![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] [DONATE] | |||||||||
United Kingdom Upper Tribunal (Tax and Chancery Chamber) |
||||||||||
PLEASE SUPPORT BAILII & FREE ACCESS TO LAW
To maintain its current level of service, BAILII urgently needs the support of its users.
Since you use the site, please consider making a donation to celebrate BAILII's 25 years of providing free access to law. No contribution is too small. If every visitor this month gives just £5, it will have a significant impact on BAILII's ability to continue providing this vital service.
Thank you for your support! | ||||||||||
You are here: BAILII >> Databases >> United Kingdom Upper Tribunal (Tax and Chancery Chamber) >> Commissioners for His Majesty's Revenue and Customs v Marlborough DP Ltd (INCOME TAX - tax avoidance scheme - whether amounts paid by respondent under trust arrangements taxable as earnings from employment under s62 ITEPA 2003 - whether taxable as earnings under Part 7A ITEPA 2003 because paid "in connection with" employment - Edwards v Bairstow challenge) [2024] UKUT 98 (TCC) (12 April 2024) URL: https://www.bailii.org/uk/cases/UKUT/TCC/2024/98.html Cite as: [2024] STC 1627, [2024] UKUT 98 (TCC), [2024] BTC 514 |
[New search] [Contents list] [View without highlighting] [Printable PDF version] [Help]
(Tax and Chancery Chamber)
7 Rolls Buildings Fetter Lane London EC4A 1NL Heard on: 6 and 7 November 2023 With further written submissions on 24 January 2024 |
||
Judgment Date: 12 April 2024 |
B e f o r e :
JUDGE GUY BRANNAN
____________________
THE COMMISSIONERS FOR HIS MAJESTY' S REVENUE AND CUSTOMS |
Appellants |
|
- and - |
||
MARLBOROUGH DP LIMITED |
Respondent |
____________________
For the Appellants: Julian Ghosh KC and Barbara Belgrano, Sarah Black and Colm Kelly, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs
For the Respondent: Michael Firth KC, Counsel, instructed by Morr & Co LLP
____________________
Crown Copyright ©
INCOME TAX – tax avoidance scheme – whether amounts paid by respondent under trust arrangements taxable as earnings from employment under s62 ITEPA 2003 – whether taxable as earnings under Part 7A ITEPA 2003 because paid "in connection with" employment – Edwards v Bairstow challenge – appeal allowed in part – observations in relation to applications for permission to appeal and pleadings before the Upper Tribunal where an Edwards v Bairstow challenge is made
Introduction
REPRESENTATION
Background
(1) On 4 September 2007, Dr Thomas was sent various documents from BW regarding "Remuneration Trust Arrangements".
(2) On 3 October 2007, MTL Management Limited ("MTL") was incorporated in Belize with Dr Thomas as the sole director and shareholder.
(3) BW prepared two similar documents entitled "Report to the Board" dated 16 November 2007 and 5 December 2007 setting out how the RT arrangements were intended to work.
(4) On 20 January 2008, Dr Thomas, as the director of MDPL, resolved to make contributions to the RT. Dr Thomas could not explain why this took place before the RT was established.
(5) The RT was established by Deed executed on 31 January 2008. The RT Deed was made between MDPL and Bay Trust International Limited ("BTIL") of Belize as the trustee. Dr Thomas signed the RT Deed as the director of MDPL.
(6) On 1 February 2008:
(i) BTIL delegated to UPL Holdings Limited, a company established in Belize, "the execution or exercise of all or any of the Trust's powers and discretions conferred upon it as Trustee as regards the management and custody of the Trust Fund."
(ii) UPL Holdings Limited, as "the Principal", and MTL, as "the Fiduciary", entered into a "Fiduciary Services Agreement" pursuant to which MTL was stated to have "all the rights to apply and deal with the Property and the income and capital thereof and all accumulations thereto as if it were the beneficial owner thereof…."
(7) On 19 March 2009 and 26 June 2012, Dr Thomas and BTIL (as trustee of the RT) executed Deeds of Amendment to the RT Deed which were said to have effect retrospectively to the date the RT was established on 31 January 2008.
(8) Several times each year, in the period from 5 March 2008 to 23 March 2015, Dr Thomas, acting as the sole director of MDPL, resolved to make contributions to the RT and, usually within a few days, Dr Thomas would write to BTIL on MDPL headed paper asking it to consider advancing a loan to him. The contributions made by MDPL to the RT comprise all or substantially all the profits made by MDPL from its dentistry practice. A loan would then be made by the RT, via MTL as nominee for the Trustees, to Dr Thomas. In all but two cases the loan was in the same amount as the contribution. In the two other cases, one loan was £1,000 less than the corresponding contribution, and the other loan was £500 more than the corresponding contribution.
