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NMB HOLDINGS LIMITED v. SECRETARY OF STATE FOR SOCIAL SECURITY [2000] EWHC Admin 369 (14th July, 2000)
CO/357/2000
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CROWN OFFICE LIST
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 14th July 2000
B e f o r e :
THE HON MR JUSTICE LANGLEY
Between:
|
NMB
HOLDINGS LIMITED
|
Claimant
|
|
-
and -
|
|
|
SECRETARY
OF STATE FOR SOCIAL SECURITY
|
Respondent
|
-
- - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr R Venables QC and Mr J Henderson. (instructed by Messrs Slaughter
and May for the Claimant)
Mr L Henderson QC and Mr J Peacock (instructed by the Solicitor to the
Department of Social Security for the Respondent)
Judgment
As Approved by the Court
Crown Copyright ©
MR JUSTICE LANGLEY:
INTRODUCTION
This is an appeal by way of Case Stated under Section 18 of the Social Security
Administration Act 1992 against a decision of the Respondent (the Secretary of
State) made on 23rd September 1998 to the effect that payments made by the
Claimant (NMB) by way of the conferment of beneficial interests in platinum
sponge on certain persons (all directors of NMB and referred to as "the
directors") amounted to the payment of "earnings" for national insurance
purposes for the relevant years and were not payments to be excluded from
"earnings" by virtue of Regulation 19 (1)(d) of the Social Security
(Contributions) Regulations 1979 (The 1979 Regulations).
The consequence, if it is upheld, is that NMB was obliged to pay secondary
Class 1 National Insurance Contributions on the realised value of the interests
in platinum sponge. The liability of the directors to pay contributions would
not be affected as each had paid the maximum contribution on his salary paid in
cash in each relavant year.
On seven occasions between May 1994 and April 1997 NMB conferred bonuses on the
directors in the form of beneficial interests in platinum sponge which it had
purchased for the purpose acting on the advice of its auditors and advisers,
Messrs Deloitte & Touche (formerly Touche Ross). After acquiring the
interest in each case the directors sold it back the next day to the company
(originally Republic Mase Bank Ltd and subsequently Barclays Bank PLC) from
which NMB had bought it.
The decision of the Secretary of State was made under Section 17(1)(a) of the
1992 Act, after an enquiry held in accordance with Section 17(4). The appeal is
brought under Section 18(3) and by virtue of Section 18(6) the decision of this
Court "shall be final".
An appeal can only be brought on a question of law. That, it is agreed, means
that NMB can only succeed if it can identify an error of law made by the
Secretary of State in the form either of some misinterpretation of relevant
statute or other legal principle or a finding of primary fact without evidence
to support it or an inference drawn from a finding of primary fact which no
reasonable decision-maker could have made: Furniss v Dawson [1984] AC 474: at 527F-528D by Lord Brightman.
The basis of the Secretary of State's decision was that:
(1) applying the principles to be found in Ramsay v Inland Revenue
Commissioners [1982] AC 300, and disregarding steps inserted in the
transactions which had no business purpose other than the avoidance of
liability for national insurance contributions, earnings were paid to the
directors within the meaning of section 6 of the 1992 Act and there was no
"payment in kind" to be disregarded under Regulation 19(1)(d) of the 1979
Regulations (see paragraph 6(27) of the Case Stated); and
(2) in any event, in respect of the benefits conferred after 6 April 1995, the
platinum sponge was an asset for which "trading arrangements" existed within
the meaning of paragraphs 9C and 19 of Schedule 1A to the 1979 Regulations,
having regard to the definition in section 203K of the Taxes Act, with the
result that the provision of the benefits was not to be disregarded under
Regulation 19(1)(d) in the computation of earnings for National Insurance
contribution purposes (see paragraph 6(37) of the Case Stated). In the relevant
years this was a further reason why NMB was liable to make contributions on the
realised value of the interests in the platinum sponge, albeit in view of the
decision on the first point it was not necessary so to decide.
