LM Ferro Ltd v Revenue & Customs

It is worth noting the further explanation in the Supreme Court’s analysis of Part 7 at [5] that where benefits conferred are to be made contingent on satisfactory performance that this creates a problem because:

After quoting from Lord Radcliffe in Abbot v Philbin [1961] AC 352 Lord Walker then goes on to explain:

In relation to the appellant’s reliance on Mayes it is correct that the Court of Appeal makes the point that prescriptive and detailed legislation may be prone to exploitation. But, the basis for this is not that prescription and detail in itself means there is no purpose but that the prescriptive code points in different directions making it difficult to discern a purpose. It is not sufficient in our view to point to a code being prescriptive and then assume it therefore has no purpose.

Examining the statutory provisions we note the following in the light of the above purposes as set out by the Supreme Court. An exhaustive definition of “securities” is provided which includes “shares”. However, “money” is excluded. That exclusion is consistent with the purposes outlined by the Supreme Court. In particular, where an employee is awarded “money” the value will not on the face of it depend on future events. There is no reason to wait and to charge tax instead of or in addition to a charge on the acquisition of money.

Chapter 2 applies to securities which are “employment-related securities”. These according to s421B ITEPA are securities which are acquired by a person where the right or opportunity to acquire securities is available by reason of an employment of that person or any other person. This provision coupled with the definition of “restricted securities” is consistent with the purpose set out by the Supreme Court that benefits in order to be effective may have to be made contingent on performance.

The chargeable events set out in s427 ITEPA of restrictions being lifted, varied or of the shares being disposed of are all consistent with the idea that there are points in time at which value can be said to pass. In terms of the “wait and see” principle referred to by the Supreme Court they are when it becomes necessary to “see” having done the waiting.

Section 429 provides exemption for situations where all the company's shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities. This means that where e.g. those securities are disposed of as a part of a wider transaction whose purpose is therefore unlikely to be about realising value from the employment related securities a chargeable event does not arise. Exempting disposals where they arise for reasons unrelated to employment is consistent with a regime focussed on employment-related securities.

Beyond referring us to statements that Part 7 is complex and technical the appellant has not pointed us to any statutory provisions which would suggest that Lord Walker’s analysis in Grays Timber as to the underlying purposes of Part 7 is not to be accorded its due weight.

We therefore prefer the Respondents’ interpretation of purpose. While, as highlighted by Lord Hope’s judgment in Grays Timber at [56], there are difficulties in drawing conclusions as to how the charging provisions in each Chapter are to applied if the overall aim is consistency in particular in relation to the meaning of “market value” Lord Hope’s suggested approach was to not to try to draw conclusions from the application of that term in other parts of Part 7. Any difficulties arising from a consistent interpretation of “market value” are in any case not on point on the issue of ascertaining the purpose underlying the exclusion of “money” from Part 7. In contrast to Mayes it has not been shown to us that the code has provisions which point in different directions making it impossible to discern a purpose.

The statements of the UT in UBS set out above must also be read in the light of their earlier statements in [162] (quoted below) which make it clear that the UT contemplated that there would be certain schemes (described as “money in - money out”) which would not be successful in falling outside the “money” exception. Their observations about Chapter 2 cannot be taken to mean that contrived and artificial schemes will necessarily succeed because of the complexity of the statutory code.

The appellant also made an argument along the lines that the proposals for a GAAR (General Anti-Abuse Rule) would be irrelevant if Ramsay type arguments could apply to a device which enabled a director to be remunerated at the cost of only a comparatively small capital gains tax charge.

