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14 Dec 2023

International Tax BulletIN – HMRC v Fisher




International Tax BulletIN – HMRC v Fisher
Speed Read
The UK Supreme Court (SC) has ruled against HMRC’s expansion of the Transfer of Assets Abroad (ToAA) rules to cover transfers made by a company. These rules make an individual subject to income tax on certain profits accruing to a person abroad under S721 Income Tax Act 2007 (ITA07) and are aimed at counteracting tax avoidance by UK resident individuals who enjoy the fruits of assets transferred out of the UK.

The SC ruled, overturning the decision of the Court of Appeal, that a natural reading of the legislation clearly shows that it refers to individuals and their spouses only.The SC also stated that the transfer of assets abroad by a company is not a transfer of assets abroad by its shareholders for the purposes of the ToAA legislation regardless of their shareholding in the company. HMRC had argued that the transfer by the company could be deemed to be a transfer by its shareholders as quasi-transferors.

This means that where a UK company set up for purely commercial reasons and carrying on a trade transfers its assets to a person abroad, the shareholders of the company, irrespective of their shareholding, cannot, prima facie, be the transferors for the purposes of the ToAA rules. However, a taxpayer cannot avoid the operation of the legislation by simply moving income bearing assets to a UK company prior to the transfer abroad by the company. A few reasons why this will be the case is that under general law the corporate veil could be pierced and the transfer treated as a transfer by the individual and not the company. Also, the courts could rely on the Ramsay principle to look at the result or substance of the entire transaction and not just its form. Finally, a person who, though not being the transferor, receives benefits from the transfer will be subject to tax on the benefit they receive.

Introduction
In its most simplistic form the ToAA introduced way back in 1936 and now consolidated in ITA07 seeks to address a simple way of avoiding UK tax: the transfer by a person resident in the UK of income bearing assets, such as shares, to a person abroad and therefore outside the UK tax net.

The effect of such a transfer in our example above is that the dividend income, arising on the shares, which would otherwise be within the scope of UK taxation, accrues to a non-resident or domiciled person and escapes UK taxation, or with a few tweaks, that money that should have accrued to the transferor as UK income is now received as capital and subject to a lower tax charge.

The ToAA stops this cunning plan by imposing an income tax charge on:

  • a transferor of assets abroad who is resident in the UK and has power to enjoy the income accruing to the person abroad – the charge to tax is based on the income arising to the person abroad;
  • a transferor of assets abroad who receives a capital sum as a result of the transfer of the asset abroad; and
  • a non-transferor who receives benefit as a result of the transfer of the asset abroad based on the value of the benefit received.

The ToAA operates subject to the UK remittance basis and protected foreign income rules, which exempt foreign income of non-domiciled UK residents from tax.

Where there are multiple transferors, the total income accruing to the person abroad is deemed to arise and to be chargeable to each UK resident transferor with any potential double tax charge mitigated by S743 ITA07.

The provisions of the ToAA will not apply where avoiding a liability to tax is not a purpose for the transfer of the asset abroad or where the transfer is effected as part of a genuine commercial transaction and any tax “advantage” is incidental.

However, what seems simple on the surface, has proved to be very complicated in practice with both taxpayers and HMRC seeking to apply the rules in their favour, with the latest contest finally settled by the Supreme Court in HMRC v Fisher [2023] UKSC 44.

Facts
The facts of the case are not contentious. Anne and Stephen Fisher and their children Peter and Dianne owned shares in a UK resident company Stan James (Abingdon) Limited (SJAL) a betting company. The shares were held 38%, 38%, 12% and 12% respectively. The development of the telebetting industry and the rising rate of UK betting duty led to a lot of companies relocating their businesses to Gibraltar and placing bets on behalf of UK clients while charging a lower 1% duty on the bet placed.

Faced with the threat of ceasing to be a going concern because of the business decision of its competitors, a decision was made by the directors of SJAL to set up a branch in Gibraltar. The branch initially took bets from non-UK customers, but soon started taking UK bets by telephone.