THE GROUNDS OF APPEAL
The grounds of appeal are that:
(a) the Secretary of State erred in law in finding that the Ramsay
principle applied so as to characterise the transactions as ones involving the
receipt of earnings in cash rather than kind;
(b) The Secretary of State erred in law in finding that, as regards benefits
conferred after 5 April 1995, there were "trading arrangements" in place "for
the purpose of enabling the employees to obtain an amount similar to the
expense incurred in the provision of the asset".
THE LEGISLATIVE PROVISIONS
The relevant provisions of the 1992 Act are as follows:
6(1) Where ... earnings are paid to or for the benefit of an earner ... in
respect of any one employment of his which is employed earner's employment
-
(a) ...
(b) a secondary Class 1 contribution shall be payable in accordance with
this section ...
[There is no dispute that the conferment by NMB on the directors of benefits in
the form of beneficial interests in platinum sponge was in respect of their
employed earner's employment with the employer and that, if such conferment
amounted to the payment of earnings to or for their benefit, then the Claimant
was obliged to pay secondary Class 1 contributions in respect of them.]
"Earnings" is partly defined, by section 3(1) of the Act:
(1) In this Part of this Act and Parts II to V below -
(a) "earnings" includes any remuneration or profit derived from an
employment; and
(b) "earner" shall be construed accordingly.
The Treasury has powers, in particular under section 3(2) and (3) of the Act,
to make regulations respecting the amount of a person's earnings and in
particular that payments of a particular class or description shall be
disregarded.
The main regulations are The 1979 Regulations (SI 1979/591).
Regulation 19 provides for payments to be disregarded. Schedule 1A provides for
assets not to be disregarded as payments under regulation 19(1)(d). Schedule 1B
provides for readily convertible assets not to be disregarded as payments under
regulation 19(1)(d).
Regulation 19 provides:
19-(1) For the purposes of earnings-related contributions, there shall be
excluded from the computation of a person's earnings in respect of any employed
earner's employment any payment in so far as it is-
...
(d) subject to paragraph (5) of this regulation, any payment in kind or by
way of the provision of board or lodging or of services or other
facilities.
19-(5) Payments under paragraph (1)(d) of this regulation shall not include
any payment by way of the conferment of any beneficial interest in -
(a) any asset falling within Schedule 1A to these Regulations; or
(b) ....
As from April 6 1995, there was added to Schedule 1A as paragraph 9C
Any other asset, including any voucher, for which trading arrangements exist
and any voucher capable of being exchanged for such an asset.
Regulation 19(5) was later twice amended to refer to newly inserted Schedules,
1B and 1C. Schedule 1B was inserted, with effect from 1 October 1998. Schedule
1C was inserted with effect from 6 April 1999. Each of them likewise adds to
the range of benefits in kind to be disregarded for the purposes of regulation
19(1)(d).
The conferring of a benefit in the form of platinum sponge did not fall within
Schedule 1A at least prior to 5 April 1995, as the Secretary of State has found
as a fact that platinum sponge was not a commodity capable of being sold on a
recognised investment exchange within the meaning of paragraphs 9A and 15 of
Schedule 1A of the Regulations. After April 5 1995, the platinum sponge could
have fallen within Schedule 1A only if it was an asset for which "trading
arrangements" existed.
THE FACTS
In view both of the limited challenges to them and the limited basis in law on
which such challenges can be made and because they are set out there with
clarity and need to be referred to in the course of this judgment, I have
attached as an Annexe to this judgment a copy of the Case Stated, without its
Exhibits. The findings of primary fact are to be found in the 69 sub-paragraphs
of paragraph 3 of the Case.
Without seeking to detract from or enlarge on what is there set out, the
essentials of the scheme (using references to the sub-paragraphs of paragraph
3) were that 2 directors of NMB (who also together held a majority of the
shares) would decide how to allocate a pool of money available for bonuses (3
and 7). The bonuses were calculated in cash and would have been paid in cash
but for the intention to minimise the liability for National Insurance
contributions (11). The amount of platinum sponge to be acquired was calculated
by reference to its price and the total amount of the bonuses (27). NMB would
resolve to buy that amount (28), and then send Republic Mase (or Barclays) a
schedule which included a target figure for the cash the company hoped would be
realised by each recipient at the end of the transactions (29).