Proposals are simply that and do not have force of law. The argument did not go anywhere at the time it was made. But, since the hearing a general anti-abuse rule has been enacted in the Finance Act 2013 with effect from Royal Assent (17 July 2013) in relation to arrangements entered into after that date. The significance of that was understandably not addressed in the parties’ submissions. Nevertheless, even if the appellant’s argument is applied across to the enactment of the proposal rather than the proposal we think it is misconceived. First, this is because the general anti-abuse rule is not a rule of interpretation. Rather, it provides for a system of counter measures that may or may not be taken by HMRC to counteract abusive tax schemes. That there is now such a system cannot in our view affect the Tribunal’s views as to what the statutory purpose of particular legislation is. Second, even if the rule was capable of colouring the Tribunal’s interpretation of the statutory purpose of particular provisions, it could not, we think, assist the appellant in relation to how legislation which was in place prior to enactment of the GAAR proposal should be interpreted and applied to arrangements which were not capable of being covered by the enacted proposal.

The statutory construction of the “money” exception was considered by the UT in UBS and another. Both parties made reference to this case and it is worth setting out some background to the decision before going to the UT’s views on statutory construction.

UBS and another concerned a tax avoidance scheme which was designed to enable the appellant banks (UBS and Deutsche Bank) to provide substantial bonuses to employees in the tax year 2003/04 in a way that would escape liability to income tax and national insurance contributions through an award of redeemable shares (in the case of UBS these were termed Non-Voting Shares (“NVS”)) in a special purpose offshore company set up to participate in the scheme. It was intended the shares would be “restricted securities” subject to the special taxation regime contained in Chapter 2 of Part 7 ITEPA. As described by the UT on appeal at [6], the issues in the two appeals could be grouped under three headings.

First, whether the employees became entitled to be paid their bonuses in money before the sums allocated to them were applied in acquiring shares under the scheme. Apart from in relation to a guaranteed element of bonus in relation to 10 or so employees the FTT found that no entitlement crystallised before the scheme was set in motion. The UT agreed there was no entitlement but also held that was the case for the employees with a guaranteed element of bonus.

Second, if the answer to the first issue was no, whether the shares were “restricted securities” as defined in s423 ITEPA, and if so whether the employees were entitled to an exemption under s429 ITEPA on the happening of a chargeable event when the shares ceased to be subject to the relevant restriction. The FTT held the shares were not “restricted securities” on materially different factual grounds in both appeals, but that if they were wrong on that point the s429 exemption (on materially different facts) would be available for both appeals. The UT disagreed that the exemption under s429 was available in relation to Deutsche Bank.

Third, in the alternative, could it be concluded by application of the Ramsay principle that on a realistic appraisal of the facts the scheme fell outside the scope of Chapter 2 altogether? The FTT concluded in both appeals that it could. The UT held in both appeals the scheme could not be characterised in this way.

In this case the Respondents are not pursuing an argument on entitlement and it is the UT’s discussion on the third strand which is most relevant to the issue in this case.

The appellant referred us in particular to the following passages in which the UT set out their view on any argument that the UBS scheme fell within the “money” exception. At [162] the UT explained:

At [163] the UT sounded a note of caution in interpreting the exception too broadly:

The UT went on at [164] to consider the money exception in the light of the particular facts of the case:

Both parties referred us to the above passage; the appellant for the views expressed on purpose and of a narrow construction of the “money” exception being taken, the Respondents for the acknowledgement that there may be disguised and artificial schemes which fall within the exception. For the Respondents, Mr Brennan made it clear he was not however seeking a generalisation to the effect that a scheme which was disguised or artificial must fail.

Where does that leave us? It is not enough to say Part 7 is complicated, therefore artificial schemes must succeed. It is not enough to say that because a scheme is artificial it will inevitably fail. It means that a scheme will not fail because it is artificial but there are some artificial schemes in particular those of the “money in- money out” variety which do fail in their object.

Further, for the reasons explained by the UT the exception is to be construed narrowly in the sense that it is not enough that what a person receives may be treated as “money” because it can be converted to money in the hand of the recipient. There are items described in the provisions which plainly can be converted but are nevertheless intended to be captured within Part 7.

In assessing the scope of the “money” exception we think the following points are relevant too.