Accounting period ended | Return submitted | Enquiry opened |
31 March 2009 | 31 March 2010 | 21 January 2011 |
31 March 2012 | 4 December 2012 | 28 November 2013 |
31 March 2013 | 30 March 2014 | 1 August 2014 |
31 March 2014 | 29 December 2014 | 15 December 2015 |
31 March 2015 | 24 December 2015 | 9 December 2016 |
The relevant statutory provisions
Earnings from employment (including PAYE and National Insurance Contributions)
"(a) any salary, wages or fee",
"(b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth" (meaning something that is (i) of direct monetary value to the employee, or (ii) capable of being converted into money or something of direct monetary value to the employee" (under section 62(3) ITEPA), or
"(c) anything else that constitutes an emolument of the employment";
Part 7A Income Tax (Earnings and Pensions) Act 2003
(1) Chapter 2 applies if—
(a) a person ("A") is an employee, or a former or prospective employee, of another person ("B"),
(b) there is an arrangement ("the relevant arrangement") to which A is a party or which otherwise (wholly or partly) covers or relates to A,
(c) it is reasonable to suppose that, in essence –
(i) the relevant arrangement, or
(ii) the relevant arrangement so far as it covers or relates to A,
is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A's employment, or former or prospective employment, with B,
(d) a relevant step is taken by a relevant third person, and
(e) it is reasonable to suppose that, in essence—
(i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or
(ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.
(2) In this Part "relevant step" means a step within section 554B, 554C or 554D.
(3) Subsection (1) is subject to subsection (4) and sections 554E to 554Y.
…
(5) In subsection (1)(b) and (c)(ii) references to A include references to any person linked with A.
(6) For the purposes of subsection (1)(c) it does not matter if the relevant arrangement does not include details of the steps which will or may be taken in connection with providing, in essence, rewards or recognition or loans as mentioned (for example, details of any sums of money or assets which will or may be involved or details of how or when or by whom or in whose favour any step will or may be taken).
(7) In subsection (1)(d) "relevant third person" means—
(a) A acting as a trustee,
(b) B acting as a trustee, or
(c) any person other than A and B.
…
(11) For the purposes of subsection (1)(e)— (a) the relevant step is connected with the relevant arrangement if (for example) the relevant step is taken (wholly or partly) in pursuance of an arrangement at one end of a series of arrangements with the relevant arrangement being at the other end, and (b) it does not matter if the person taking the relevant step is unaware of the relevant arrangement.
(12) For the purposes of subsection (1)(c) and (e) in particular, all relevant circumstances are to be taken into account in order to get to the essence of the matter."
Distributions
"1000 Meaning of "distribution"
(1) In the Corporation Tax Acts "distribution", in relation to any company, means anything falling within any of the following paragraphs.
Any dividend paid by the company, including a capital dividend.
Any other distribution out of assets of the company in respect of shares in the company, except however much (if any) of the distribution—
…
(b) is (when it is made) equal in amount or value to any new consideration received by the company for the distribution.
For the purposes of this paragraph it does not matter whether the distribution is in cash or not……… (Emphasis added)
Corporation tax deduction
The decision
The Decision – The assessment of the credibility of Dr Thomas
The Decision - Were the payments earnings under general principles?
"(1) whether contributions made by MDPL (which enabled those funds to pass into Dr Thomas' hands as loans) are to be regarded as remuneration or a reward for the provision of Dr Thomas' services as director of MDPL on the basis that that role is the reason why MDPL made the contributions or is a sufficiently substantial case of the contributions for this test to be met; or
(2) whether MDPL made the contributions for a different reason such that they have a non-employment source, the only identifiable other reason being that they were made in respect of Dr Thomas' shareholding in MDPL."
"(1) There was no contractual obligation on MDPL to pay the sums as a reward for Dr Thomas' services as director/dentist and there is nothing in any of the documents or evidence to suggest that that was the reason for the extraction of MDPL's funds into Dr Thomas' hands.
(2) The sums paid to Dr Thomas comprised the totality of the overall profits of MDPL's business, as computed after the deduction of expenses, such as salaries paid to those employed by MDPL including the relatively small salary paid to Dr Thomas and, accordingly they were paid out sporadically.
(3) Dr Thomas' evidence was that, had those profits not been routed through the RT arrangements, they would have been paid to him by way of dividend and not as salary. It lends support to the credibility of Dr Thomas's evidence in this respect that:
(a) As Mr Firth noted, it is a well-known common practice for a sole owner and director of a company to organise matters such that the relevant company pays him or her a low salary and much more substantial dividend payments (and see the comment in [130] below).
(b) That is how Dr Thomas extracts profits from the company he now operates through now he no longer uses the RT arrangements and, as noted, MDPL paid him a small salary during the periods in question.
(4) For the reasons set out in full below, we do not accept HMRC's view that Dr Thomas' evidence is not relevant. In short, (a) his evidence, as the controlling mind of MDPL, indicates that its purpose, in putting in place steps to extract the funds into the hands of Dr Thomas, was to provide him with a return on his investment in it as shareholder in the same way as if it had formally declared and paid a dividend, and (b) it does not detract from this that Dr Thomas and MDPL did not consider that MDPL was making a dividend or check that in making the relevant contributions MDPL was not making an unlawful distribution for company law purposes."
(1) MDPL received income generated by its dental business because of Dr Thomas' role as director;
(2) the resulting profits represented the "fruits of his labour"; and
(3) the payments of these amounts as contributions to the RT were not declared as dividends and were not related to his shares in MDPL.