Although Mr Venables QC challenged the basis for this latter finding it was
clearly supported by the documents and in particular (as regards the first
bonus) an internal memorandum dated 18 May 1994.
The paperwork by which the transaction was effected was completed over 2 days.
What follows relates to the first transaction. On Day 1 (31) NMB sent a fax to
Republic Mase asking it to buy the relevant quantity of platinum sponge at the
morning fix price. Republic Mase would confirm the purchase and the price. NMB
would pay the price. The platinum sponge remained throughout in the custody of
a Bank in Hong Kong.
On Day 2 (33) NMB resolved to transfer the appropriate quantity of the platinum
sponge to the directors. A copy of the resolution was sent to Republic Mase and
NMB wrote to the directors informing them of the provision of a bonus in a
given quantity of platinum sponge located in Hong Kong and indicating that the
director could sell or retain the platinum sponge as he wished. Each director
sent a mandate to Republic Mase requesting it to open a metal account and wrote
saying that he wished to sell the platinum sponge and to have the funds
transferred to his bank account. That was done at the fix price on that day and
the proceeds duly remitted.
The procedure with Barclays for the subsequent transactions was not materially
different.
The Secretary of State also found as a fact (24) that whilst the draft
documentation prepared for the first transaction did not oblige the directors
to sell the platinum sponge back " that was what was intended". Mr Venables
also sought to challenge this finding as a mis-reading of the letter (and its
enclosures) sent by Touche Ross to NMB on 13 May 1994. He submitted that at
most the letter was referring to an "expectation" that the directors would sell
back the platinum sponge and not something which could be characterised as
"pre-ordained" or "pre-determined". Reading the letter and enclosures as a
whole, in my judgment the finding as expressed was entirely reasonable and
certainly unassailable in law. The letter did assume that the platinum sponge
would be sold back and provided draft documentation for that to be done.
There are unchallenged, and again in my judgment wholly justified, findings
that:
(i) Barclays did not expect the directors to wish to retain the platinum
sponge, and expected and were keen to buy it back from them so the Bank could
re-cycle it (37);
(ii) Various charges were designed to encourage a sale back (43);
(iii) It was never suggested to Touche Ross that any of the directors might
want to sell it to anyone else (56). This finding was also commented upon by Mr
Venables but simply reflects what was said in evidence (Transcript day 1, page
56 A to B);
(iv) Each of the directors intended to sell it back. One, on one occasion,
considered (briefly) whether to hold it as an investment but did sell it back
(56 to 59).
The findings concerning platinum sponge itself (60 to 69) are also
unchallenged. They can be summarised by saying that there is no recognised
trading market for it and it would not normally be bought (or sold) by private
individuals as an investment.
As Lord Brightman said in the passage of his speech in Furniss v Dawson
to which I have already referred in cases such as this the inferences properly
to be drawn from the primary facts are likely to be most material and to those
which were drawn by the Secretary of State on the basis of the report of the
Inquirer I will return after a consideration of the authorities to which I have
been referred so that they may be seen in context.
THE ISSUES
The issues raised on this appeal by NMB may be summarised as:
(1) Does "the Ramsay principle" apply at all to National Insurance contribution
legislation?
(2) If it does, does it apply in the present circumstances and, if so, how?
(3) The "trading arrangements" issue arising under paragraph 9C of Schedule 1A
to the 1979 Regulations.
ISSUE (1) RAMSAY AND NIC
Mr Venables expressly did not put this submission at the forefront of his case.
In my judgment he was plainly right not to do so.
In I.R.C.V McGuckian [1997] STC 908, at page 916, Lord Steyn, following
what Lord Wilberforce had said in Ramsay, said that the Ramsay principle
had been developed as a matter of statutory construction. He continued:
The new development was not based on linguistic analysis of the meaning of
particular words in a particular statute. It was founded on a broad purposive
interpretation giving effect to the intention of Parliament. The principle
enunciated in the Ramsay case was therefore based on an orthodox form of
statutory interpretation. And in asserting the power to examine the substance
of a composite transaction the House of Lords was simply rejecting formalism in
fiscal matters and choosing a more realistic legal analysis.