As observed by the appellant, the UT does not in its decision refer to the Court of Appeal case of HMRC v PA Holdings Ltd [2011] EWCA Civ. There, the Court of Appeal explains an approach of statutory construction whereby the question is asked whether a legislative act is intended to apply to one act or whether it can apply in relation to a series of transactions or a part of a composite transaction (see [54] to [56] Moses LJ). Although the UT’s decision in UBS did not mention PA Holdings we note that their acknowledgement that there may be “money in-money out” schemes which fall within the exception is consistent with the “money” exception being able to apply to particular series of transactions or composite transactions.

We also note that part of the UT’s analysis on “money” being construed narrowly is based on the presence of anti-avoidance provisions in Part 7 in particular Chapters 3A, 3B, 3C and 3D. i.e. if a wide interpretation encompassing anti-avoidance is adopted what role would there be for these chapters to play? We note that at least some of these chapters do not exclusively target schemes involving employment related securities where it is clear at the outset that the scheme has an avoidance purpose. It appears that Chapters 3A and 3B could also have a role in relation to employment-related securities that may not have been part of an avoidance scheme at the outset but where subsequently something else is done involving avoidance. We note for instance s446A ITEPA (the application provision for Chapter 3A which deals with securities with artificially depressed market value) applies the chapter where the market value of employment-related securities is “reduced by things done” otherwise than for genuine commercial purposes. This is broad enough to capture situations where employment-related securities were not part of a scheme when they were acquired but where their market value is subsequently reduced for an avoidance purpose. Section 446K provides a similar formulation in relation to Chapter 3B which deals with securities with artificially enhanced market value. In this regard at least, giving an anti-avoidance role to “money” does not mean Chapters 3A and 3B are redundant. It also cannot be the case that “money” has no anti-avoidance role given that the UT says that “money in-money out” schemes may be caught.

We conclude the “money” exception is not to be interpreted in an overly broad way but equally it is not to be restricted to single acts but may apply to a series of transactions or part of a composite transaction. The exception can bring within its scope some, but not necessarily all, artificial and contrived tax avoidance schemes, which brings us to the question of how it applies to the facts of this particular scheme.

UBS gave the example of “money in – money out” schemes of the type considered in NMB Holdings and DTE.

The appellant argues the scheme in this case is not a “money in money out scheme”. It was not inevitable money would be paid out. Mr Ferro had no need for the cash, he could use SG123 Ltd., a company which he controlled through the shares he was awarded, as a private investment vehicle.

The Respondents say this is an “old-fashioned” scheme which ignores the decisions in NMB and DTE . They say it is a disguised or artificial way of paying money to employees. The minutes, resolutions, alterations to share capital, to the company’s articles were all with one purpose; money in, money out. It is precisely the sort of “disguised or artificially contrived method of paying money to employees” which was referred to in UBS .

Before continuing it is necessary to briefly outline NMB and DTE .

In NMB the High Court considered whether the transfer of platinum sponge to directors as a bonus was 'earnings' and not 'payments in kind' for the purposes of the Social Security (Contributions) Regulations 1979, SI 1979/591. The court looked at the substance of the transaction. There were arrangements whereby the directors could immediately sell the platinum sponge for cash, to the bank which held the sponge. The bonuses were not 'payments in kind' exempt from the Social Security legislation (The court's approach and conclusion were endorsed by Lord Hoffmann in MacNiven [2001] STC 237 at [68], [2003] 1 AC 311 at [68]).

DTE concerned a composite transaction consisted of three stages, the purchase by an employer of a contingent reversionary interest in a trust fund in a sum equivalent to the intended bonus, the assignment of that interest to the employee and the payment of the cash sum by the trustee when the interest fell into possession. Viewed, as Jonathan Parker LJ put it, 'through Ramsay eyes', the company decided that its employee should have a £40,000 bonus and the employee got that bonus. ( [2001] STC 777 at [41], 74 TC 14 at [41]).

