes.
- •Bonuses paid as loan notes in a newly incorporated company (PIL), owned by the director.
- •Loan notes subject to a condition of forfeiture if the director died within 12 months.
- •The scheme was designed by tax advisors to minimize tax liability using the Conditional Shares Legislation (1998 legislation, predecessor to Restricted Securities Legislation).
- •Director died after the conditionality period.
- •Key issue: Whether the transfer of loan notes fell within the ambit of the 1998 legislation.
Legal Principles
Purposive construction of tax legislation, considering the realistic view of the facts and the legislation's intended application.
WT Ramsay Ltd v Inland Revenue Commissioners [1982] 300; Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46; Lord Nicholls in Barclays Mercantile Business Finance Limited v Mawson [2005] 1 AC 684.
In the context of the Restricted Securities Legislation (and by analogy, the Conditional Shares Legislation), conditions must have a business or commercial purpose to fall within the legislation's ambit. Commercially irrelevant conditions solely for tax avoidance are excluded.
UBS AG v The Commissioners for Her Majesty’s Revenue and Customs; DB Group Services (UK) Ltd v The Commissioners for Her Majesty’s Revenue and Customs [2016] UKSC 13; Cyclops Electronics Ltd and another v The Commissioners for Her Majesty’s Revenue and Customs [2018] UKUT 7 (TCC).
Even if a condition is real and has meaningful commercial effects, if its sole purpose is tax avoidance, it's excluded from the legislation.
UBS AG v HMRC; DB Group Services (UK) Ltd v HMRC [2016] UKSC 13
Outcomes
Appeal dismissed.
The condition of forfeiture upon death, while real, lacked a business or commercial purpose; it was solely for tax avoidance. The court applied the purposive construction principle from UBS and Cyclops, finding that the 1998 legislation, like its successor, doesn't apply to schemes designed purely for tax avoidance.
Income tax and NICs are chargeable at the point the loan notes were acquired.
The loan notes did not fall under the 1998 legislation because the condition was solely for tax avoidance. This overrode the fact that the condition was real and had potential commercial effects.