There is, therefore, no reason why the same approach to construction should not
be applied to National Insurance legislation. To do so is to do no more than
follow orthodoxy. Moreover it can hardly be gainsaid that, however described,
National Insurance contributions are very closely analogous to a tax. They are
a compulsory state-imposed levy on employers and employees and the relevant
legislation is of a recognisable kind in such a context.
Mr Venables referred to the speech of Lord Nolan in Customs and Excise
Commissioners v Thorn Materials Supply Ltd [1998] STC 725 at 733f where
Lord Nolan described the question whether the Ramsay principle had any
application to VAT as one raising novel issues of "great importance and
complexity both in our national and community law." Mr Venables submitted that
this showed that the answer to the present issue was not so straightforward as
the same arguments would apply equally to VAT. I do not agree. Not only did Mr
Venables fail to advance any arguments to justify a submission that the matter
was one of complexity in the case of National Insurance but it also has no
community law element and I accept from Mr Henderson that community law
provides (or at least arguably provides) for different canons of construction
than those of our national law.
In my judgment, therefore, the Ramsay principle does apply to the legislation
here in issue.
ISSUE 2 RAMSAY.
Before embarking on the application of the principle to the facts of this case
I should set out my understanding of what the principle itself involves in
cases of this sort. In referring to "the substance of a composite transaction"
as he did in the passage I have quoted from Lord Steyn in McGuckian I
have already touched upon it.
Ramsay itself concerned what is commonly referred to as a
self-cancelling circular transaction. That is not and is not contended by the
Secretary of State to be the case here.
But, for the purposes of this case, two important points of principle are to be
found in Ramsay and in particular in the speech of Lord Wilberforce at
page 324. First, a finding that documents forming the relevant transaction are
not shams does not preclude consideration of "what as evidenced by the
documents themselves or by the manifested intentions of the parties the
relevant transaction is." Second, that in deciding whether a transaction is a
"composite transaction" it is not necessary for each step to be obligatory once
it has been set in motion but it may suffice that "there is an expectation that
it will be so carried through and no likelihood in practice that it will
not".
These principles have in my judgment remained part of the foundation of the
Ramsay principle as it has developed. The development of immediate relevance to
this case came with the decision in Furniss v Dawson because that case
decided that the Ramsay principle applied to "linear" transactions also. In
that case a sale by the taxpayers of two family companies was made by selling
the shares to "G" an Isle of Man company (incorporated for the purpose) in
exchange for shares in G. G then sold the shares on to another company "W" for
cash. The decision was that for fiscal purposes the insertion of the Isle of
Man company into the sale transaction was to be disregarded and the taxpayers
assessed to capital gains tax on the basis that they had disposed of their
shares in the family companies for the consideration paid by W to G.
The statement of principle is to be found in the speech of Lord Brightman at
page 527C where he sets out what he described as the "limitations of the Ramsay
principle" as follows:
First, there must be a pre-ordained series of transactions; or, if one
likes, one single composite transaction. This composite transaction may or may
not include the achievement of a legitimate commercial (i.e. business) end. The
composite transaction does, in the instant case; it achieved a sale of the
shares in the operating companies by [the taxpayers to W]. It did not in
Ramsay. Secondly there must be steps inserted which have no commercial
(business) purpose apart from the avoidance of a liability to tax - not "no
business effect". If those two ingredients exist, the inserted steps are to be
disregarded for fiscal purposes. The court must then look at the end result.
Precisely how the end result will be taxed will depend on the terms of the
taxing statute sought to be applied.
The concept of a pre-ordained or single composite transaction was addressed
further in Craven v White [1989] 1 AC 398. The (as held) essential
distinction between the facts of the first case on appeal in Craven v
White and the facts in Furniss v Dawson was that the transfer of the
"taxpayers shares" to an Isle of Man company took place at a time when, whilst
negotiations for the sale of the company were taking place, there was no
certainty that a sale would take place or to whom. A sale did in fact take
place some 3 weeks later. The House of Lords (by a majority of 3:2) held that
in those circumstances the transaction was not "pre-ordained".
