Rialas: UT dismisses HMRC's appeal in transfer of assets abroad case

In HMRC v Andreas Rialas [2020] UKUP 0367 (TCC), the Upper Tribunal (UT) has confirmed that the taxpayer was not liable to income tax on dividends paid from a UK company as a result of the transfer of assets abroad anti-avoidance legislation (TOAA).

Background

Mr Rialas (R), a Cypriot national, was at all relevant times resident and ordinarily resident in the UK.  R and Mr Cressman (C) each owned 50% of Argo Ltd (Argo), a UK company which carried on a fund management business. R wished to buy out C's shareholding in Argo, so that he could then dispose of the entire share capital of Argo. 

In order to achieve this, R acquired a BVI-incorporated Cypriot-resident shelf company, Farkland Ltd (Farkland), which he then transferred to a new discretionary trust, the Rialco Trust, which was governed by Cypriot law, and to which he had contributed 10 Cyprus Pounds (C£10) of initial capital. The beneficiaries of the Rialco Trust were R and his family.

Farkland borrowed the purchase price for the shares and entered into a share purchase agreement with C. C transferred his share in Argo to Farkland, which received interim dividends from Argo.  Finally, R and Farkland sold Argo to a UK listed company.

HMRC assessed R to income tax on the interim dividends, which HMRC considered was due under the TOAA provisions, originally contained in section 739 et seq, Income and Corporation Taxes Act 1988 (section 739) (the legislation has since been rewritten and can be found in Chapter 2, Part 13, Income Tax 2007), on the basis that R either was the transferor, or had procured the transfer of assets (the shares), to a person abroad, and R had the power to enjoy the income derived from those assets.

R appealed to the FTT.

FTT decision

The appeal was allowed.

The FTT held that R was not a transferor, or quasi-transferor, for the purposes of section 739.  While R had orchestrated the structure for the purchase of the shares from C, in the view of the FTT it would be "stretching the meaning of the word "procure" beyond breaking point to suggest that the fact that he organised the purchasing structure means that he dictated to whom [C] should sell his shares".  Nor did the provisions apply in relation to the initial contribution of C£10 to the Rialco Trust.  The FTT also considered that the TOAA regime contravened R's right to the free movement of capital under EU law.  

HMRC appealed to the UT.

UT decision

The appeal was dismissed.

The UT noted that the purpose of the legislation was to prevent the avoidance of income tax by individuals ordinarily resident in the UK by means of transfers of assets and it achieves this by imposing a charge to income tax in circumstances where:
(a) there is a transfer of assets;
(b) by virtue of or in consequence of that transfer, either alone or in conjunction with 'associated operations', income arises to a person resident or domiciled outside the UK; and
(c) by virtue of or in consequence of the transfer, either alone or together with associated operations, such an individual  has 'power to enjoy' income of a non-UK resident or domiciled person which would have been subject to income tax had it been received by the individual.  The charge is imposed on such an individual on the income they have 'power to enjoy' even though it is in fact received by a non-resident person. 

HMRC argued, firstly, that the FTT, in arriving at its decision, had misunderstood the relevant case law in proceeding on the basis that section 739 applied in relation to a taxpayer who had not actually effected a transfer of assets only if the taxpayer had procured the transfer. In fact, HMRC argued, there were other bases for holding an individual liable under section 739.  The relevant transfer of assets was the transfer by C of his shares to Farkland and, due to R's close involvement in the structuring and financing of the operation, all the conditions were present for R to be subject to tax on the dividends received by Farkland.  

The UT noted that guidance had (since the FTT hearing) been provided by the UT in Fisher v HMRC [2014] UKFTT 804 (TC). In that case the UT said that it was important  to identify who the real transferor was and if a person had no influence over what the actual transferor did with the assets there was no good reason for him to be treated as the 'real' transferor.

In relation to HMRC's first argument, the UT noted that the FTT had foreshadowed the approach adopted by the UT in Fisher.  While R's involvement was crucial in arranging the structure (and in particular the finance) utilised for the sale of C's shares, this did not mean that R had any control over whether C actually sold them.  The UT considered that in order to conclude that the FTT had erred in rejecting HMRC's first argument, it would need to decide that either or both of the decisions in IRC v Pratt [1982] STC 756 and Fisher were wrong, and it did not consider that this was the case.  It therefore rejected HMRC first argument.

HMRC's second argument was that the initial payment of C£10 into the Rialco Trust was made by R; that R used the C£10 to purchase the subscriber shares in Farkland (an 'associated operation' in relation to the C£10 'transfer of assets'); that without Farkland being held by the Rialco Trust there would be (i) no vehicle available to acquire C's shares and receive the dividends paid on them; and (ii) no power for R to enjoy income received by Farkland; and therefore the requirements of section 739 were met such that R could be assessed to tax on dividends received by Farkland.  HMRC argued that the FTT's decision in relation to the C£10 was vitiated by a misunderstanding of the purpose of section 739 and had been motivated by a consideration that it was too small an amount of money to worry about.

The UT dealt briefly with this argument.  The statutory requirement was that the receipt of income by non-residents be "by virtue or in consequence of" the transfer of assets and associated operations.  While the establishment of the Rialco Trust and its acquisition of the subscriber shares in Farkland were necessary preconditions to the transfer of C's shares, they did not themselves enable Farkland to receive dividends on the shares.  This could only be guaranteed once C had, in addition, agreed to sell the shares, and once Farkland had the funds to pay for them.   

Comment

Following this decision, where an offshore structure acquires assets at their full market value from a third party, it will be difficult for HMRC to mount a successful argument that another individual has procured the transfer. However, this is unlikely to be the final word on this issue. The UT declined to rule on HMRC’s claim that the FTT was also wrong in determining that applying a charge to income tax under the TOAA regime to R would infringe his EU rights to free movement of capital. This was, in part, in order to reach a swift decision on the core issue so as to enable a co-ordinated appeal by HMRC of the UT's decision  in this case with its appeal in Fisher (the Court of Appeal is due to hear HMRC’s appeal in Fisher later this year) where the core issue in dispute is the same, namely, when should an individual who has not personally made a transfer of assets abroad be treated as a transferor for the purposes of the TOAA regime? HMRC’s position is that where an individual has been involved in the creation of a structure, they should be treated as the transferor. It is understood that there are a number of other cases in which HMRC is maintaining this argument and clarification of the correct interpretation of the TOAA from the Court of Appeal will be welcome.

Our previous blog on the FTT's decision can be viewed here.

The UT's decision can be viewed here.