In July 1999 the shareholders of SJAL incorporated a Gibraltar company, Stan James Gibraltar Limited (SJGL), and subsequently transferred the whole of SJAL’s telebetting operation and its other activities (apart from shops) to SJGL on 29 February 2000.

The agreement giving effect to the transfer was signed by Stephen Fisher as duly authorised director on behalf of SJAL and by Peter Fisher as duly authorised director of SJGL. At the time of transfer the shareholdings in SJG were 24% each to Dianne and Peter Fisher and 26% each to Anne and Stephen Fisher.

HMRC, relying on the ToAA code, issued an assessment to tax to each of Anne and Stephen in respect of the tax years 2000/2001 to 2007/2008 and Peter in respect of 2000/2001 to 2004/2005 as he subsequently became non-UK resident. No assessment was levied on Dianne as she was non-UK resident and was outside the scope of the ToAA rules.

The tax liability for Anne and Stephen was £2,175,624 each and for Peter it was £948,706. Disagreeing with the assessment, the Fishers appealed the tax assessment made by HMRC under the ToAA. A fundamental point in the dispute was whether the shareholders of SJAL could be deemed to be transferors or quasi-transferors of the company’s assets abroad and subsequently fall within the income tax charge under the ToAA code.

Decisions
The First-tier Tribunal Tax Chamber (FTT) held on 14 August 2014 that the Fishers were the transferors of the business sold by SJAL to SJGL and that the whole of the transfer was to be attributed to each of them with any potential double taxation addressed by the apportionment provision in S744 Income and Corporation Taxes Act 1988 (ICTA88) (now S743 ITA07).

The Fishers appealed to the Upper Tribunal (Tax and Chancery Chambers) (UT), who allowed the appeal and overturned the decision of the FTT holding that the transfer was made by SJAL and not any of its shareholders or directors, and thus the ToAA code was not engaged. HMRC appealed the decision of the UT.

At the Court of Appeal, the majority allowed HMRC’s appeal ruling that the ToAA code was engaged as Stephen and Peter were properly subject to the charge under S739 ICTA88 (now S721 ITA07), but held that Anne escaped the charge as she was not involved in the running of the business and had no active part in the decision making. However, the dissenting judgement stated that the ToAA was not engaged and that none of the Fishers had procured the transfer of assets by SJA by simply voting in favour of the transfer.

Stephen and Peter appealed to the Supreme Court (SC) while HMRC appealed the decision in relation to Anne.

The SC distilled two issues for determination:

  • whether the individual charged to tax under S739 ICTA88 (as the relevant rule was when this contest started) has to be the transferor of the assets who has the power to enjoy the income that becomes payable to the overseas person; and
  • whether the Fishers transferred the assets abroad.

Lady Rose, with whom all the justices agreed, concluded that S739 ICTA88 construed as part of the overall ToAA code is limited to charging UK resident individuals (or their spouse) who transfer income generating assets to persons abroad whilst having the power to enjoy the income. The SC dispelled any suggestion that there is an overlap between S739 ICTA 88 and S740 ICTA88 (now S732 ITA07) holding that it is not within the  purview of HMRC to decide whether to tax a non-transferor on the total income of the person abroad (under S739 ICTA88) or only on the benefit received (S740 ICTA 88) as this would be “falling into the trap that the courts have branded unconstitutional.”

The SC added that a narrow interpretation was required to arrive at a natural meaning of the provision as was held in the earlier decision in the Vestey case.[1] The court noted that the extended meaning given to the word ‘individual’ to refer also to one’s spouse or civil partner shows that the intention of parliament was not to bring everyone with the power to enjoy within scope whether they are the transferor of the asset or not, but that it was aimed at individual transferors.

On the second issue, the SC held that there was no reason to construe S739 ICTA88 as applying to the shareholders of a company and treating them as transferors of assets which are transferred abroad by the company on the basis of their association with the company or holding that they can procure the company to transfer assets abroad.