In the course of his speech Lord Keith (at page 479) referred to a limit on the
Ramsay principle on which Mr Venables placed reliance. He said:
The principle does not involve in my opinion that it is part of the judicial
function to treat as nugatory any step whatever which a taxpayer may take with
a view to the avoidance or mitigation of tax. It remains true in general that
the taxpayer, where he is in a position to carry through a transaction in two
alternative ways, one of which will result in liability to tax and the other of
which will not, is at liberty to choose the latter ....
As became apparent in the course of submissions this principle is clear but its
application may result in some circularity of argument. The first question must
I think be whether the taxpayer is in a position to choose and the ambit of any
choice which may be available to him. And the Ramsay principle is or may be
effective at that stage.
On the question of "pre-ordainment" Lord Keith said (at page 481):
In my opinion both the transactions in the series can properly be regarded
as pre-ordained if, but only if, at the time when the first of them is entered
into the taxpayer is in a position for all practical purposes to secure that
the second also is entered into.
Lord Oliver referred (at page 512) to the many circumstances in which
transactions are so closely linked as realistically to be regarded as a single
indivisible composite whole - a concept which may be summed up in homely terms
by asking the question whether at the material time the whole is already "cut
and dried". At page 514F he described the essentials emerging
from Furniss v Dawson to be four in number:
(1) that the series of transactions was, at the time when the intermediate
transaction was entered into, pre-ordained in order to produce a given result;
(2) that the transaction had no other purpose than tax mitigation; (3) that
there was at that time no practical likelihood that the preplanned events would
not take place in the order ordained, so that the intermediate transaction was
not even contemplated practically as having an independent life, and (4) that
the pre-ordained events did in fact take place. In these circumstances the
court can be justified in linking the beginning with the end so as to make a
single composite whole to which the fiscal results of the single composite
whole are to be applied.
The contrast (515C) was between something done "as a preparatory step towards a
possible but uncertain contemplated future action and something which is done
as an integral and interdependent part of a transaction already agreed and
effectively predestined to take place."
Mr Henderson accepts that as the law stands (Inland Revenue Commissioners v
Willoughby [1997] 1 WLR 1071) Lord Oliver's step (2) would better be
expressed in terms of tax "avoidance" not "mitigation".
Unsurprisingly Mr Venables referred me to a number of other authorities which,
he submitted, reflected further limitations or restrictions on Furniss v
Dawson. Indeed on occasion he came close to submitting that they had
provided the rule to which Ramsay and Furniss v Dawson were the
exception albeit he acknowledged the reverse was the case.
Foremost among these authorities was Inland Revenue Commissioners v
Fitzwilliam [1993] 1 WLR 1189. That involved a scheme to avoid capital
transfer tax. Lord Keith (at page 1204) made clear that "pre-ordainment" was
essential but not sufficient for the Ramsay principle to apply. In that case
"the problem for the Crown" was that it had to rely on one of the impugned
steps in the transaction to make its case and thus there was "no question of
running any two or more transactions together, as in Furniss v Dawson or of
disregarding any one or more of them".
That was the material distinction; or as Lord Keith put it at page 1203 F to
G:
No case applying the Ramsay principle has yet held it to be legitimate to
alter the character of a particular transaction in a series or to pick bits out
of it and reject other bits. In Furniss v Dawson the transfer to the
intermediary company G was disregarded for fiscal purposes because of the
pre-existing informal agreement and of the manner in which the two transactions
were carried out, which made it intellectually possible to hold that G never
had control of the operating companies within the meaning of the statute. No
comparable exercise is possible here.
In Willoughby Lord Nolan (at page 1079) referred in the context of an
express statutory anti-avoidance provision to the absurdity of describing as
tax avoidance the acceptance of an offer of freedom from tax which Parliament
had deliberately made by that provision and which the Commissioners had found
as a fact the taxpayer had complied with.
In MacNiven v Westmoreland Investments [1998] STC 1131 (a decision of
the Court of Appeal which is under appeal to the House of Lords) the same
distinction between unacceptable tax avoidance and acceptable tax mitigation
was drawn. The decision was that the taxpayer was entitled to adopt the
fiscally most advantageous course open to it to crystallise a genuine tax loss.
