Taxpayer win on Transfer of Assets Abroad Legislation.

Background to the appeal

 This appeal concerned the transfer of assets abroad (“TOAA”) provisions set out in the Income and Corporation Taxes Act 1988 (“ICTA 1988”) and in particular section 739 of ICTA 1988, which specifies the circumstances in which an individual who transfers assets to a person overseas may be liable to pay tax on income arising from those assets after the date of transfer.

 

The facts

Anne and Stephen Fisher are the parents of Peter and Dianne Fisher (together, the “Fishers”). The Fishers established a betting business which, from 1988, was run through a UK company, Stan James (Abingdon) Limited (“SJA”). The Fishers held the shares in SJA and acted as directors of the company. SJA specialised in “telebetting”, which involves the placing of bets by telephone.

 

The Fishers decided to transfer their betting operations to Gibraltar, which at the time charged a significantly lower rate of betting duty. They initially set up a branch of SJA in Gibraltar and later incorporated a new company in Gibraltar, Stan James Gibraltar Limited (“SJG”). In 2000 SJA and SJG entered into an agreement transferring the whole of SJA’s business (other than its betting shops in the UK) to SJG. The agreement was signed by Stephen Fisher as director on behalf of SJA and Peter Fisher as director on behalf of SJG. At the time of the transfer, the shareholdings in each of SJA and SJG were held entirely by the Fishers in varying proportions.

 

The HMRC assessments and the judgements of the Tribunals/Court below

HMRC issued assessments to tax to each of Stephen, Anne and Peter in respect of a number of years of assessment falling between 2000/2001 and 2007/2008.  Under section 739 of ICTA 1988, HMRC treated the profits of SJG as the deemed income of the Fishers in proportion to their respective shareholdings in the company. (HMRC did not seek to tax Dianne as she was not a UK resident). The Fishers (excluding Dianne) appealed to the First tier Tribunal Tax Chamber (“the FTT”). The FTT agreed with HMRC that for the purposes of section 739 the Fishers should be treated as the transferors of the business sold by SJA to SJG. The FTT allowed Anne’s appeal on other grounds and allowed the appeals of Peter and Stephen in respect of some of the years of assessment on other grounds not relevant to the present appeal. The Upper Tribunal (Tax Chamber) allowed the Fishers’ appeal on the ground that the transfer of assets had been made by SJA and not the Fishers. The Court of Appeal by a majority allowed HMRC’s appeal as regards Stephen and Peter but dismissed it as regards Anne. The Fishers and HMRC then appealed to the Supreme Court.

 

In the Supreme Court

The Supreme Court unanimously allowed the Fishers’ appeal.  In their Lordships’ view,  the Fishers were not, either singly or collectively, the transferors of the business that was sold by SJA to SJG.  It was common ground that the appeal should be determined on the basis of the legislation as it stood between March 1997 and April 2007. In broad terms, section 739 is an anti-tax avoidance provision that applies where an individual resident in the UK transfers assets abroad with the result that income arising from those assets becomes payable to a person abroad. Where the individual resident in the UK retains the “power to enjoy” the income (for example, the individual is able to control how the income is spent), as defined in the Act, the provision operates so that the income received by the overseas person is treated as income of the individual resident in the UK. That UK resident individual is then taxed on the income. It is not a requirement of the provision that the individual resident in the UK actually receives any of the income within the jurisdiction. Section 740 of ICTA 1988 imposes liability on an individual resident in the UK who has received a benefit because of the transfer of assets outside of the UK but who did not themselves carry out the transfer.

 

The Fishers argued that in order to fall within section 739(2), the taxpayer had to be the individual who transferred the assets. They relied on the House of Lords decision in Vestey v Inland Revenue Commissioners (Nos 1 and 2) [1980] AC 1148 (“Vestey”), which concerned an earlier version of the provision.  In response, HMRC argued that the interpretation upheld in Vestey should not be followed in the present case as ICTA 1988 differs in important respects from the predecessor legislation.