(1) Dr Thomas accepted that (i) the RT arrangements were put in place solely with the aim of getting the profits of MDPL's business into his hands tax-free whilst enabling MDPL to obtain a tax deduction for the payments it made and (ii) the RT arrangements did not succeed in achieving these tax consequences given that they were based on factually incorrect propositions as regards the basis on and purposes for which the contributions were paid by MDPL;
(2) the use of an ineffective structure solely for the purpose of obtaining a tax advantage did not shed light on the underlying reason for the extraction of the funds from MDPL into Dr Thomas' hands. Once the RT arrangements were stripped bare of the "untruths" on which they were based, the FTT was left with the conundrum of determining, as a matter of substance, MDPL's purpose in putting the monies into Dr Thomas' hands.
(3) Thus, the manner in which the relevant sums were extracted from MDPL merely indicated that Dr Thomas/MDPL wanted to avoid a charge to tax on Dr Thomas in respect of those sums whilst ensuring MDPL would obtain a tax deduction for the payments. Since the stated reasons for the arrangements were spurious and unfounded they did not shed light on whether (i) the parties' underlying purpose was to reward Dr Thomas for his services as director, whilst securing for MDPL a tax deduction that an employer would usually obtain in respect of such sums or (ii) to avoid a charge to tax on Dr Thomas on sums intended as a return on his shares in MDPL whilst generating a tax deduction for MDPL which was not usually available.
(1) income/profits arising to a corporate owner of the business which were in part generated by the activities of its sole shareholder and director, were necessarily linked in their entirety to that individual's role as a director; and
(2) unless paid by way of a formal dividend, the extraction of those sums from the company into the individual's hands constituted earnings as the fruits of the individual's work as a director.
The Decision - Part 7A ITEPA
(1) Chapter 2 of Part 7A applies to a step
(a) if on or after 9 December 2010 but before 6 April 2011 a relevant step ("the early step") within section 554C(1)(a) ITEPA is taken,
(b) Chapter 2 of Part 7A of would have applied by reason of the early step had the reference in paragraph 52(1) of Schedule 2 to 6 April 2011 been a reference to 9 December 2010, and (c) the early step is not chargeable to income tax by virtue of Schedule 34 to the Finance Act 2004 in whole or in part.
(2) In determining the tax year for which the employment income of "A" (i.e. the employee/director) counts for the purposes of s 554Z2(1) ITEPA, the early step is treated as having been taken on 6 April 2012; but, otherwise, chapter 2 of Part 7A applies by reference to when the early step was actually taken.
(1) it was reasonable to suppose that HMRC's conclusion was that all relevant sums arising in connection with the RT arrangements which were properly attributable to the tax year 2012/13 were subject to income tax in that year. On that basis the FTT considered that HMRC were not precluded from arguing that income tax was chargeable under Part 7A in respect of the 2012/13 tax year by reference to the value of all relevant sums properly attributable to that year, whether they arose in the tax year or in an earlier period under the anti-forestalling rules.
(2) Given that the MDPL did not object to HMRC raising the argument on fairness grounds (and whether Part 7A applied was addressed in full at the hearing), there was no basis for the FTT to preclude HMRC from raising this point.
(3) There was no concern that the relevant sums might be taxed twice by virtue of section 554Z11C ITEPA.
The Decision - The Deductibility Issue
(1) MDPL's purpose in paying the contributions (and thereby funding the loans) had to be taken to be to provide Dr Thomas with earnings; and
(2) in choosing to deliver the relevant funds to Dr Thomas as contributions and loans through the RT arrangements, MDPL's purpose must be taken to be to avoid the sums being taxed as earnings on the basis that preserved the usual consequential tax effect of an employer paying such sums, namely, that MDPL would obtain a tax deduction for them in computing its profits for corporation tax purposes.
(3) This was (using the language used in Scotts Atlantic v HMRC [2015] UKUT 66 (TCC at [67]) the "ordinary, intended or realistically expected outcome" or, as it was put in Vodafone Cellular Ltd and others v Shaw [1997] STC 734, a consequential or incidental benefit of, expending sums which, according to MDPL's "true" intent, were incurred to reward Dr Thomas for his services as director. Furthermore, Judge Morgan did not consider that the assessment of MDPL's underlying true purpose in making the contributions was affected by the fact that:
(a) The particular method for extraction of the relevant sums into Dr Thomas' hands was dictated by the desire to ensure that, contrary to Dr Thomas'/MDPL's "true" purpose, the relevant sums are not viewed as earnings.
(b) In order to give effect to and further this objective, MDPL acted ostensibly on the basis of the justification for obtaining a tax deduction for them which, as Dr Thomas accepted, was untrue, rather than on the basis of the "true" reason namely that the contributions were made to reward Dr Thomas for his services as director.
(4) HMRC's argument was that the existence of inaccurate or untrue statements in the relevant documents as regards the reasons for the routing of the relevant sums through the RT arrangements was a free-standing reason for a corporation tax deduction to be denied. However, it was for the FTT to establish, in all the circumstances, MDPL's purpose in making the contributions. Statements and documents (such as those in the resolutions for the making of the contributions) which were admittedly untrue did not cast light on the "true" purpose for which the sums were expended.