There was also a genuine commercial interest for the company in refinancing its
indebtedness. Nonetheless, for my part, I find the line between avoidance and
mitigation as drawn on the facts of that case one which is not easy to divine
but the principle that it has to be drawn is not in issue in this case. On
which side of the line the present facts fall is addressed later. I also think
that Ingram v Inland Revenue Commissioners [1997] STC 1234 (CA) [2000] 1 AC 293 (HL) and the judgment of Millett LJ in the Court of Appeal is another
example of the same exercise, but not a qualification let alone a change in the
principle to be applied or the question to be asked: see at page 1270e to g.
The decision of the Special Commissioner in Reynaud [1999] STC (SCD) 185
is, I think, one of fact that in the circumstances of that case there was no
pre-ordainment and also an application of Lord Keith's dictum that the Ramsay
principle cannot be used to pick bits out of a scheme and reject others or to
alter the character of a transaction. The case did not involve, as the
Secretary of State contends happened here, the insertion of an artificial asset
in the course of events. That did, however, occur in DTE Financial Services
v Wilson [1999] STC 1061 a decision of Hart J which I understand is subject
to appeal to the Court of Appeal. Hart J also applied Lord Keith's dictum. Mr
Henderson frankly and rightly accepted that the decision was therefore closer
to the facts of this case but, of course, it too was a decision applying its
own facts to the statement of principle of Lord Brightman in Furniss v
Dawson: page 1072 at e to g. Mr Henderson submitted that (right or wrong)
the decision could in any event be distinguished because what was at issue was
PAYE and to be taxed a payment had to be found to have been made to the
recipient of the bonus from which PAYE fell to be deducted. It was the
Revenue's submission that such a payment could be found but only in, or by
"re-modelling", one of the impugned steps of the scheme. That was fatal, as the
judge decided, following Lord Keith's dictum. In this case, Mr Henderson
submits that all that is necessary is for the relevant legislation to be
construed so that when the proceeds of their sale of the platinum sponge
arrived in the directors' bank accounts they can (and should) be treated or
characterised as a payment to the directors of earnings within the true meaning
of the relevant legislation. That is to link the beginning with the end.
I conclude from these authorities that Lord Brightman's statement of principle
in Furniss v Dawson remains the guiding light to consideration of the
issues in this case, read with Lord Oliver's dictum in Craven v White. I
would add this. As a principle of statutory construction the Ramsay principle
must I think, and as Mr Venables submits and the cases show, give way where a
statute clearly entitles a particular course to be followed and tax avoided.
But it is not, I think, a legitimate limitation on the principle to submit, as
Mr Venables did, that because the relevant legislation has sought to plug what
are conceived to be some gaps in its provisions therefore an unplugged gap must
be taken to have been expressly permitted. That would not only be to ignore the
ingenuity of tax advisers but to come close to emasculating the Ramsay
principle altogether. So in this case to say that because Parliament has
excluded "payments in kind" from the relevant calculation (and also provided
for exclusions from the exclusion) therefore payments in platinum sponge are
excluded is in my judgment to beg the very question which is the last one in
Lord Brightman's formulation, namely is what happened in this case properly to
be characterised as a payment in kind or in money.
Further, as the essence of the Ramsay principle is to give a purposive
construction to such legislation it is relevant to ask what the purpose was in
Parliament excepting "payments in kind" (and enacting exceptions to the
exception). Mr Henderson submitted that the reference in Regulation 19(1)(d)
itself to "the provision of board or lodging or of service or other facilities"
gave a strong indication of the legislative purpose, namely to exclude things
of either a consumable nature or which carried with them a degree of permanence
such that an employee could be expected to use or retain them rather than seek
to realise them for cash. I think there is force in this submission. I cannot
think that, had the matter been before it, Parliament would have granted
exemption to what took place here. The fact that such things have not formed
express exceptions to the exception is I think two-edged. Granted that it is
intended to retain exception for things of the nature to which Mr Henderson
refers and so the exception for payment in kind is to survive in some form, the
other exceptions to the exception not only bite when of course there is no
available Ramsay principle in such cases at all to catch them but raise again
the primary question whether the true inference is that no express provision
was made because on its true construction the existing provisions are
sufficient to catch "payments" made as they were in this case.