 

The Supreme Court held that section 739 is indeed limited to charging individuals who transfer assets abroad, this being the most natural interpretation of the legislation  and that the changes made to the legislation since Vestey did not undermine the reasoning in that case. The severe effect of section 739 for a taxpayer meant that it is inappropriate to apply it to someone who was not the transferor. The presence of section 742(9), which extends the reference to “an individual” in section 739 to include the spouse of the individual, was  inconsistent with HMRC’s proposed interpretation; there would be no need for the spousal extension if everyone who has the power to enjoy the income could be charged regardless of whether they are a transferor or not. Similarly, the inclusion of section 740, which deals with the liability of non-transferors, weighed against a wider interpretation of section 739.

HMRC argued that, notwithstanding that the legal transferor of the assets was SJA and not the Fishers, the Fishers should be treated as the transferors of the assets because together they owned the controlling interest in SJA. The Supreme Court, however, held that:

 

• Section 739 does not apply to an individual in relation to a transfer made by a company in which they are a shareholder, regardless of the size of their shareholding;
• There are no principled criteria set out in the statute which can be used to determine the circumstances in which a shareholder should be treated as responsible for a transfer made by a company;
• In contrast with other statutory regimes, the TOAA code does not provide any framework for determining when an individual should be treated as controlling a company for this purpose;
• The existence of multiple transferors for the purposes of section 739 would cause numerous difficulties in the provision’s application.

 

The Court said:

 

73  Nonetheless, the speeches of their Lordships in Vestey left some flexibility as to who is a transferor. Is there any reason to construe section 739 as applying to the shareholders of a company on the basis that they are “associated with” or that they “procure” the transfer of assets by that company? In my judgment there are no reasons for construing the section in that way and plenty of reasons not to do so……

 

75  During the hearing before this court, Mr Ewart struggled to express what was needed in order for a shareholder to become a transferor. At some points he seemed to be suggesting that the fact that the shareholders at a general meeting usually have the power to remove the board of directors was enough for them all to be transferors, by reason of them not exercising that power when the directors cause the company to transfer an asset. At other times he seemed to be suggesting that it was necessary for the shareholders to have been seen to get together, or to act in concert (though it was not clear what he meant by that) before they could be regarded as quasi-transferors. A myriad of different scenarios were suggest.  What happens to a holder of, say, 30% of the shares who, knowing that all the other shareholders intend to vote to transfer the company’s assets overseas, cannily votes against the motion, or abstains, or cries off attending the meeting? Does he or she thereby avoid the charge to tax whilst still having the power to enjoy the assets transferred pursuant to the motion passed by the other shareholders so that it is only the voting shareholders who are caught by the provision?

 

76 At some points Mr Ewart seemed to be suggesting that this degree of uncertainty about when and to whom the charge applied was a positive virtue of the drafting. The provision was, he said, designed to discourage people from moving assets abroad with a tax avoidance purpose. The problem with having a bright line is that people devise a way round it. The penal provision works better to achieve its aim if taxpayers are unable to know whether they would be caught or not. HMRC could then assess them to tax on the income of the overseas person, leaving the taxpayer to try to convince HMRC or the tribunal on appeal that they were not transferors. That is, in my judgment, an improper argument for HMRC to run. It has a flavour of the same unconstitutional approach to the enforcement of these provisions that was so strongly deprecated in Vestey.  I agree

with Mr Afzal’s submission in response when he said that the law cannot be left in some

unclear state “just to scare people”.

 

77……..Like Cohen LJ in Congreve, I would reject the idea that even a “controlling” shareholder in the company is to be treated as procuring the transfer of assets by the company.’

 

Conclusion

 

The Fisher case is a significant victory for the taxpayer and a welcome clarification from the Supreme Court of this difficult area of law.  Many taxpayers have been caught by these provisions and for open appeals the impact of Fisher will enable taxpayers to deploy arguments which were not previously available to them.