UK Supreme Deploys Economic Concepts Similar to US Doctrines for Attacking Tax Shelters (4/4/16)

The UK Supreme Court has nixed a sham tax scheme.  New Judgment: UBS AG v HMRC; DB Group Services (UK) Ltd v HMRC [2016] UKSC 13 (UKSC Blog), here (with link to the opinion, here). Jane Croft and Vanessa Houlder, UBS and Deutsche avoided tax on bonuses, rules Supreme Court (FT 3/9/16), here.  A reader sometime back advised me of this development; apologies to readers for not getting around to it earlier.)

To me, the interesting point was the discussion of statutory interpretation, with incident of taxation based on the reality of the transaction, ignoring the insertion of meaningless steps solely to affect taxation, etc..  I direct readers to  the Supreme Court opinion, here:¶¶ 61, p. 20 -  32, p. 33).   Here is the conclusion:

98. The error of the Court of Appeal in these cases lies, in my opinion, in adopting a literal construction of Chapter 2, and applying it to a correspondingly formal analysis of the facts. Adopting a purposive construction of Chapter 2, the conditions relied upon in order to bring the shares in question within the scope of the exemption conferred by section 425(2) failed to make provision of the kind required by section 423(1)(a): that is to say, provision having a business or commercial purpose, as distinct from provision whose only purpose was the obtaining of the exemption. That does not however mean that the conditions are to be disregarded for all fiscal purposes. Income tax is payable on the value of the shares as at the date of their acquisition in accordance with Abbott v Philbin, account being taken of any effect which the conditions may have had.

Excerpts From the FT article:

UBS and Deutsche Bank have lost a legal challenge brought by HM Revenue & Customs over two offshore schemes designed to avoid paying tax on bankers’ bonuses. 

The Supreme Court on Wednesday overturned two earlier court decisions over the controversial schemes that operated in 2003 and 2004.

HMRC had argued throughout the 12-year dispute that the schemes were designed to exploit tax avoidance loopholes and the banks should pay back about £50m each. 

The tax schemes centred on bankers receiving shares in specially created companies, meaning they escaped income tax. 

The banks then paid banker bonuses into the schemes without having to account to HMRC for income tax or national insurance contributions for the staff or their own liabilities on earnings. 

Some 426 staff agreed to take part in the scheme and it was argued in court papers that UBS devised schemes in 2003 and 2004 to avoid paying £36.9m of tax and £12.7m in national insurance on £92m of bankers’ bonuses.\ 

Deutsche’s scheme revolved around £91m of bonuses and share awards to individual bankers above £2m. 

The Supreme Court found the restrictive conditions attached to the shares in the UBS scheme “had no business or commercial rationale beyond tax avoidance”. In the Deutsche scheme, the conditions were “simpler but equally artificial”. 

Lord Robert Reed, the Supreme Court justice, noted in his ruling: “In our society, a great deal of intellectual effort is devoted to tax avoidance.” 

He added it was “difficult to accept” arguments that parliament when passing the law had intended to encourage tax exemptions for restricted share awards where this “has no purpose whatsoever other than the obtaining of an exemption itself”. 

* * * *

Jolyon Maugham, a barrister, said the Supreme Court ruling was a landmark decision that would apply to all types of tax avoidance. He said: “The Supreme Court has found the purpose of the statute otherwise than in the language parliament has used. That really does open the door to a much looser type of statutory construction”, a reference to the process by which courts interpret legislation. 

“It will be regarded by HMRC as a major new weapon in its armoury and I can see many years of litigation ahead trying to understand what limits there are to a really rather broad principle.” 

The ruling is the second big win for HMRC in a week after Stagecoach lost an £11m battle against the agency in a tax tribunal. 

The tribunal sided with HMRC, which argued the bus and train operator had tried to reduce its 2010-11 tax bill artificially through “an attempt to manufacture losses”.
HMRC also chalked up another win last December in a tax tribunal case involving a £54m tax planning scheme used by bookmaker Ladbrokes. 

HMRC is increasingly under political pressure to crack down on various schemes used by companies and banks. 

MPs want it to take a tougher approach to tackling corporate tax avoidance. It also came under fire for failure to prosecute hundreds of British customers who used HSBC’s Swiss bank to evade tax. 

But it has prosecuted bankers who poured money into film finance schemes to avoid paying income tax. 

Last year three ex-Bear Stearns traders were jailed for 4.5 years at Southwark Crown Court after being convicted of conspiring to cheat the tax authorities by investing in film investment schemes.

 JAT Comments:

1.   The "scheme" was of the genre that I would generally describe as a bullshit tax shelter.  Mostly smoke and mirrors with no real meaningful substantial economic effect.  The analysis of the UK Supreme Court parallels the interpretive analysis that US courts often apply to bullshit tax shelters.