APPLICATION OF RAMSAY
I turn then to consider the application of the Ramsay principle in this
case.
(1) PRE-ORDAINED/COMPOSITE TRANSACTION
The question, as expressed by Lord Oliver, is whether there was no practical
likelihood that the pre-planned events would not take place in the order
ordained. It is agreed that it is a high test.
The Secretary of State found in terms (last sentence of paragraph 6(22) of the
Case Stated) that this question was to be answered "Yes". He therefore asked
himself the right question and in my judgment answered it in what in reality
was the only sensible way to do so and certainly in a way which cannot be
impugned on an appeal of this sort. The bonuses were calculated in cash. None
of the directors acting sensibly would have retained the platinum sponge.
Indeed the scheme included documentation which assumed they would sell it back.
The reasoning in paragraph 6(22) is in my judgment impeccable and there was
ample evidence to justify it.
(2) INSERTED STEPS WITH NO COMMERCIAL PURPOSE
It is important to note that Lord Brightman made it quite plain that the fact
that the overall transaction had a legitimate commercial or business purpose
(in Furniss v Dawson the sale of the shares, in this case the payment of
a bonus) is not what this requirement is referring to. It refers to the steps
inserted by which that purpose is achieved. In this case everything that was
done following the decision to pay bonuses of a given cash amount was done to
ensure that the amount (or very close to it) was received by the directors. But
the purchase, transfer and re-purchase of the platinum sponge located in Hong
Kong had no commercial or business purpose at all. Neither NMB nor the
directors had any use for platinum sponge; it was of course chosen simply
because it was a commodity to which the Regulations did not expressly apply. It
also follows in my judgment that those steps had no purpose other than to avoid
the payment of secondary contributions on the bonuses and cannot sensibly be
described as tax mitigation. Both counsel accept that the distinction is an
elusive one and that it overlaps with the final question in Lord Brightman's
formulation, but in this case there was no genuine tax loss to be realised, no
genuine wish to split a freehold estate, no express reliance on a specific
statutory provision of the kind in issue in Willoughby. What there was
was a decision to pay and the actual receipt of cash bonuses with an artificial
scheme created in the middle whereby the money went into and out of platinum
sponge in the course of about 24 hours. Looked at as a whole, that, in my
judgment, is tax avoidance not mitigation.
(3) CAN THE INSERTED STEPS BE DISREGARDED?
Mr Venables submitted that even if I was (as I am) against him thus far and so
the purchase and re-sale of the platinum sponge fell to be disregarded, that
would avail the Secretary of State nothing because there was then no payment
from NMB left in the chain to which a liability to pay contributions could
attach. He submitted that the only way the Secretary of State could escape from
that conclusion was by re-characterising or adopting one of the impugned
intervening steps and that was forbidden by the authorities such as
FitzWilliam and DTE. I do not accept this submission. What the
Secretary of State contends for is no more in principle than the House of Lords
upheld in both Furniss v Dawson and McGuckian and remains in my
judgment "intellectually possible". Indeed Mr Venables really had no answer to
the suggestion that such was the case. In those cases the House in effect
decided that the substance or reality of the composite transactions was to be
considered free of any artificial steps. If the substance of this transaction
was, as I think it was, and the Secretary of State found, a payment of bonuses
in cash that is sufficient and does not involve impermissible picking and
choosing bits of the artificial stages and seeking to attach any fiscal or
other real consequences to them. The artificial insertion of the sale and
purchase of platinum was no different in principle from the insertion of
company G in the sale of the companies in Furniss v Dawson.
(4) THE RELEVANT "TAX" PROVISIONS
The final step is that the court must look at the end result and see how the
relevant legislation can be applied to it. The question is whether "earnings"
or "remuneration" were paid to the directors and not "payments in kind" under
the platinum sponge scheme.
In my judgment the Ramsay principle does entitle the Secretary of State to
characterise what happened and the cash receipts the directors in fact obtained
as payments in cash and not in kind within the meaning of the relevant
provisions. That is not to deprive NMB of a choice offered to it by the
legislation but to construe the legislation so that the events which happened
fall within the ambit of earnings and not payments in kind.