Grounds of appeal
Ground 1 (the Part 7A issue) – permission given by the FTT
Ground 2 (the general earnings issue) – permission given by the UT
(1) in reaching the conclusion that the monies "lent" to Dr Thomas each year were not "emoluments" which were "from" Dr Thomas' directorship in MDPL;
(2) in holding that the monies paid by MDPL to the RT were, therefore, distributions made "in respect of shares" held by Dr Thomas in MDPL.
Ground 3 (the Deductibility Issue) – permission given by the UT
Discussion
Ground 2 – general earnings
"127. …[I]t is plain from the caselaw that sums constitute earnings if they are paid as remuneration or a reward in return for a person's services as an employee. The courts have consistently recognised that, given the test is centred on why or in return for what a payment is made, establishing the purpose of an employer in making a payment is key to assessing, as it was put in PA Holdings, its character in the hands of the recipient "looking at its substance and not its form". As summarised in Kuehne[2] the courts have also recognised that this may be a difficult finely balanced exercise where there is more than one reason for a payment. As it was put at [52] of that case, a tribunal or court needs to be satisfied that the payment is from employment rather than from a non employment source. That involves evaluating the reasons and background to the payment and applying a judgment as to whether the payment was from the employment rather than from something else. Whilst employment "does not have to be the sole cause" of the payment "it does have to be sufficiently substantial as to characterise the payment as one from employment" (see [56] of Kuehne)."
"43. Mr Ghosh suggested in his submissions that, on the basis of this evidence, Dr Thomas accepted that he would have received 100% of the contributions as loans even if there had been another shareholder such as his wife. However, we do not accept that conclusion can be drawn from this evidence. In cross examination the relevant questions were focussed on whether, if Dr Thomas had not held all the shares in MDPL, that would have made any difference to the sums contributed to MDPL. Dr Thomas was not asked whether if the shareholdings were different he would still have received all the sums contributed by way of loan.
…
49. It was put to Dr Thomas that the loans he received had nothing to do with him holding shares in MDPL; it was just a good way of extracting that money tax-free. He said: "That's what I was told, yes". We note that Dr Thomas agreed only that this is what he was told; he did not state that he thought that the loans had nothing to do with his shareholding.
53. We do not take from this evidence that, as Mr Ghosh suggested, Dr Thomas accepted that the monies received by MDPL (and passed on to him under the RT arrangements) were all related to his role as director given that he only agreed with that proposition when asked to put to one side the fact that MDPL employed others, such as the associate dentist and hygienist. Otherwise, he was clear that, in his view, but for the RT arrangements, MDPL's profits would have been extracted as dividends and that those profits are generated by other person's activities for MDPL as well as his own (as accords with the evidence set out at [41(2)])."
[Day 1/57/3-58/17]
Q. I'm asking you something very simple. I'm sorry to press it and make a meal of it, but I do want to hear this from you, so that when I make submissions on your evidence, I don't put a spin on it. At paragraph 22, taking the loans out in a way that's not taxable for you, that was one of the things that appealed to you and one of the objectives of the scheme; that's right, isn't it?
A. One of them, yes.
Q. Yes. Now, let's get to the other one, which is looking at paragraph 24: that the money that's being paid by the company to the trust, you wanted a tax deduction for the company; that's the other feature, isn't it?
A. Yes.
Q. Now, you said there in 24 that the way you'd quantify it, so that the amount of money paid was simply all the profits of the company; that's right, isn't it?
A. Yes.
Q. And that was the only driver, the only component of giving the number of how much was going to be paid: it was to reduce the CT [Corporation Tax] profits to nil, wasn't it?
A. Yes.
Q. And that would have been exactly the same whether you held 100% of the shares or, like now in this other company you've got, your wife held 25% of the shares; it would have been exactly the same, wouldn't it?
A. I'm sorry, I don't --I don't understand –
Q. Don't you?
A. --what you're asking, sorry.
Q. The way that you quantified how much the company was going to pay –
A. Yes.
Q. --was simply the number that reduced the CT profits to zero; yes?
A. Yes.
Q. And my question is: and you would have paid that exact same amount whether you held 100% of the shares or, like in your other new company, 75% of the shares?
A. Yes.
[Day 1/68/22-69/4]
"Q. All right. At 31, if you could just read that. That confirms everything we have said, and you've said, which is that the amount paid was simply to reduce the CT profits to nil and whether you held 100% of the shares or less than 100%, that doesn't make any difference. Is that a fair summary of where we've got to, when we read 31?
A. Yes."
[Day 1/98/9-99/9]
"Q. Okay. Now, have a look, then, back at 712. And just before you do, I'm going to remind you that you accepted before lunch that the primary purpose of the contributions was to be able to make you tax-free loans. Do you remember? Do you remember that?
A. And to reduce the liabilities of tax on the company.
Q. I think I was very careful in how I choose my words, and I said to you the primary purpose was to deliver to you these tax-free loans; but --and you took a note of it, you said "yes". So are you changing your evidence now?
A. I'm sorry, I don't recall that. But the main purpose was to reduce tax liabilities on the company, as well as to take tax-free loans out for myself.
Q. Yes. And these tax-free loans, just while we're at it, because I'm about to ask you some questions about this resolution, you already accepted that the payments into the trust, they were quantified by reference to just whatever it took to reduce the CT profits to nil . You remember that?
