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Transfer of assets abroad

Author: Andrew Cockman

Published: 03 Feb 2022

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Transferring assets abroad

Andrew Cockman reviews the Court of Appeal decision in HMRC v Fisher [2021] EWCA Civ 1438 concerning the rules over transfer of assets abroad.

Currently, Fisher is the leading case involving closely held companies, where shareholders are treated as having procured a transfer. The decision was not unanimous and there was a powerful dissenting judgement.

Background

The Fisher family built up a betting business, run through Stan James (Abingdon) Limited (SJA). In 2000, SJA sold much of its business to Stan James Gibraltar Limited (SJG).

Stephen, his wife Anne, his son Peter and his daughter Dianne were the only shareholders of both companies. They were also the only directors of SJA, albeit from 1996 onwards Anne had virtually nothing to do with the business. From 1994 on, telebetting became an increasingly important source of income. Betting duty was charged on bets placed with SJA and it set up a branch in Gibraltar in 1997 in an attempt to avoid this additional cost.

In March 1999, a major competitor moved its entire telebetting business to a Gibraltar resident company. By 2000, the Fisher family followed suit to remain competitive – eventually transferring its existing telebetting business to SJG. Dianne resigned as a director of SJA and eventually became the only family director of SJG, but the Fisher family remained the sole shareholders of both companies.

Stephen, Anne and Peter were assessed by HMRC on the profits of SJG for 2000/01 to 2007/08 under the transfer of assets abroad (TOAA) provisions. They all appealed – Anne successfully, on the basis that the TOAA code was not compatible with European Union law rights (the EU defence), which she enjoyed as an Irish Citizen.

The First-tier Tribunal (FTT) also concluded that several assessments on all three were defective, albeit confirming others in relation to Stephen and Peter. In the interests of brevity, the final outcome of these assessments under the discovery rules is not considered further.

The Fishers and HMRC all appealed. At the Upper Tribunal (UT), two of the judges held that the TOAA code was not engaged at all and, even if it had been, the Fishers could rely on the motive defence in what was s741, Income and Corporation Taxes Act 1988 (ICTA 1988). The UT also considered that Anne and Stephen could rely on the EU defence. The UT differed on whether some of the assessments on Stephen and Anne were defective.

The Court of Appeal heard the appeals in July 2021 and reversed the decision of the UT on most key points, but it held that the assessment in relation to Anne as a quasi-transferor (see below) should be dismissed. The leading reasoned decision was given by Newey LJ. In the main he adopts a mechanistic approach.

TOAA code

The TOAA provisions tax the income of a person resident or domiciled outside the UK where a UK resident individual has ‘power to enjoy’ the income concerned. These provisions were originally enacted in Finance Act 1936, albeit there have been numerous amendments.

Lord Greene MR stated in the case of Lord Howard de Walden v IRC [1941] 1 KB 389 that it was a penal provision “intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest”. Hoffman J said in a later case that the TOAA code was a “broad spectrum anti-avoidance provision which should not be narrowly or technically construed” (IRC v Brackett Ch D 1986, 60 TC 134).

The quasi-transferor issue

As originally framed, the TOAA code would not work if a taxpayer could argue that a transfer had to be made by an individual or his agent. This was the point at stake in Congreve v IRC (1948) 30 TC 163. It was held there that a transfer would also be caught where it was procured by the individual.

The decision of the House of Lords in Vestey v IRC (No2) [1980] AC 1148 restricted this approach to where the person made or engineered the transfer.

The later decision of Walton J in IRC v Pratt Ch D 1982, 57 TC 1 gave practical guidance on this. He considered that it was not possible to have multiple quasi-transferors because the legislation at that time did not allow for apportionment of income attributed in such case. That changed when s744(1), ICTA 1988 was introduced to prevent the same income being assessed several times over on different people. 

In deciding that Stephen and Peter were quasi-transferors, Newey LJ relied on the decision in Congreve that transfers could be procured, as well as broad brush interpretative approach.

He did not think that Anne could be said to have procured the transfer and hence was not a quasi-transferor. He noted that the FTT said that Anne “had virtually nothing to do with the business” after 1996. He agreed with the FTT that ‘procure’ means ‘doing something positive to bring something about’, not ‘passively allowing someone else to do something’.

Does there need to be actual avoidance?

The simple answer here is that although the TOAA code is aimed at preventing avoidance of income tax, it does not follow that the code was only applicable where it was actually avoided.

The motive defence issue

The motive defence is provided by s741, ICTA 1988. The TOAA regime does not apply if either:

  • the purposes of avoiding liability to taxation was not the purpose or one of the purposes for which the transfer or any associated operations were effected; or
  • the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.

It was the second test that mattered here, the issue being determined subjectively. The second test is satisfied where the main purpose is not the avoidance of taxation (Carvill v IRC [2000] SpC (SSCD) 143).

It was accepted in this case by all concerned the transfer by SJA to SJG was a bona fide commercial transaction. The FTT had concluded that the main purpose behind the transfer was saving the business and betting duty avoidance was simply the means of achieving that purpose. Newey LJ considered that these two motives were inseparable, which meant that neither of the motive defences in s741, ICTA 1988 could apply.

It might be said that saying the two motives were inseparable was a bit of a fudge. It also opens the possibility that where similar tests feature in legislation, HMRC will be able argue that inseparable tax minimisation motives interfere to preclude the availability of taxpayer relief.

Was the TOAA code compatible with EU law?

The UT had referred to the Court of Justice of the European Union (CJEU) to determine whether as a matter of EU law, Gibraltar and the UK were to be treated as a single Member State. This would have a bearing on the extent that the TOAA code could be considered in the context of the fundamental freedoms protected under European law.

The CJEU ruled that they were to be treated as a single state. Taking all other relevant factors into account, the Court of Appeal concluded that the TOAA rules did not infringe Anne’s freedom of establishment as an Irish citizen resident in the UK.

Was some of the income of SJG too remote?

The question here was whether the income derived from the fresh trading activities after SJG had been established fell within the TOAA regime. This aspect had not been fully argued before the FTT, and Newey LJ ruled that it was not open to the Fishers to do so now.

Lord Justice Philips

The third judge gave a powerful dissenting judgement. He ruled that it was wrong in principle to regard a minority shareholder as ‘procuring’ an act by the company simply by voting in favour of (or otherwise supporting) that act. They cannot be said to have procured anything. He observed (at para 146): “If being part of a group of minority shareholders who vote in favour of a transaction is sufficient to render them all quasi-transferors, that must apply to thousands of shareholders in a PLC … as Mr Ewart on behalf of HMRC accepted in the course of argument. Indeed, it would even apply, potentially, to a shareholder who has given a proxy to the board of a PLC which was proposing the effect the transfer.”

Conclusion

The decision covers a whole range of TOAA topics and is a must-read for anyone involved in this area. But it is not entirely clear that we have ended up with a position that is entirely logical or sustainable. It potentially opens other doors, such as whether the wishes of settlor and beneficiaries might be said to procure the actions of trustees.

It is understood that the taxpayers and HMRC have made separate appeals, but at the time of writing it is understood that no decision has been taken as to whether the case will be heard by the Supreme Court. Hopefully a final authoritative decision will put some of the uncertainties to rest.

About the author

Andrew Cockman, Director Personal Tax Advisory, Azets Birmingham and member of the Tax Faculty’s Private Client Committee