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Tax avoidance scheme succeeds at the Upper Tribunal

10 December 2012. Published by Adam Craggs, Partner

The eagerly awaited decision of the Upper Tribunal (‘UT’) in the case of UBS AG and DB Group Services (UK) Limited v HMRC [2012] UKUT 320 (TCC) has now been released.

The facts

UBS AG (‘UBS’) and DB Group Services (UK) Limited (‘DB’), each entered into what the UT described as a “carefully planned tax avoidance scheme which was designed to enable the appellants to provide substantial bonuses to employees in the tax year 2003/04 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.


UBS created a company ESIP Limited (‘ESIP’) in an offshore jurisdiction. ESIP was not controlled by UBS. The shares in ESIP were held by Mourant & Co Trustees Limited (‘Mourant’), professional trustees of a charitable trust. A special class of restricted shares was created in ESIP. The shares were subject to non-permanent restrictions, being a forced sale provision linked to the occurrence of a trigger event. The trigger event was a specified aggregate rise in the closing level of the FTSE 100 index during a three week vesting period. UBS purchased the restricted shares. UBS, through a nominee, held legal title to the shares and allocated beneficial interests in the restricted shares to employees in value to the amounts that UBS had decided would be payable as bonuses to them.

UBS then claimed that, under section 425 ITEPA there was no charge to tax on acquisition as the securities were restricted securities within the meaning of section 423 ITEPA.

Shortly thereafter, the restrictions were removed from the restricted shares and UBS claimed an exemption under section 429 ITEPA on the basis that the majority of the company’s shares were not held by or for the benefit of the employees of the company or associated companies of the company (section 429(4)(a) and (b)). In order to succeed on this point, it was necessary for UBS to establish than it was not associated with ESIP. Under sections 421H and 432(6) ITEPA two companies are associated if one controls the other.


DB’s scheme was similar to the one used by UBS. There was, however, a key difference between the two schemes. In DB’s case the majority shareholder in Dark Blue Investments Limited (‘Dark Blue’) , the equivalent of ESIP, was Investec Bank (UK) Limited (‘Investec’) to whom DB paid a fee for its involvement, whereas the majority shareholder in ESIP was Mourant, a professional trustee acting as trustee of a charitable trust.

The FTT’s decision

The cases were heard consecutively before the FTT on appeal from determinations made by HMRC that the sums allocated to the employees as bonuses at the start of the scheme were liable to income tax as earnings from employment and to class 1 national insurance contributions (‘NICs’) on the same basis. The FTT decided that:

  • the shares acquired under the UBS scheme were not restricted securities but the DB shares were;
  • neither UBS nor DB controlled the issuing company;
  • the Ramsay principle applied (WT Ramsay v IRC (1982) 54 TC 101) such that the arrangements did not succeed as for both UBS and DB they fell outside of the restrictive securities provisions contained in Chapter 2 Part 7 ITEPA.

The decision of the UT

As might be expected of a decision given by Mr Justice Henderson and Judge Hellier, the decision of the UT is both clear and detailed. The UT allowed the appeal of UBS.

Firstly, the UT held that the shares were indeed restricted securities. Here, the key issue was whether or not the employees were entitled to receive less than market value for their shares on a forced sale. The UT decided that the answer to this question was yes, despite a hedging mechanism used under the scheme whereby the amount received by employees on such a forced sale would be equivalent to the cash value of their bonuses.

Secondly, the UT applied the decision of the Court of Appeal in Steele v EVC International NC [1996] STC 785, which decided that control of a company, within the meaning of sections 421H and 432(6) ITEPA, meant control at shareholder level. The UT concluded that there was no evidence of control of ESIP by UBS, or any evidence that UBS together with Mourant exercised control over ESIP.

Thirdly, the UT said that it found the FTT’s reasoning (Dr David Williams and Mr David Earle) on the Ramsay principle very difficult to follow. The FTT had examined the scheme as a whole and concluded that, in reality, it could not properly be described as one providing restricted securities within the meaning of the legislation. Accordingly, the facts viewed as a whole fell outside Chapter 2 altogether. The FTT stated that the purpose of Chapter 2 was that amounts derived from securities that are within the definition of restricted securities are to be charged to income tax not on acquisition but on a later chargeable event. In the FTT’s view, the reality of the scheme was that, had the scheme not been in place, employees would have received a bonus net of tax and NIC’s. Because of this, the FTT did not consider that “… in reality, the Scheme can be properly described as one providing restricted securities within the scope of Chapter 2 … “.

The UT had little difficulty in rejecting the FTT’s reasoning. The UT held that it might be possible, on a realistic appraisal of the facts, to conclude that the scheme was not one which provided securities but rather money, which fell outside the definition of securities for the purpose of the legislation. However, the securities in this case had a real and enduring nature and could not be ignored or regarded as a mere vehicle for the transfer of money.

Accordingly, the UT allowed UBS’s appeal. However, with regard to DB’s scheme, the UT held that DB and Investec together controlled Dark Blue. This was because Investec simply did what DB told it to do, without bringing any independent thought or judgement to bear in the fulfilment of its preordained role.


Two conclusions can be drawn from this decision. Firstly, how an arrangement is structured and implemented is often crucial to whether the intended fiscal result will be achieved. DB’s arrangements failed, whereas UBS’s succeeded. Secondly, there is a perception amongst many advisers and taxpayers that the FTT has in recent years adopted an over-robust attitude towards all forms of tax mitigation structures such that succeeding in an appeal before the FTT is something of a rare event. The decision of the UT is welcome and demonstrates that is not always sufficient for HMRC to simply cry ‘the Ramsay principle’, in order to defeat the taxpayer. The intellectual honesty of Mr Justice Henderson and Judge Hellier is to be applauded.

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