A. Yes.
Q. And nothing to do with shares you held in the company, nothing to do with had anybody else held shares in the company. They weren't relevant; what was relevant was just reducing the CT profits to nil. Do you remember that?
A. Yes."
[Day 1 99/10-22]
"Q. And do you remember me showing you Baxendale Walker --and just to be clear, by calling the firm "Baxendale Walker", I don't mean any disrespect by calling that firm by its surname --Baxendale Walker had described the benefit, that's the loan, as a loan and not a distribution . And you said: well, that's quite right. Do you remember me showing you that?
A. Yes.
Q. Equally, the loan had nothing to do with you holding shares in the company, did it? It was just a –what you'd been told, it was a good way of extracting that money tax-free?
A. That's what I was told, yes."
"55. In relation to an appeal which is said to involve a point of law of the kind identified in Edwards v Bairstow, we were reminded by HMRC of what was said by Evans LJ in Georgiou v Customs and Excise Commissioners [1996] STC 463 at 476, as follows:
"It is right, in my judgment, to strike two cautionary notes at this stage. There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law. That is well seen in arbitration cases and in many others. It is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way. Secondly, the nature of the factual inquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact. The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made? In other words, was the finding one which the tribunal was entitled to make? Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled."
56. He continued:
"... for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make."
57. He concluded:
"What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal's conclusion was against the weight of the evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court.""
"67. We note whilst Dr Thomas accepted that looking at the documents now there are statements in them that are untrue, he was not questioned about (a) whether or, the extent to which, he realised that the relevant statements were untrue at the relevant time when the transactions were entered into (other than as regards the fact that, as he accepted, he must have known that he had not prepared the answers in the questionnaire), or (b) whether he had intended to mislead HMRC in entering into the documents with these statements in them (as opposed to being asked whether the documents were designed to be misleading). We do not, therefore, find it appropriate to express any opinion on whether Dr Thomas knowingly intended to mislead HMRC. We note also that given concessions made by MDPL at the hearing, we do not need to make any findings as to whether Dr Thomas/MDPL acted "deliberately" within the meaning of the relevant legislation."
"(4) [Dr Thomas] agreed that the statements in the questionnaire do not reflect the running of the proposed scheme and that statement in the written resolution that the director made them was untrue when made as he must have known at the time."
[Day1/133/4 – 14]
"Q. So now I'm asking you, in terms: does that mean that paragraph 2 --I'm going to be asking about the rest of it --is an untruth?
A. Well, they don't reflect the running of the proposed scheme.
Q. I'm asking you to come clean, Dr Thomas. Is it an untruth?
A. Well, that's what I'm saying. It doesn't reflect it, no.
Q. No, I want to hear it from you. Is it an untruth?
A. In hindsight, yes.
Q. All right. And I do want, and it's my job, to get honest answers from you fairly. So you've accepted that it was an untruth that these responses were given by you and I'm quoting here: "Those responses continued to accurately reflect the purpose of the company in establishing the proposed scheme." That's untrue, isn't it?
A. In hindsight, yes.
Q. Why just in hindsight?
A. Well, you've pointed out, and me reading it over and over again; then that's not what happened.
Q. But it never happened. You never gave answers to the questionnaire questions. It is nothing to do with hindsight.
A. No, I ...
Q. So it was untrue at the very beginning, wasn't it?
A. Yeah, it must have been.
Q. So that I'm fair to you: you knew that you had not given answers to those questions in the questionnaire, and you knew that those answers given in the questionnaire were given by Baxendale Walker; that's right, isn't it?
A. Looking at that now, yes.
Q. No, then. Forget now; then. You knew that the answers were given by Baxendale Walker?
A. In -- yes, in the questionnaire, yes, yes. They are not my answers."
"THE EFFECT OF DELAY
43. The danger posed by a seriously delayed judgment in a case which involves assessments of fact and which depends at least in part on the oral evidence of witnesses, is that the delay may have so adversely affected the quality of the decision that it cannot be allowed to stand. In Goose v Wilson Sandford & Co [1998] TLR 85 the Court of Appeal ordered a retrial because some of the trial judge's conclusions were held to be unsafe as a result of a delay of some 20 months. Peter Gibson LJ said this at [112]:
"A judge's tardiness in completing his judicial task after trial is over denies justice to the winning party during the period of the delay. It also undermines the loser's confidence in the correctness of the decision when it is eventually delivered. Litigation causes quite enough stress, as it is, for people to have to endure while a trial is going on. Compelling them to await judgment for an indefinitely extended period after the trial is over will only serve to prolong their anxiety, and may well increase it. Conduct like this weakens public confidence in the whole judicial process. Left unchecked it would be ultimately subversive of the rule of law. Delays on this scale cannot and will not be tolerated."
44. As Sir Geoffrey Vos, then the Chancellor of the High Court, emphasised in the more recent case of Bank St Petersburg v Arkhangelsky [2020] EWCA Civ 408, the general, albeit unwritten, rule is that a judgment should be delivered within 3 months of the hearing. That rule should be adhered to even in long and complex cases because, as he put it at [84]:
"Justice delayed is justice denied. The parties to civil and particularly commercial litigation are entitled to receive their judgments within a reasonably short period of time. That period should not be longer than three months. As has been repeatedly said any other approach will lead to a loss of public and business confidence in our justice system."