We were also referred by the Respondents to PA Holdings for the proposition that it is important not to confuse the nature of the reward with the manner of its delivery.

The facts concerned a taxpayer company with a discretionary bonus scheme under which certain employees received dividends from preference shares in a third party company.

There, as highlighted by the Respondents, the award of money was distinguished from the mechanism for its delivery. The award of shares and the declaration of dividend were, in reality not separate steps but the process for delivery of the bonuses. The court held a court is not to be restricted to the legal form of the source of the payment but must focus on the character of the receipt in the hand of the recipient. A Ramsay approach is not even necessary. The scheme was a process for delivering a cash bonus not an award of shares.

The appellant refers us to the finding in UBS that the FTT had no basis for ejecting the scheme from Part 7. It says the same is true here. Here there is no machinery to turn what was in the company SG123 Ltd. into cash. It says NMB can be distinguished and so can DTE and PA Holdings for the following reasons.

In NMB it was clear there was never any intention of physically transferring the platinum sponge to a director or of doing anything with it other than having it purchased by the company, transferred to the director, and then sold back. It remained in the custody of a bank in Hong Kong and there was no ready market so practically it had to go back to the original vendor. Platinum sponge was alien to the directors’ knowledge or to any use they may have for it. In the current appeal there was no trading mechanism. Shares in an investment company were transferred to Mr Ferro and there was a variety of ways Mr Ferro could exploit those shares. An investment company is clearly a vehicle with which businessmen are familiar. Whereas in NMB the purchase and sale of platinum sponges were simply machinery, there was no such machinery here.

DTE can be distinguished too. It was a simple structure into which cash went in and then went out ending up in the hands of the employees

The appellant says PA Holdings is also distinguishable. It was not agreed that what was paid was income and the bonus recipients only had a minority interest in the third party company which meant it was not attractive as an investment vehicle in the way that the shares in this appeal were. Mr Ferro had the controlling interest in the company. There were many other things he could have done with the company; he could have continued to operate the company perhaps buying investments in it and running it for his long term benefit. The appellant says PA Holdings is a decision about source of income: Is it Schedule F or is it income tax? It is not a blanket authority to say rewards from corporate body to executive are subject to PAYE. If it was there would be no point to Part 7.

The appellant’s riposte to the Respondents’ remark that this case had an “old fashioned” feel to it was to note that in UBS, a case where UBS succeeded also concerned the tax year 2003/4.

We are not persuaded that NMB is irrelevant because there the bonuses were in platinum sponge, an unfamiliar subject matter whereas here what was paid were SG123 Ltd. shares with which Mr Ferro could have done a variety of things apart from turning them to cash.

The relevance of the unfamiliarity of platinum sponge in NMB was in the context of the Secretary of State’s consideration (at [6(22)] and endorsed as “impeccable reasoning” by Langley J) of whether, once started, the scheme would proceed through the various steps to the end. The unusual nature of platinum sponge from a private individual’s point of view meant that practically the only thing a private individual can do is to sell it. However the fact that the assets here were shares in SG123 Ltd. and that such shares were of a less unusual nature does not prevent the conclusion being reached that the scheme would proceed to its end if that is what the particular circumstances of this case point towards.

In this case it seems clear to us that the receipt of shares was not the end of the scheme but one of the steps in the scheme. We note for instance Mr Ferro’s adviser’s indication prior to 1 June 2004 describing his client as “half-way through under the 0% scheme”.

The approach in NMB (consistent with a realistic appraisal) is to take account of what practically an individual could do with what they received in order to throw light on whether the scheme would be followed through. The fact that there is a theoretical possibility that others might use SG123 Ltd. for other purposes does not get round the fact that realistically that was not what Mr Ferro was going to do with them.