In supporting this view, the SC observed that although it could be argued that an individual with a controlling interest in a company is a “quasi-transferor”, it becomes more complex where the shareholder in question is a minority shareholder, as minority shareholders have no power themselves to procure any outcome. In a publicly held company, for instance, if the board decides to transfer assets abroad, thousands of shareholders could potentially be liable to tax on all the profit of the company, with HMRC having discretion to decide who pays what and how much.

The SC also added that the motive defence did not act as a protection for minority shareholders, as its focus is on the purpose for which the transfer was effected and not the purpose of each individual whom HMRC seeks to charge to tax. As such, if a minority shareholder who voted against the transfer is treated as a quasi-transferor, they will still be liable to tax regardless of any anti avoidance purpose.

The SC, without any equivocation, went further to state that even a shareholder with a controlling interest in a company is not a quasi-transferor and cannot be treated as procuring the transfer of assets by the company as the section refers strictly to individuals and their spouses. The SC found support for this view in the fact that there was no mechanism in the ToAA code to determine the meaning of control in contrast with other parts of  UK tax legislation.

Finally, the SC emphasised that simply transferring an asset to a company and then getting the company to transfer the asset abroad does not get around the ToAA because:

  • under S740 any benefit received will be subject to tax;
  • the interposition of the company would be regarded as a device and the substance of the transaction would be a transfer of assets abroad by the individual (the Ramsay principle); and
  • of the scope to pierce the corporate veil where a company has been set up with the distinct intention of circumventing tax.

And that if any gap has been created by its ruling, “gaps in the tax law can be and usually are speedily filled.”


[1]Vestey v. Inland Revenue Comrs (No 2) [1979] Ch 198.
Conclusion 
The SC agreed with the Fishers that “the law cannot be left in some unclear state just to scare people”, but it must be noted that the judgement does not pretend to provide complete certainty in relation to the interpretation of the ToAA.

An example of an issue that has been left undecided is whether, when there has been a transfer to an overseas company, all of the company’s income is within charge, or just that which relates to the transfer.  Consider the scenario where a person has incorporated an overseas company for purely commercial reasons, and subsequently transfers a trade to it. The scope of the legislation is to allow HMRC to tax the whole of the income arising to the person abroad, and not just the portion attributable to the transfer.

On this basis, the scope of the legislation has in the past been described as imposing the “severest penalties” on persons transferring assets abroad.

The argument of the Fishers in this case that it should only be taxed on the portion of the income of SJGL attributable to the transfer of assets by SJAL and not all of the income of SJGL failed, both at the FTT and UT, and the SC did not provide a concrete view on it.

It remains to be seen what income will be deemed to arise to the UK resident in such circumstances. Does the transfer of assets to the foreign company “taint” the income of the company and make it all taxable in the UK regardless of how remote the transfer is with the profits generated by the company? Perhaps we will find out in another 90 years!

Postscript
There was a risk (for taxpayers at least) that given the proximity to the Autumn Statement, HMRC might have sought to immediately overturn the decision by including provisions in the draft Finance Bill 2024 published at the same time. Luckily this didn’t happen, and as a result, the scope of the ToAA rules has been sensibly narrowed – for the time being.

If you have any questions on the transfer of assets abroad rules discussed above or other UK anti-avoidance rules, please do not hesitate to contact us.

Miles Dean

Head of International Tax
M: +44 (0)7785 770 431
E: miles.dean@uk.Andersen.com

Andrew Parkes

National Technical Director, Tax
M: +44 (0)7522 229 589
E: andrew.parkes@uk.Andersen.com

Chimezirim Echendu

Associate
T: +44 (0)7496 410 126
Echimezirim.echendu@uk.Andersen.com

Andersen LLP, 2 George Yard, London, EC3V 9DH

Tel: +44 (0)20 7242 5000
Fax: +44 (0)20 7282 4337

Enquiries@uk.Andersen.com  |  uk.andersen.com

The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.

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