45. We respectfully agree. A delay of the magnitude in the present case, whatever the explanation may be, is plainly inexcusable. It should not have happened and should not have been allowed to happen, particularly in a case where there were allegations of dishonesty, and the reputations and future employment prospects of the individuals concerned were at stake. Nevertheless, it is quite clear from the authorities that delay alone will be insufficient to afford a ground for setting a judgment aside. However, the delay will be an important factor to be taken into account when an appellate court is considering the trial judge's findings and treatment of the evidence, and the appellate court must exercise special care in reviewing the evidence, the judge's treatment of that evidence, his findings of fact and his reasoning.
46. As Lord Mance JSC said in the course of adumbrating the relevant principles in Central Bank of Ecuador and others v Conticorp SA and others [2015] UKPC 11, at [5], an appellate court must be extremely cautious about upsetting a finding of primary fact. Likewise, caution must be applied before overturning conclusions reached by the trial judge after an evaluation of different factors which have to be weighed against each other, on which it is possible for different judges to legitimately differ. (Of course, that assumes that the trial judge has taken all material factors into consideration when carrying out that balancing exercise. Failure to do so will amount to an error of law).
47. The correct approach to be adopted by the appellate court when the appeal is against findings of fact was succinctly summarised by Lord Reed JSC in Henderson v Foxworth Investments Ltd [2014] 1 WLR 2600 at [67]:
"In the absence of some other identifiable error, such as (without attempting an exhaustive account) a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified."
48. In the ordinary case, where a party seeks to appeal fact-findings which are based on an assessment of credibility, it is well-established that the appeal court will show a considerable degree of deference to the trial judge, who has had the advantage of seeing and hearing the witnesses. The greater that advantage, the more reluctant the court should be to interfere. However, as Lord Mance went on to point out in Central Bank of Ecuador at [164] (referring to the "salutary approach" of Robert Goff LJ in Armagas Ltd v Mundogas SA ("The Ocean Frost") [1985] 1 Lloyd's Rep 1 at [56]-[57]), a failure by the judge to address the factors and issues that are really significant, or to test the witnesses' account against objective facts proved independently of their testimony, particularly by reference to the contemporaneous documents, or the inherent probabilities, may amount to an error of law such as to justify intervention."
"113. Because of the delay in giving judgment, it has been incumbent on us to look with especial care at any finding of fact which is now challenged. In ordinary circumstances where there is a conflict of evidence a judge who has seen and heard the witnesses has an advantage, denied to an appellate court, which is likely to prove decisive on an appeal unless it can be shown that he failed to use, or misused, this advantage. We do not lose sight of the fact that the judge had transcripts of the evidence, as well as very extensive written submissions from counsel. But the very fact of the huge delay in itself weakened the judge's advantage, and this consideration had to be taken into account when we reviewed the material which was before the judge. In a case as complex as this, it is not uncommon for a judge to form an initial impression of the likely result at the end of the evidence, but when he has come to study the evidence (both oral and written) and the submissions he has received with greater care, he will then go back to consider the effect the witnesses made on him when they gave evidence about the matters that are now troubling him. At a distance of 20 months, Harman J. [the trial judge] denied himself the opportunity of making this further check in any meaningful way."
(1) Dr Thomas drew no or minimal salary from MDPL during the years in question, but previously had taken drawings. So far as Dr Thomas did draw a minimal salary from MDPL, this minimal salary was not sufficient for his living expenses or a fair reflection of work done for MDPL.
(2) The payments by MDPL to the RT effectively represented the fruits of Dr Thomas' labours, albeit that it also reflected the labours of other employees in the dental practice.
(3) Furthermore, the payments to the RT were authorised by Dr Thomas as a director of MDPL.
(1) there was no contractual obligation on MDPL to pay the sums paid out to the RT as a reward for Dr Thomas' services as a director or dentist;
(2) the sums paid out comprised the totality of the overall profits of MDPL's business (after the deduction of expenses, such as salaries of those employed by MDPL, including the relatively small salary paid to Dr Thomas) and that those sums were paid out sporadically;
(3) Dr Thomas's evidence was that had those profits not been routed through the RT arrangements, they would have been paid to him by way of dividend and not as salary. It was a well-known practice for a company with a sole owner and director to organise matters so that the bulk of the payments were paid by way of dividend and not as salary. Secondly, that was how Dr Thomas arranged his affairs after the MDPL arrangements.
Ground 1 – Part 7A ITEPA
"(c) it is reasonable to suppose that, in essence –
(i) the relevant arrangement, or
(ii) the relevant arrangement so far as it covers or relates to A,
is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A's employment, or former or prospective employment, with B,…"
"137. We agree with MDPL's view that, reading s 554A(1)(c) in context, for there to be a "connection" of the required kind with Dr Thomas' employment, the employment must be part of the reason for the reward, recognition or loan. On that basis, an assessment of whether [it] is reasonable to suppose that, in essence the RT arrangement so far as it relates to Dr Thomas is (wholly or partly) a means of providing or, is otherwise concerned (wholly or partly) with, the provision of, rewards or recognition or loans in connection with Dr Thomas' employment requires essentially the same analysis as that set out in relation to whether the relevant sums constitute earnings. Accordingly, we have concluded that this test is not met as regards the connection test for all the same reasons as are set out above."