In relation to the appellant’s argument that a lack of machinery to turn shares to cash means (in contrast to the “machinery” for selling the platinum sponge) that their scheme is not a “money in – money out” scheme we consider this fails to take account of the different nature of the asset involved. The appellant accepted Mr Ferro was in control of SG123Ltd. The company had £300,000 in its bank account. It is not surprising that there were not the same kinds of arrangements put in place to turn the shares to cash as compared with the arrangements for turning platinum sponge to cash. In any case, as mentioned above, the scheme was not complete at the stage of the award of shares. More steps were to follow. The detail of these was to change because of changes in legislation, so in the event, the step which was taken and part of the machinery of the scheme was to enter into an agreement under which the appellant guaranteed to pay a purchase price for the shares to Mr Ferro.

In relation to DTE the appellant says the arrangement there was some distance away from the facts here. DTE, say the appellant was a simple structure in which case went out and cash ended up in the hands of the employees.

But, to call the structure simple, and contrast this with the facts here is not comparing like with like in the sense that the cash in cash out depiction arises after looking at the matter through Ramsay eyes. The scheme comprised a number of steps: the creation of an off shore discretionary settlement of a sum of cash (borrowed by the settlor) under which the settlor becomes entitled (by virtue of an appointment made by the trustee) to a sum equal to the intended bonus plus a sum in respect of costs. The contingent reversionary interest amounts to a right to a specified sum of cash on a specified date. The employer takes an assignment of the contingent reversionary interest for consideration and then assigns it to the employee. The interest is non-assignable and on the specified date the employee receives a cash payment equal to the amount of his intended bonus. The scheme the appellant used also comprised a number of steps and we disagree that DTE is distinguishable on the ground the appellant suggests.

As considered above we reject, on a realistic appraisal of the facts that there was any role for SG123 Ltd for holding investments or properties. The contrast the appellant highlights between Mr Ferro’s control of SG123 Ltd and the bonus recipients’ minority interests in PA Holdings is not a basis on which to disregard the approach and observations set out in PA Holdings .

Having dismissed the appellant’s reasons for why DTE and NMB and PA Holdings are not relevant we do take into account that each of those cases concerned different legislation and different schemes. Their relevance lies in their support for an approach of looking at a series of transactions as a whole and in considering whether, given the purpose of the relevant legislative provisions at issue, the transaction was with the legislation’s scope.

The Respondents’ arguments caution against getting confused between what is delivered and the means by which it is delivered. There are references in the case law variously to steps in a scheme being “vehicles” ( UBS) or “machinery” or a “process for delivery” ( PA Holdings Ltd ). While all of those concepts helpfully describe the character of steps which are found to be intermediate steps in transactions we are conscious that if it were to simply be asserted in this case that the award of shares was a vehicle, or a process for delivery, or machinery, this would beg the question of what the outcome to which the process, vehicle, or machinery was directed towards. As shown by the decision of the UT in UBS it may also be the case that something which is ostensibly a “vehicle” in a contrived avoidance scheme turns out not to be upon further examination.

In UBS the facts also concerned an artificial scheme and there was specific consideration of the “money” / “securities” dividing line. We need to return there to look at the reasons why the scheme was successful in its object. In that case there was a vehicle / machinery but the UT found it could not be ignored.

The Respondents say UBS is factually distinguishable because there the Non-Voting Shares “NVS” which were awarded were of a “real and enduring nature”. It is to be noted that nearly half of them were not redeemed for two years making it “impossible to ignore them or regard them as a mere vehicle for transfer of money.” In this case the 998 ‘B’ Shares awarded to the appellant were not comparable to the NVS. They were held for only 6 months and that was largely because of the press release of May 2004 announcing the legislative changes to Part 7 ITEPA. There was, also a particular fiscal reason for why half the shares were not redeemed.

