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Deutsche Bank and UBS tax avoidance schemes succeed

01 May 2014. Published by Natalie Drew, Senior Associate

The cases of DB Group Services (UK) Limited v HMRC and HMRC v UBS AG[1] were heard together by the Court of Appeal in November 2013 and the decision was published last month.

The Court of Appeal (Rimer, Kitchen, Christopher Clarke, LLJ) held that similar tax avoidance schemes being operated by DB Group Services (UK) Limited ('DB') and UBS AG ('UBS'), both of which used restricted securities, were successful, upholding the decision of the Upper Tribunal ('UT') in the case of UBS, and overturning the UT's decision in the case of DB.


UBS and DB, each entered into tax planning arrangements which were designed to enable them to provide bonuses to employees in a way that would escape liability to both income tax and national insurance contributions. The mechanism chosen was the award to employees of shares in an SPV offshore company, the shares being intended to be ‘restricted securities’ within the meaning of the special taxation regime in Chapter 2 of Part 7 of Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’). If the scheme succeeded, UK domiciled employees would only be subject to capital gains tax at 10% and non-domiciled employees would escape tax entirely unless they chose to remit redemption amounts to the UK.

Although the arrangements were by no means identical, they were broadly similar. For example, both of the schemes: were devised to take advantage of the exemption provided in section 429 ITEPA; involved incorporating a new company to issue shares to employees (ESIP Limited in the case of UBS, and Dark Blue in the case of DB); were structured in that the majority shareholder was a third party (Mourant & Co Trustees for ESIP Limited, and Investec Bank Limited for Dark Blue).

Decision of the Tribunals

The First-tier Tribunal (Tax Chamber) ('FTT') came to the same decision for both taxpayers, albeit through different analysis. In summary, it held that:

  • the shares acquired under the DB scheme were restricted securities (compared to those in the UBS scheme, which were not deemed as such);
  • section 429 was applicable in exempting the DB shares from a potential charge (and, in the case of UBS would have been available if the shares had been restricted securities);
  • in neither arrangement could it be said that UBS or DB controlled the issuing company, thereby meaning the issuing company was not ‘associated’;
  • the Ramsay principle[2] did apply to both cases and therefore the schemes were unsuccessful.

Both DB and UBS appealed to the UT, which held that:

  • the shares awarded in both schemes were restricted securities;
  • the Ramsay principle did notapply to either arrangement;
  • in the case of UBS, the section 429 exemption didapply (therefore its appeal was successful);
  • in the case of DB, the above exemption did notapply, as DB and Investec (the company issuing the shares) together controlled Dark Blue (the third party majority shareholder), thereby making DB an ‘associated’ company of Dark Blue.

Court of Appeal decision: UBS

In the case of UBS, an appeal was brought by HMRC, who argued, amongst other things, that:

  1. The UT erred in its application of the Ramsay principal to the arrangements;
  2. The shares awarded were not restricted securities (as a hedging arrangement, which increased the value of the shares on forfeiture) should be taken into account in valuing the shares for the purpose of Chapter 2 (sections 422 to 432) of Part 7 of ITEPA;
  3. The conditions referred to in section 429 were not met, as UBS controlled ESIP by controlling Mourant (the majority shareholder); and
  4. A provision in ESIP’s articles of association that removed all voting and dividend rights from the relevant shares at any time a UBS group company held them should be ignored because it had no commercial purpose (which, in turn, would mean that UBS controlled ESIP).

The Court considered each of the above arguments and concluded, that the Ramsay principal did not apply, particularly not in the way that HMRC sought to apply it.

The Court also concluded that the shares remained restricted securities, despite HMRC’s attempt to take the hedging agreement into account for valuation purposes. The Court found that there was no scope to read additional wording into section 423(2)(c)[3], the meaning of which was plain.

With regard to argument 3, HMRC proposed that the Court should find that the FTT had erred in lawin finding that UBS did not control Mourant, despite this being a finding of fact, reached after hearing detailed evidence on the issue. This submission was dismissed as ‘hopeless’ by the Court of Appeal.

Finally, HMRC had sought to argue that a provision in ESIP’s articles (stating that if relevant shares were, at any time, held by a UBS group company, the shares would be stripped of certain rights (including voting and dividend rights)) should be disregarded for being artificial and uncommercial. They pursued this argument as, if the article in question was disregarded, it followed that UBS would have had control of ESIP at some point during the arrangements, thereby bringing it outside of the section 429 exemption requirements. In the Court's view, the FTT had found that the article in question was genuine; UBS intended to be bound by such arrangements, and there was no finding of a sham, therefore there was no basis on which the article could be disregarded.

Court of Appeal Decision: DB

DB’s appeal was decided by the Court based on the procedural history of the case. The FTT had found that DB did not control Dark Blue via Investec. The UT had decided that the FTT had set the bar for the control test too high, and had therefore erred in law. The Court was of the view that the UT had misinterpreted the FTT’s approach and that it was wrong for the UT to decide that it was open to it to reconsider whether DB controlled Investec, and therefore, Dark Blue. In any event, the Court said that it found the UT’s decision that DB did control Investec as ‘obviously wrong’. Although each company was participating in a pre-ordained scheme it did not follow that one was in control of the other. The Court also agreed with the UT that the Ramsay principle could not apply to the arrangements under consideration.


The Court of Appeal's confirmation that the Ramsay principle was not applicable to either arrangement (despite all parties accepting that the purpose of the arrangements was to avoid tax) is a timely reminder to HMRC of the limitations of the Ramsay principle. It is not a panacea which can be invoked to strike down all tax planning.

The cases also confirm that where the statutory provisions under consideration are prescriptive,[4] courts should not be prepared to read extra wording into the legislation so as to disapply those provisions simply because the arrangement under consideration involves tax avoidance.

This decision will be unwelcome to HMRC who will no doubt seek permission to appeal to the Supreme Court.

[1] DB Group Services (UK) Limited v HMRC and HMRC v UBS AG [2014] EWCA Civ 452.

[2] WT Ramsay v Inland Revenue Commissioners (1982) 54 TC 101 and subsequent cases.

[3] To be classed as a restricted security, one of the conditions that must be met is that a person ‘will not be entitled on transfer, reversion or forfeiture to receive in respect of the employment related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion of forfeiture) at the time of the transfer, revision or forfeiture’ (section 423(2)(c)).

[4] Chapter 2 has since been amended to include a general anti-avoidance provision that disapplies the Chapter 2 charging regime where securities are acquired for the purposes of tax avoidance.