"[38] The words 'in connection with' are probably as broad a formulation as will be found in statutory provisions for linking A with B. It is a question of fact whether a connection exists within the meaning of the statutory provision in question. In s 612(1) nothing more is required than the payment should be given in connection with past service. The relevant facts are not here in dispute. Where, as here, the free tax service was provided to retired employees and their spouses, because they had been employees or were married to retired employees, it is to my mind clear that the service was provided in connection with past service."
"18. The primary question in this case is the proper meaning of the words "in connection with past service" in section 612(1) of ICTA. The expression "in connection with" could describe a range of links. In Coventry Waste Ltd v Russell [1999] 1 WLR 2093 at 2103, Lord Hope held that in this situation the court must look closely at the surrounding words and the context of the legislative scheme:
"The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words "in connection with" as meaning "having to do with". This explanation of the meaning of the phrase was given by McFarlane J in Re Nanaimo Community Hotel Limited [1944] 4 D.L.R. 638. It was adopted by Somervell L.J. in Johnson v. Johnson [1952] P. 47, 50-51. It may be that in some contexts the substitution of the words "having to do with" will solve the entire problem which is created by the use of the words "in connection with." But I am not, with respect, satisfied that it does so in this case, and Mr. Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the 1991 Amending Order and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity."
19. Accordingly, the other parts of the definition of "relevant benefits" and the surrounding provisions of the legislative scheme, will inform the court as to the extent of the link required by any particular provision. Thus the court must examine the function or purpose of the definition of "relevant benefits". Here, the purpose of the definition is to identify the chargeable payments under a retirement benefits scheme. At the very least, Parliament is unlikely to have intended to limit connections to direct connections. That would have left the possibility that taxpayers could easily circumvent the charging provisions. Furthermore, it must have been foreseen that, over the life of the scheme, changes might be made to benefits. The changes would not simply involve a straight exchange or substitution of one benefit for another, but, on occasion, the loss of a benefit and the rendering of some monetary recompense. The charging provisions could only fairly apply if they applied to the giving of the new benefits, or recompense, as much as to the giving of the benefit originally provided by the scheme. It is also significant that Parliament did not limit itself to payments in consideration for services.
20. Thus I conclude that a connection may be indirect for the purpose of the definition of relevant benefits. Accordingly, it is possible that the making of a payment will have a relevant connection with more than one thing. In that situation, it is in my judgment necessary to see whether the connections can co-exist, or whether one will actually exclude the other. If, on proper analysis the further connection displaces a prior connection, the prior connection ceases to be a relevant connection for the purpose of s.612(1)."
"[69] These cases show that the meaning of "on, or in connection with" is heavily dependent both on context and policy. The phrase might require what Robert Walker LJ in Coventry Waste referred to as "a strong and close nexus" or it might require "a weak and loose one". Ben-Odeco v Powlson introduces the concept of remoteness, which is another way of considering the same question."
(1) The phrase "in connection with" must be construed by looking closely at the surrounding words and the context of the legislative scheme (Barclays Bank [18] and [19]) and at the context and policy of the provision (London Luton [69]).
(2) A connection can be both direct or indirect, and this is likely to be the case whenever the phrase "in connection with" is used (Barclays Bank [19] to [20]).
(3) There can be a connection with more than one other thing, in which case it is necessary to see if the connections can co-exist or whether one will actually exclude the other (Barclays Bank [20] and [25]).
(4) A connection once established is unlikely to be displaced by other factors or connections (Barclays Bank [22] to [23]).
(5) A payment made to every member of a class of people is likely to be made in connection with that class (Barclays Bank [22] and [26]).
"The June 2010 Budget announced that legislation would be
introduced from April 2011 to tackle arrangements using trusts and
other vehicles to reward employees which seek to avoid, defer or
reduce tax liabilities."
"23. Lord Steyn's speech in R (Westminster City Council) v National Asylum Support Service [2002] UKHL 38 establishes that Explanatory Notes to Finance Bills can in principle be relied on as an aid to construction as they may:
'…cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed…'
Moreover, the statute does not have to be ambiguous before a court or tribunal can have regard to evidence of the contextual scene set out in the Explanatory Notes.
24. However, the relevance of Explanatory Notes should not be overstated. It is important to bear in mind that Explanatory Notes might simply reflect the views of the Government (as distinct from Parliament) and, moreover, that Explanatory Notes will often include summaries of statutory provisions prepared by people who are unskilled in statute law.
25. Thus, in R (Westminster City Council) v National Asylum Support Service Lord Steyn said at [6] of his speech:
'What is impermissible is to treat the wishes and desires of the Government about the scope of the statutory language as reflecting the will of Parliament. The aims of the Government in respect of the meaning of clauses as revealed in Explanatory Notes cannot be attributed to Parliament. The object is to see what is the intention expressed by the words enacted.'
