Fisher – TOAA rules not applicable to sale of business from a UK company to a Gibraltar company

In S Fisher and Others v HMRC [2020] UKUT 62 (TCC), the Upper Tribunal (UT) allowed the taxpayers' appeals and held that the transfer of assets abroad rules did not apply to the sale of a business from a UK company to a Gibraltar company, which was under the control of the same directors and shareholders.

Background

Stephen Fisher, his wife Anne Fisher, and their son Peter Fisher (the appellants) were UK taxpayers. All three were shareholders and/or directors of Stan James (Abingdon) Ltd (SJA), a UK-resident company and Stan James Gibraltar Ltd (SJG), a Gibraltar based  company. Although the appellants were at all material times resident and ordinarily resident in the UK, Mrs Fisher was an Irish national. In March 2000, the appellants decided to transfer a tele-betting business owned by SJA to SJG.

Section 739, Income and Corporation Taxes Act 1988 (ICTA) (now section 720, Income Tax Act 2007), prescribes an anti-avoidance code in respect of the transfer of assets abroad (the TOAA code). The TOAA code is designed to prevent UK residents transferring the ownership of assets overseas whilst continuing to benefit from the income those assets generate without suffering UK income tax.

Section 741, ICTA, provides a defence to section 739, the so-called 'motive' test. Section 741 provides that section 739 shall not apply if the individual transferring the asset can show that either:

(a)  the purpose of avoiding liability to taxation was not the purpose or one of the purposes for which the transfer or associated operations were affected; or

(b)  the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.

HMRC assessed each of the appellants to income tax on an apportioned allocation of SJG’s profits for 2000/01 to 2007/08, under the TOAA code. 

The appellants appealed the assessments to the First-tier Tribunal (FTT). 

FTT decision

The FTT held that the appellants were "quasi-transferors" by virtue of either their directorships and/or shareholdings in SJA, and were accordingly subject to the TOAA code in respect of the profits made by SJG. 

The FTT did find, however, that although Mr Fisher and his son could not utilise the section 741 motive defence, Mrs Fisher, through her status as an Irish national, could. This was as a result of the TOAA code infringing her EU right to freedom of establishment. The legislation therefore had to be interpreted in line with EU legislation to ensure conformity. References to "tax avoidance" within ICTA would therefore be constrained to those circumstances where tax was avoided by artificial means and that was not the case in this instance.

The FTT also found that certain of the assessments were invalid because the requirements of section 29(5), Taxes Management Act 1970 (TMA), for making discovery assessments, were not satisfied.

The appellants appealed to the UT.

UT decision

The appeals were allowed.

The UT held that the TOAA code did not apply to the sale of the tele-betting business from SJA to SJG. 

The statutory provisions expressly required the transfer of assets to be made by an individual. Although there might be circumstances in which an individual shareholder with a controlling interest could be said to have used their control to bring about a transfer, that was not the position in the instant case. In the normal course of business, an act of a company in transferring its assets could not be treated as in reality the act of one of its shareholders just because that shareholder took part in a collective board decision to carry out the transfer.

The UT also found that had the TOAA code been engaged, the motive defence would have been available to the appellants on the grounds that the primary reason the appellants had transferred the tele-betting business from SJA to SJG was to ensure the business remained profitable. 

The UT agreed with the FTT's finding that the TOAA code restricted Mrs Fisher's rights of freedom of establishment as it would have forced her to relocate outside of the UK to avoid liability for income tax on the profits of SJG and that her husband, with UK nationality, could also rely on that breach as a defence to the charge under the TOAA code.

Although not necessary, the UT also considered the FTT’s decision on the discovery issue. The FTT had held that section 29(5), TMA, was not satisfied because, at the time the relevant enquiry window had closed, knowledge of the contents of SJG’s accounts for 2006 and 2007 could be imputed to HMRC even though those accounts had not been filed. The UT disagreed with this interpretation, noting that it would be strange if HMRC could ask repeatedly for documents (as it had done in this case), the taxpayer could fail to provide them, but HMRC would nevertheless have imputed to it full knowledge of the content of those documents.

Commentary

The decision of the UT is to be welcomed, confirming as it does that the circumstances in which the courts will pierce the corporate veil and attribute the acts of a company to its controller (or controllers) in order to enable HMRC to levy a tax under the TOAA code, will be rare. 

If the UT had been prepared to apply section 739 to a situation where the transferor is a company (irrespective of whether the individuals behind it are directors and shareholders), it would have broadened the scope of the TOAA code in such a way as to offend against both the statutory language and its purpose.

Taxpayers can also be encouraged by the fact that the UT was also of the view that the 'motive' defence was satisfied in this case where the transfer was made in order to save a business, even though the transfer resulted in a saving of betting duty. In the view of the UT, the tax charge which HMRC sought to levy was unjustified as the transaction was a bona fide transfer from one legitimate tax-paying business to another. SJG paid tax on its profits in Gibraltar and so to make the appellants pay tax on the same profits which had already been taxed once in Gibraltar could not be characterised as preventing tax avoidance and would have gone "far beyond what might be regarded as proportionate to achieve that objective".

Often, where there is a 'purpose' test in issue, and a tax advantage has resulted from the transaction entered into, HMRC will challenge that transaction. It is to be hoped that this decision will cause HMRC to think carefully before arguing that as a consequence of an incidental tax advantage arising the main purpose, or one of the main purposes, of a genuine commercial transaction, was to save tax.  

The decision can be viewed here.