I have not overlooked the submissions Mr Venables made to the effect that
administratively a decision that the scheme was to be characterised as I have
held would not work because the amount of the "earnings" could not be
ascertained and there were short time limits in which the legislation required
payment of contributions to be made. The relevant amount is in my judgment and
as Mr Henderson submitted the amount in fact received by the directors:
Tullett and Tokyo Forex International Ltd v Secretary of State for Social
Security 28th May 2000 (unreported: Collins J). Any employer making a
payment in such a manner is of course in a position to insist on being told the
proceeds as soon as they are known and meeting its liability accordingly. In
fact of course NMB knew the figures on Day 2.
That is sufficient to dispose of this appeal and to uphold the decision of the
Secretary of State, but I will consider the third issue which can be dealt with
much more shortly.
ISSUE 3 TRADING ARRANGEMENTS
The short question is whether the platinum sponge was an asset for which
"trading arrangements" existed within Schedule 1A of paragraph 9C of the
Regulations. "Trading arrangements" has to be construed in accordance with
Section 203K of the Taxes Act 1988:
(2) Trading arrangements -
(a) for an asset, are arrangements for the purpose of enabling the person to
whom the asset is provided to obtain an amount similar to the expense incurred
in the provision of the asset;
(3) For the purposes of subsection (2) above
(a) ...
(b) an amount is similar to the expense incurred if it is greater than,
equal to or not substantially less than that expense.
There is no issue that the approach to construction of "arrangements" in the
Case Stated was correct. The Secretary of State, applying Re British Basic
Slag's Application [1963] 1 WLR 727 by analogy, construed it to mean "a
plan which has been set in order or designed in advance, but which is not
legally binding". There is also no dispute that what took place here was or
amounted to an "arrangement" so construed for the reasons set out in paragraph
6(35) of the Case Stated.
The short point Mr Venables takes is that on the evidence the directors were
likely to be able to obtain a similar amount for the platinum sponge "quite
independently of any arrangement" and so, he submits, the arrangements were not
for the purpose of enabling them to do so. The arrangements might have enabled
them to make a sale more easily and at a price closer to the amount paid in
providing the platinum sponge but no more.
I find this submission wrong both as a question of construction and fact. That
an asset could be sold otherwise does not in my judgment preclude arrangements
which are made for its sale being arrangements made for the purpose of enabling
it to be sold. Even if the arrangements made were quite unnecessary that could
still be the case. The fact that there is no point in making the arrangements
does not preclude them from having a purpose. Nor do I think the word
"enabling" has the connotation that what is enabled "cannot otherwise be done".
That would be to limit the operation of the provision to artificial situations,
for which there is no justification either in principle or in the language
used.
The question therefore is whether the arrangements for a sale back to Republic
Mase or Barclays were made to enable the directors to obtain a similar amount
to the amount paid by NMB for the platinum sponge. On the evidence in my
judgment they plainly were. It must be probable that if the arrangements had
not been made the directors would never have accepted (or procured) that the
bonuses were paid to them in platinum sponge, for which neither they nor NMB
had any use. They were provided with a ready buyer at a price capable of
calculation which in practical terms it was known, because of the short time
span between purchase and sale, would be similar to the price paid by NMB. That
was the basis on which the Secretary of State reached the conclusion he
expressed in paragraphs 6(36) and (37) of the Case Stated and I think it was
both unimpeachable and right.
In my judgment therefore the appeal fails on this issue also.
I will hear the parties as to the terms of any orders to be made as a
consequence of this judgment.
MR JUSTICE LANGLEY: I would like to thank both parties for their
amendments to the draft judgment, all of which I taken on board and I will now
hand down an amended version as my judgment in this case.
MR HENDERSON: My Lord, just two matters: your Lordship raised at the end
of the judgment the form of the order. It should just be that the appeal be
dismissed and the Secretary of State's decision should stand, nothing else is
needed and, secondly, costs. I ask that costs be paid by the Appellant to be
assessed if not agreed.
MR PEACOCK: I cannot resist that application.
MR JUSTICE LANGLEY: I will so order, thank you very much.
© 2000 Crown Copyright
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