Supreme Court provides clarity on Transfer of Assets Abroad legislation

In Fisher v HMRC [2023] UKSC 44, the Supreme Court (SC) allowed the taxpayers' appeals, finding that they were not "transferors" for the purposes of the Transfer of Assets Abroad (TOAA) provisions contained in the Income and Corporation Taxes Act 1988 (ICTA).

Background

Stephen and Mark Fisher (the Fishers) were minority shareholders and directors of the UK-based betting business Stan James (Abingdon) Ltd (SJA). SJA was one of the first betting businesses to recognise and exploit the possibilities of telebetting. 

In 1999, UK betting duty was charged at a rate of 6.75% on the amount staked. In Gibraltar betting duty was charged at 1%. The Fishers decided to set up a branch of SJA in Gibraltar and took bets from non-UK customers over the telephone. In July 1999, Stan James Gibralter Ltd (SJG), incorporated in Gibraltar, was set up and SJA’s business was transferred to that company.

HMRC subsequently issued the Fishers with assessments to tax, which treated the income of SJG as the deemed income of the Fishers under the TOAA provisions contained in sections 739 to 746, ICTA. 

The Fishers appealed to the First-tier Tribunal (FTT), which held that they were transferors of the business sold by SJA to SJG and that the whole of the transfer was to be attributed to them. The FTT's decision was overturned by the Upper Tribunal (UT) and the UT's decision was overturned on appeal by the Court of Appeal. 

Both the Fishers and HMRC appealed to the SC, which considered two questions:

1. Does the transfer of assets referred to in section 739(1) and (2)  have 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?

2. If the individual has to be the transferor of the assets in order for section 739 to apply, 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?

SC judgment

The SC unanimously allowed the Fishers' appeal and dismissed HMRC's appeal.

With regard to the first question, the SC held that the Fishers could only be subject to the charge under section 739 if they were properly to be regarded as the transferors of the assets that were sold by SJA to SJG. To that end, the SC noted that, since Vestey v Inland Revenue Comrs (Nos 1 and 2) [1980] AC 1148, the courts had regarded the requirement that the taxpayer be the transferor of the assets as having been settled. The SC determined that section 739 construed as part of the overall TOAA code was limited to charging individuals who were ordinarily resident in the UK and who transferred the assets that generated the income that was then deemed to be their income under section 739(2), or that generated the capital triggering the charge under section 739(3). 

The SC also found, contrary to HMRC's submission, that the presence of the apportionment mechanism in section 744 did not mitigate the penal and harsh features of the charge. Rather, it was still the case that a single individual caught by section 739 could be charged tax on the whole of the income of the overseas transferee if they had power to enjoy that income, even if they had received little or no actual income from which to defray that tax. In the view of the SC, this penal aspect of the charge was a strong pointer towards limiting the scope of the charge to the transferor.

In terms of the second question, the SC dismissed HMRC's contention that the Fishers should be treated as the transferors of the assets because they owned a controlling interest in SJA. The SC said it was clear that the Fishers, although shareholders in the company and also the directors of the company, were not quasi-transferors and did not procure the transfers made by the company. 

In particular, the SC noted that minority shareholders had no power themselves to procure any outcome, having to abide by the majority decision, and if being part of a group of minority shareholders who voted in favour of a transaction was sufficient to render them all quasi-transferors, that must apply to thousands of shareholders in a Plc. HMRC's suggestion that the degree of uncertainty about when and to whom the charge applied was a positive virtue of the drafting because the penal provision worked better to achieve its aim if taxpayers were unable to know whether they would be caught or not, was roundly rejected by the SC, which commented that it was an improper argument for HMRC to run and had a flavour of the same unconstitutional approach to the enforcement of the TOAA provisions that was so strongly deprecated in Vestey. The SC agreed with the Fishers that the law could not be left in some unclear state “just to scare people”.

Further, the SC held that the existence of the motive defence, in section 741, did not provide any protection to minority shareholders because its focus was on the purpose for which the transfer was effected and not the purpose of each individual whom HMRC sought to charge to tax. As such, if a minority shareholder was treated as a quasi-transferor, then they could be taxed even if they did not have any tax avoidance purpose, provided that the transfer was carried out with a tax avoidance purpose by the other transferors.

Comment

As acknowledged by the SC, the TOAA provisions are notoriously complex, and have perplexed and concerned generations of advisors and judges alike. In recent years, there has been a notable push by HMRC to extend the scope of those provisions beyond what many consider was Parliament's intention when enacting them, and practitioners have keenly awaited the final determination of the issues raised in Fisher for almost a decade. The SC's decision provides a welcome rebuke of HMRC's expansionist approach, and much needed clarity on the application of the TOAA regime and its limitations. It remains to be seen what HMRC's response to the decision will be, and a legislative reaction cannot be ruled out.    

The judgment can be viewed here.