Ramsay and commercially irrelevant provisions

The FTT has held that a condition that included in the award of employee security interests with no commercial purpose could be ignored in applying the restricted securities legislation originally introduced in 1998: Lynx Forecourt Ltd v HMRC [2024] UKFTT 278. The relevant provisions should be construed as only applying to conditions which were not commercially irrelevant and it was not sufficient that they were both real and would have had a commercial effect.

Background

The appeal concerned bonuses paid by the appellant to its main shareholder and director, CP, in 2002 and 2003. Rather than pay cash bonuses, the appellant and CP took advice on implementing a tax efficient bonus scheme. The arrangements involved the issue of loan notes issued to the appellant by an entity set up by CP and the award of those loan notes by the appellant to CP or for CP’s benefit.

The award of the loan notes was subject to a condition that CP should not die within one year of the award. Further arrangements were entered into following the award to ensure that the value of the loan notes for tax purposes (or the amount brought in for tax purpose on redemption) was substantially reduced.

The appellant contended that the award of the loan notes fell within the scope of ICTA 1988 s.140A dealing with the conditional acquisition of shares. On this basis, the award of the loan notes did not give rise to a tax point and they were only taxable once the condition expired (at which point the tax value had been decreased). HMRC rejected that approach and argued that the condition in this case should be ignored for tax purposes.

FTT decision

The appellant argued that the language of s.140A was clear and unambiguous and the award of an interest in shares or securities where subject to forfeiture upon the occurrence of the recipient’s death within 5 years fell within the terms of the legislation.

HMRC put forward three arguments for ignoring the condition in this case:

• The condition was illusory
• The condition was not meaningful since a failure to satisfy it would have led to the same commercial result
• Even if the condition was both real and meaningful, the situation viewed realistically did not fall within the scope of s.140A construed purposively.

The FTT rejected the argument that the condition was illusory. The risk was a genuine one that could have occurred. Even the fact that CP might have brought the conditionality to an end by exercising an early redemption right did not mean that the condition could be simply ignored.

The FTT also considered that the fact that failure of the condition might have resulted in little practical difference as they would have in practice been received by CP’s wife both on failure of the condition or on CP’s death had the loan notes have been issued unconditionally. In practice, HMRC had failed to make out this case in any event, as there was no evidence as to CP’s will and, in fact, the loan notes would have gone back to the appellant (not CP’s wife) on failure of the condition, and CP only owned 70% of the appellant.

Finally, the FTT accepted HMRC’s argument on the purposive interpretation of s.140A. HMRC argued that, even if the condition was both real and meaningful, this condition viewed realistically did not fall within the scope of s.140A. Essentially, the FTT noted that the Supreme Court in UBS AG v HMRC [2016] UKSC 13 had held that the subsequent, similar provisions in ITEPA 2003 only applied to conditions having a business or commercial purpose and did not include commercially irrelevant conditions whose only purpose was to obtain the benefit of the relief. The FTT considered that, although there were differences between s.140A and the provisions in ITEPA 2003, the purpose of the legislation was broadly the same in seeking to prevent the reduction of tax payable by reducing the value of an award as encumbered by conditions.

As such, the FTT agreed that HMRC was entitled to ignore the commercially irrelevant condition included in the loan notes and tax the immediate receipt of those loan notes.

Comment

The decision, in effect, amounts to an application of the Ramsay principle to exercise a provision included in securities issued in this case. The Ramsay approach required the Court to consider the purpose of the relevant legislation and apply it to the facts, realistically identified. The fact that the legislation itself was essentially anti-avoidance legislation which the taxpayer was seeking to rely on to achieve a favourable tax result certainly will not have assisted the arguments.

Indeed, the case brings to mind the commercially irrelevant “anti-Ramsay devices” included in the decision of the House of Lords in Scottish Provident, which were equally considered to be of no consequence as the scheme needed to be considered as it was intended to operate, ignoring such provisions. “The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned”.