26. The 7th edition of Bennion on Statutory Interpretation summarises the position as follows at [24.14]:
'Although explanatory notes may therefore be useful as an aid construction, the courts will resist attempts to elevate the notes to a status where they supplant the language of the legislation itself. There is also always a risk that the notes will be wrong or misleading.'"
"For the purposes of subsection (1)(c) and (e) in particular, all relevant circumstances are to be taken into account in order to get to the essence of the matter." (Emphasis added)
Part 7A ITEPA – anti-forestalling provisions
"We anticipate that the company will have some knowledge of the transactions to which the liability relates. Whatever the level of knowledge of officers of the company has been before now, you need to know that HMRC believes that the payments are arguably within the Income Tax (Earnings and Pensions) Act 2003 and that PAYE and NICs should have been deducted. Without prejudice to any other arguments HMRC may wish to advance, we think the payments are either employment income on first principles or are brought within the charge to employment income by Part 7A of the Act referred to above."
"All employees and officers of the company who are liable for tax on 'employment Income' (as defined by Section 7, Income Tax (Earnings and Pensions) Act 2003) arising in connection with the company's Remuneration Trust arrangements."
(1) These were different amounts that were paid in a different year.
(2) Those amounts were not assessable under the ordinary Part 7A machinery but solely by virtue of deeming machinery tucked away in FA 2011, Schedule 2, para 53 (which includes treating the step has having been taken on 6 April 2012 (para 53(4)).
(3) That deeming machinery had its own mechanism for arriving at the chargeable amount and when it is to be assessed – none of which was in the contemplation of the decision-making officer.
"[106] In the first place, I agree with Mr Jones that the scope of the assessment, and of any appeal from it, must be defined by the subjective discovery that the assessing officer has made. That is the only assessment which the officer has jurisdiction to make, and the scope of the assessment, as opposed to the arguments which may be used to support it, cannot in my view be extended by virtue of the appeal process. The correct approach was in my judgment that stated by Kitchin LJ (as he then was) in the Fidex case at [45], in the context of an appeal from a closure notice:
"In my judgment the principles to be applied are those set out by Henderson J [in the Tower MCashback case, at first instance] as approved by and elaborated upon by the Supreme Court. So far as material to this appeal, they may be summarised in the following propositions:
(i) The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions.
(ii) What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions.
(iii) The closure notice must be read in context in order properly to understand its meaning.
(iv) Subject always to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice."
(1) It is reasonable to suppose, on the basis of the broad and general wording in the relevant determination and given the background to its issue (as to which see Part E), that HMRC's conclusion was that all relevant sums arising in connection with the RT arrangements which are properly attributable to the tax year 2012/13 are subject to income tax in that year. On that basis, we cannot see that HMRC are precluded from arguing that income tax is chargeable under Part 7A in respect of the 2012/13 tax year by reference to the value of all relevant sums properly attributable to that year whether they arise in that tax year or in an earlier period under the anti-forestalling rules.
…
(3) There is no concern that the relevant sums may be taxed twice for the reason given by HMRC [viz that section 554Z11C ITEPA would remove a double charge].
The Deductibility Issue
"[65] Thus, on one interpretation of its decision, the FTT appears to have found that SAML and SFML had incurred expenditure for the purposes of their trade, but that because those companies then decided to incur that expenditure in a particular way, their objects in incurring it came to include in addition the object of avoiding corporation tax.
[66] If that was the FTT's reasoning we do not agree with it. That reasoning would be to confuse the object of the expenditure with the reasons for incurring it in the way in which it was in fact incurred. As we have already noted at para [55], above, a taxpayer is entitled to order its affairs in a way which incurs the least tax liability and the mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose. It does not, therefore, necessarily follow that the adoption of the scheme by SAML and SFML results in a duality of purpose (although it may do so as a matter of fact) unless this is one of those cases referred to by Lord Oliver in MacKinlay v Arthur Young[5] (see para [53], above) where the results (in the present case, the securing of deductions) are so inevitably and inextricably involved in particular activities (in the present case, the making of the contribution and the effecting of the scheme) that they cannot but be said to be a purpose of those activities."
"[71] Thus we conclude that the FTT's decision contains a finding that one of the purposes of the contributions, in contrast with the purpose of the method of effecting the expenditure by way of the scheme, was to obtain a corporation tax deduction which would not have been available if the contribution had been made by more conventional means, and that in these particular circumstances such purpose was not an incidental consequence of the expense. Whatever else, the FTT did not conclude that because the tax benefit was a consequence of the contribution, it was a purpose of the expense."
Conclusion
POSTSCRIPT - Grounds of Appeal and Edwards v Bairstow challenges
"... for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make."
"What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal's conclusion was against the weight of the evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court."
COSTS
Any application for costs in relation to this appeal must be made in writing and served on the Tribunal and the person against whom it is made within one month after the date of release of this decision as required by rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008.
Note 1 References below to the "Decision" are to the amended Decision – see paragraph 6 below [Back] Note 2 [2012] EWCA Civ 34,[2012] STC 840. [Back] Note 3 We note that [41(3)] of the Decision is to the same effect. [Back] Note 4 We note that at [9] the FTT's opinion as regards Dr Thomas' credibility was formed at the hearing and confirmed very shortly thereafter. [Back] Note 5 , [1990] 2 AC 239 at 255 [Back]