The appellant points to the fact that in UBS the other half of the shares were redeemed within a couple of months. The 998 ‘B’ Shares were ordinary real shares which could vote dividends and which had restrictions. They continued to exist until the company was dissolved. They were real from 29 April 2004 until 15 May 2007. Shares do not stop being real because they are transferred. The shares were in a company which gave Mr Ferro virtually all control and the company had £300,000 in its bank account. It could be used for any commercial purpose.

It is worth recalling [164] of the UT’s decision (extracted above at [154]). It shows there were several strands to the UT’s view as to why the facts of the UBS case fell well outside of the money exception one of which was the “real and enduring nature of the NVS”. It was not this fact alone though but that it was “combined with the fact that nearly half of them were not redeemed for two years”. Further the point is made that even where shares were held for only 2 months the amount received on redemption bore no necessary relation to the initial amount of the bonus.

The 998 ‘B’ Shares were real and enduring in the sense they were real shares – they carried voting rights, rights to dividends and distribution of surplus assets on a winding up. They did not vanish. They existed until SG123 was dissolved. The NVS in UBS entitled the holders to receive dividends and surplus assets on a winding-up (see [46] of UT decision).

But, the UT also thought it relevant to mention the issue of when the shares were redeemed as a separate point from their “real and enduring” nature. In the context of a question before them as to whether the arrangements fell into the “money” exception, we think the separate reference to redemption means they were looking at the circumstances under which money was received. Redemption in that case happened to be the means by which the NVS could be turned to money and the length of time over which that happened was a relevant factor to consider. In a similar vein we think the length of time the shares were held for by the recipient before being turned to money (as opposed to the length of time the shares were in existence) is relevant.

It was also relevant, in our view, in the context of determining whether there was a bonus of money or of shares and the role of the shares in the scheme, to consider the fact that the amount coming out upon redemption, whether 2 months later or years later, would depend on the performance of the UBS shares that the special purpose vehicle (ESIP Ltd.) was bound to invest in. There were hedging arrangements protecting against loss in value but these expired after the restriction term so there was a period at which the holders of the shares bore real risk. It was not part of the scheme that there was no risk. In this case holding the ‘B’ shares in SG123 Ltd. gave control of a company which held a bank deposit.

For these reasons in assessing whether the facts of this case mean the 998 ‘B’ shares fall into the “money” exception, the fact the UT in UBS found the NVS fell well outside it does not, we think, mean that the receipt of ‘B’ shares in this case fall outside it too. The circumstances surrounding the 998 ‘B’ shares and their nature mean that they cannot be viewed in the same light as the NVS were in UBS .

The UT reached a similar conclusion on the “money” exception issue in relation to the Deutsche Bank appeal as it did in the UBS appeal which was heard at the same time. In Deutsche Bank, the vehicle corresponding to ESIP Ltd was a company incorporated in the Cayman Islands called Dark Blue Investment Ltd (DBI). The relevant shares were C1 redeemable shares. It appears from [61] of the FTT’s decision that the C1 shares were real shares, that it was possible for an employee to hold them for over two years and if they did so they received dividends from the sums invested in DBI and invested by it. That suggests DBI was not simply sitting on a sum of cash in its bank account.

It was not a foregone conclusion how much money the employee would get for the shares. Returning to the purpose underlying the legislation it could be seen there was some point to “waiting and seeing” what value emerged from holding the shares. In this case Mr Ferro received shares in a company which he controlled and which held a significant cash balance. There was no real risk or uncertainty beyond that attached to bank deposits to what Mr Ferro would get.

The appellant also says there was no pre-ordainment as the law changed unexpectedly further to the 7 May 2004 announcement. The Respondents say this is a change of route but the destination remained the same. We were referred by the appellant to the FTT decision Sloane Robinson [2012] UKFTT 451 (TC) where the point was made that there was no authority on the point, (ie when changes to the scheme arose out of changes in law) and the FTT would need to wait for a UT decision on the matter. No authorities on the point were cited to us but the Respondents suggest that should the Tribunal find it necessary to deal with the case relying on Ramsay it would not be prevented and indeed ought to set out its views on the matter. Both parties agreed that as a decision of the FTT, Sloane Robinson could only be persuasive at best, and that it was therefore open to the Tribunal to reach its view on the change of law point even though the Tribunal in Sloane Robinson did not do so.

