Upper Tribunal overturns Tower Radio decision

In a judgment published on 13 February 2015, the Upper Tribunal (“UT”) overturned the decision of the First-tier Tribunal in the case of Tower Radio Limited v HMRC [2015] UKUT 0060 (TCC) by ruling in favour of the taxpayers.

The case concerns the effectiveness of planning that sought to exploit a loophole in the rules on forfeitable securities in ITEPA 2003, Pt 7, c. 2; with some important variations, the planning was very similar to that employed in the UBS and Deutsche Bank cases [2014] EWCA Civ 452. In outline, the plan was intended to work as follows:

  • the employer company incorporated a wholly owned “money-box” company (referred to in the judgment as an “SPV”);
  • shares in the SPV were awarded to an individual (in this case the main director and shareholder of the employer company), massively diluting the employer company’s holdings in the SPV;
  • the terms of the share awards were such that the individual could be forced to sell the shares back to the employer company for 95% of their market value if they left the company within a fixed period that was less than five years;
  • shortly after the shares were transferred to the individual, the SPV was put into members’ voluntary liquidation and the assets of the SPV were paid out to the individual and to the employer company.

The taxpayer’s position was that because the individual could be compelled to sell the shares for less than their market value in the first five years, the shares should be treated as “forfeitable securities” falling within the special tax regime set out in ITEPA 2003, s 425.  Under this regime, shares are not taxed when they are acquired by employees; the tax point is deferred until a “chargeable event” as defined in ITEPA 2003, s 427 occurs (mainly, the sale of the shares or lifting of the risk of forfeiture); and because the liquidation of the company that issued the shares was not listed in s 427, it did not constitute a chargeable event.  In short, the award of shares to the individual did not give rise to tax charges and the liquidation of the SPV was not treated as giving rise to taxable employment income either.  (After these arrangements were put into place, the law was changed in 2004 to close this loophole.)

The UT found that:

  • the decisions in UBS and Deutsche Bank could not be distinguished from this case. The key point made in those cases was that the employees had received real shares that were explicitly taxed under a clear statutory scheme and that it is not possible to use a Ramsay approach to over-ride the legal form of the awards or to disregard the prescriptive regime in the legislation;
  • the decision in PA Holdings dealt with a fundamentally different question (it determined that amounts purportedly paid as dividends could be re-characterised as bonus payments) and was not helpful in a situation where legislation clearly sets out the way in which a particular transaction will be taxed;
  • Ramsay is no more than an approach to statutory interpretation – the clear wording in ITEPA 2003, s 420 meant that it was not possible to treat the shares in the SPV as anything other than “securities”, even if, on a realistic view of the shares, they were no more than a “wrapper” around bonus entitlements;
  • the legislation set out a clear, circumscribed test of what counts as a “forfeitable security” and is therefore taxable under the regime in ITEPA 2003, s 425 and there is nothing purposive in the definition – the FTT had held that the forfeiture provision had a value effect on the shares, they clearly fell into the regime set out in s 425.

Although the legislative loop-hole that was exploited in this case has since been closed and the GAAR would be a factor in weighing future planning, the case is interesting in demonstrating again the limits of the Ramsey doctrine as a tool of statutory interpretation.  It also seems to limits the decision in PA Holdings [2011] EWCA Civ 1414.

For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.