Are you the Transferor? Don’t bet on it…
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The UK Supreme Court has recently published its judgment in the important case of HMRC v Fisher (2023) UKSC44.
The judgement concludes a long-running dispute which has involved arguments on its way up to the Supreme Court on several aspects of the transfer of assets abroad regime (the “ToAA Regime“), culminating in a fundamental argument about who is capable of being a “transferor” for these purposes.
In short, the Supreme Court upheld the taxpayers’ appeal against an assessment to income tax on income arising to an offshore company under the ToAA Regime on the basis that the taxpayers were not, either singly or collectively, the transferors of the UK business that was sold to a company in Gibraltar.
The facts
The Fisher family (parents Peter and Anne and children Stephen and Dianne) carried on a successful tele-betting business in the UK through a company owned by the four of them (Stan James (Abington) Ltd) (the “UK Company“).
Owing to the imposition of betting duty in the UK which made the business uncommercial in relation to its competitors, part of the business was transferred to a company established in Gibraltar in 2000 (Stan James (Gibraltar) Ltd) (the “Gibraltar Company“) by way of sale at market value.
The business continued to thrive and HMRC subsequently assessed the three UK resident shareholders (Stephen, Peter and Anne Fisher; Dianne was non-UK resident and therefore her liability was not in point) to UK income tax on a share of the income arising to the Gibraltar Company (in proportion to their respective shareholdings) on the basis that they had transferred assets to the Gibraltar Company and had “power to enjoy” the income under the ToAA Regime.
The taxpayers appealed and set in motion this litigation which ended in the Supreme Court.
The ToAA Regime
This case concerned the correct construction of the primary anti-avoidance provision of the ToAA Regime, then contained in section 739 of the Income and Corporation Taxes Act 1988 (now contained in its successor legislation in Chapter 2 of Part 13 of the Income Tax Act 2007).
Broadly, the ToAA Regime seeks to tax UK resident individuals (the “transferors”) who transfer assets either directly or through “associated operations” to an overseas entity or person (the “transferee”). The transferors are liable to income tax on the income arising directly or indirectly as a result of the transfer, where the transferors remain able to enjoy that income (broadly, are able to benefit from it).
This is the first of two potential tax charges under the ToAA Regime and, if it does not apply, the income can be assessed on any UK residents who receive a benefit as a result of the transfer but did not themselves carry out the transfer (previously s740 ICTA, which was not the charging provision relied on in this case).
In addition, neither of these provisions will apply if a successful claim for the “motive defence” is made, i.e. that broadly, the purpose of avoiding liability to taxation was not (one of) the purpose(s) for which the transfer or associated operations were effected; or that the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation (formerly s741).
Application to the case
It was agreed that there had been a transfer of assets from the UK Company to the Gibraltar Company, and that the family members did have power to enjoy the income of the Gibraltar Company and in light of the decision it was not in fact necessary to consider the availability of the motive defence (though it is noted that the Court of Appeal dismissed the argument that it could apply, on the basis that the avoidance of betting duty was tied up with the overall commercial decision to sell the business to the Gibraltar Company).
The Supreme Court’s decision was therefore limited to deciding two matters concerning s739:
- whether the transfer of assets has to be a transfer by the individual who has the power to enjoy the income that becomes payable to the overseas person or can the transfer be by any person, provided that the individual assessed to tax has a power to enjoy that income by virtue or in consequence of the transfer; and
- if the individual does have to be the transferor of the assets, in what circumstances (if any) can an individual be treated as a transferor of the assets where the transfer is in fact made by a company in which the individual is a shareholder?
The decision
HMRC’s argument, with which the Court of Appeal had concurred, was that individuals who procure transfers were quasi-transferors and so could be treated as the transferors, and therefore as the Fishers owned a controlling interest in the UK Company and effectively made the decision to transfer the business to a non-UK company, they could be taxed as transferors.
The Supreme Court disagreed with this approach and instead concluded that section 739 is limited to charging individuals who transfer assets abroad.
In coming to that conclusion, they relied on the House of Lords decision in Vestey v Inland Revenue Commissioners (Nos 1 and 2) [1980] AC 1148, which concerned an earlier version of the provision and concluded, contrary to HMRC’s arguments, that the changes made to the legislation since the ruling in Vestey do not undermine the reasoning in that case.
They also concluded that this was the most natural interpretation of the legislation and to construe it more widely was inconsistent with other parts of the legislation that specifically include the spouse of the individual (as there would be no need if everyone who has the power to enjoy the income could be charged regardless of whether they are a transferor or not).
Similarly, a broad interpretation does not really fit well with the alternative charging provisions that make non-transferors receiving a benefit from the income liable for income tax in certain circumstances.
The Supreme Court then went on to consider the second part of HMRC’s argument: that the Fishers should be treated as the transferors of the assets even though the legal transferor of the assets was the UK Company because, together, they owned the controlling interest in the UK Company.
The Supreme Court concluded that section 739 could not apply to an individual in relation to a transfer made by a company in which they are a shareholder, regardless of the size of their shareholding because (unlike under other statutory regimes) there are no criteria set out in the statute which can be used to determine the circumstances in which a shareholder should be treated as responsible for a transfer made by a company and practically the existence of multiple transferors for the purposes of section 739 would cause numerous difficulties in applying the provisions.
In short, the Supreme Court ruled that the Fishers were not either singly or collectively the transferors of the UK business that was sold to the Gibraltar Company.
This may seem to be a surprising conclusion and one may posit that it should therefore be possible simply to put assets into a UK company, have that company transfer the assets abroad to a non-UK company and find yourself on the right side of the ToAA Regime.
The Supreme Court was alive to this point, noting that “HMRC may protest that this leaves a lacuna in the legislation”. However, the judgement notes three counter-arguments to this:
- Firstly, the introduction of section 740 applying to non-transferors means that that individual will not escape the tax charge if he or she actually receives a benefit in this jurisdiction in the form of income or capital.
- Secondly, the interposition of the UK company in the sort of scenario outlined above would be effectively artificial, and the substance of the transaction would still be a transfer of those assets by the individual to the company abroad. Likewise, if a UK company was deliberately set up to circumvent a liability to income tax, that scenario might be treated as falling within one of the recognised exceptions to the distinct legal personality of the company (such an argument would not be applicable could be relied on by HMRC here because the UK Company was a bona fide company which had been trading for many years).
- Thirdly, even if this ruling does create a “lacuna”, then as Viscount Dilhorne said in Vestey, gaps in our tax law can be and usually are speedily filled. If the Government does not regard section 740 as adequate, then it will need to think carefully about how to address this in a fair, appropriate and workable manner.
In short, it seems that the position for UK resident individual shareholders of UK commercial businesses may now have greater clarity on the potential application of the ToAA Regime where assets are transferred abroad.
However, it remains to be seen whether a similar case may be argued where the transfer of assets was on less clearly commercial grounds than that in the present case and where an individual shareholder(s) could still be said to be procuring the transfer in question.