We have considered the change in law argument from the point of view of whether when construing the “money” exception we can look at the steps in the scheme which were taken before the change in law on 7 May 2004, and after it as a whole. We think we can for two reasons.

First, as at the point of time the SG123 Ltd. shares were awarded there was a scheme whose object was to realise value in cash. The scheme did not end with the award of shares, that much is clear from Mr Modi’s prompts as to what further steps needed to be taken and the need to go to counsel. If the scheme had ended with the award of shares there would have been no need for this. We do not find that there was any realistic possibility that Mr Ferro would do anything other than turn the shares to cash. SG123 Ltd. served no purpose other than as performing a part in the scheme. Mr Ferro had no reason to want to hold onto shares in a special purpose vehicle apart from as a means of extracting money from his company.

Second, the appellant cannot reasonably have assumed that the law would necessarily stay the same. Against that backdrop, it was we think predictable, given what the appellant was setting out to do, namely extract cash from its account and deliver this to Mr Ferro, that further steps would be carried out in order to try and achieve the objective taking account of any change in law even if it was not known until later what the exact formulation of those steps would be.

There was an overarching objective and it was foreseeable advice would be sought as to the further steps to be taken. At the outset there was a scheme to extract the bonus which envisaged certain steps. Some of those steps were performed, the remainder were re-engineered but the objective remained the same. The steps taken after the change took account of the planning before. It would not be realistic, given the overall objective and the linkage between the steps, to disregard the steps taken post the change in law and to regard the change in law as giving rise to two separate sets of transactions which should be examined separately. There was one set of transactions linked by a common objective.

We agree with the Respondents. The route may have changed but the destination was the same.

Bringing the above discussion together we make the following conclusions in relation to how the legislation purposively construed is to be applied to the realistically appraised facts of this case.

The appellant argues this is not a “money in money out scheme”. It was not inevitable money would be paid out. Mr Ferro had no need for the cash; he could use it as a private investment vehicle.

Following from the findings above we disagree Stoneygate 123 Ltd. was to be held for investment purposes. There was no evidence to suggest this was the case. It is a separate point that it was capable of being held as such but that is not a realistic appraisal of the facts. Notes of meetings Mr Ferro took part in prior to implementation of the scheme (25 September 2003) reveal him wanting to extract bonus so he could reinvest. Advice in relation to the scheme show us what its objects were. The note of 4 March 2004 makes reference to “invest the money”. Mr Ferro’s adviser was keen to follow up on getting the money.

It was clear at the outset of the scheme when £300,000 was transferred by the appellant to SG123 Ltd. that the scheme was not going to end with Mr Ferro holding on to shares in SG123 Ltd.

We also find it implausible that anyone else would enter into this kind of arrangement to hold investments through such a company. In NMB Holdings it was possible for the directors to hold onto platinum sponge but ultimately it was not realistic to find they would do so. Similarly it was possible Mr Ferro would hold onto the shares but it was not realistic.

The facts of this transaction, which disclose series of meetings, resolutions, agreements and transfers, whereby Mr Ferro dutifully followed detailed instructions given to him, and signed what he was asked to sign, all performed with the ultimate objective of avoiding tax, can without any hesitation be described as components in a contrived and artificial scheme to avoid tax.

It is accepted by the Respondents that a motive to avoid tax, which there clearly was here, is not fatal to a scheme being held to be effective but as pointed out by the UT in UBS at [162] quoted above at [152] “it may of course throw light on matters such as the commerciality of the arrangements made, or the likelihood of pre-planned events occurring”.

In our view, the light the tax avoidance motive casts on any suggestion that there was a commercial reason for holding onto the shares is an unfavourable one. It also makes any suggestion that there was not an expectation that the steps that were to be taken to turn the shares to money were not pre-planned less tenable. The lack of explicit machinery to turn the shares to money as compared with the platinum sponge in NMB is not surprising given the different subject matter involved.

We have considered whether, as in UBS , the shares, were of a character such that the step of awarding them could not be ignored. We have found the shares and the circumstances of their award are materially different and conclude the shares in SG123 can be regarded as a vehicle for payment of cash.

SG123 Ltd. and SG108 had no role other than to play their part in the scheme to avoid tax. The steps which followed the appellant’s decision that it would pay Mr Ferro a £300,000 bonus, such as the award of shares in a special purpose vehicle, the transfer of shares, the giving of the guarantee disclose no commercial purpose.

We should also mention we have not overlooked the appellant’s argument to the effect that HMRC want to “have their cake and eat it” by saying something is earnings if they cannot get a charge to stick under Part 7 ITEPA. What would happen, they say, if it turned out the shares continued to be held?

We are not persuaded this argument gets the appellant anywhere. As at the time of the award of shares our finding is that realistically what Mr Ferro was getting was money. On that basis Part 7 is not accessed. The effectiveness or otherwise of the scheme negotiating its way through Part 7 without a tax charge is not relevant.

Our conclusion is the transactions which took place when realistically appraised amount to an artificial contrived scheme, whose essence was to pay money. The transaction when viewed realistically is one which it was the intention of Parliament to exclude from the regime in Part 7 by operation of the “money” exception.

In UBS the Upper Tribunal commented at [165] that HMRC’s Regulation 80 determination notice was determined in the sum of the gross amount paid by UBS into the ESIP. They state:

For the reasons discussed above at [189] to [195] as to the distinctions between the “real and enduring nature” of the ESIP shares in contrast to the shares in SG123 Ltd. we do not think the same difficulty arises in this case. As stated in reasoning of the Secretary of State in NMB Holdings at [6(22)] which was endorsed by Langley J in his consideration of the application of Ramsay it is the series of transactions which has to be pre-ordained rather than the amount of cash.

The fact that what was received was different from what was extracted from the company does not therefore mean it is not possible to take an approach whereby a series of steps which amount to a composite transaction are found to fall within a statutory provision which applies to such transactions.

The scheme amounts to a bonus of money rather than shares. Under Rule 3(c) in s18 ITEPA the timing of the payment was when the amount was determined. In accordance with our finding this was 30 April 2004 which was the date when the appellant awarded Mr Ferro shares and in doing so committed to operating the share scheme in favour of Mr Ferro. The Regulation 80 determinations under appeal are upheld.

Both parties were in agreement that the analysis for National Insurance Contributions would follow the income tax analysis.

We agree. On the basis that Part 7 ITEPA was irrelevant for income tax then Regulation 25 and paragraph 1 Part IX of Schedule 3 to the Social Security (Contributions) Regulations 2001 (“the NICs Regulations”) which provide for an earnings disregard for payments by way of “securities” and “restricted securities” is irrelevant too. The “money” exception in s420 ITEPA was equally relevant to NICs in that the definitions of “securities” and “restricted securities” in Regulation 1(2) of the NICs Regulations reflected the corresponding definitions of those terms in ITEPA 2003. There was a bonus of money rather than securities. The money counted as earnings for NIC purposes. The Respondents relied on HM Revenue and Customs v Forde and McHugh [2012] EWCA Civ 692 for the proposition that the money was paid to or for the benefit of the employee on the date on which it was paid into the scheme even if there was an obstacle bar to immediate enjoyment. The appellant did not make any argument against this.

The s8 decisions under appeal are confirmed.

The scheme amounted to a bonus in money rather than shares. The Regulation 80 determinations and the s8 decisions under appeal are upheld. The appellant’s appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.