Analysis
During the relevant tax years, R was resident and ordinarily resident, but not domiciled, in the United Kingdom. He was a Cypriot national. He held 50% of the issued shares of ACM, a company incorporated in England and Wales. R worked full time in ACM, which carried on a successful business as a fund manager. C held the other 50% of the shares of ACM.
In order to sell his shares in ACM, R decided to acquire C ‘s shares in ACM using a trust and a company resident outside the UK and borrowed funds, also from an offshore company. R established the R Trust, a discretionary family trust, governed by the Cyprus International Trusts Law of 1992, for the benefit of himself, his wife and his son and constituted it with the payment to the trustee of a nominal sum. The sole corporate trustee was MHL, a company incorporated, managed and controlled in Cyprus. R was not a director, nor an officer, of MHL. R ‘s brother, K, who was personally resident in Cyprus, was appointed to be the protector of the R Trust.
The following transactions occurred:
1) FVI, a limited company incorporated in the British Virgin Islands, was formed and its issued shares were transferred to MHL as trustee of the R Trust. K was appointed as a director of FVI.
2) A sale and purchase agreement was signed by C and FVI in respect of C ‘s shares in ACM.
3) A loan agreement was signed by FVI and MC, a company domiciled, managed and controlled in Greece, expressed to be for the purpose of the acquisition of C ‘s shares in ACM. Under that agreement, MC lent to FVI the whole of the purchase price.
4) The sale of the shares to FVI was completed.
5) Following completion of the sale, ACM paid interim dividends to FVI.
6) R and FVI then sold 100% of the shares in ACM to a UK listed company, for a mixture of cash and shares in that company.
7) FVI repaid the balance of the loan to MC, using money borrowed from AIB, a Swiss bank.
R was assessed to income tax under s739 ( ‘s739 ‘) of the Income and Corporation Taxes Act 1988 ( ‘ICTA ‘) in respect of the interim dividends paid by ACM to FVI, on the grounds that he was the transferor, or procured the transfer, of assets to a person abroad, with a result that dividends on shares in ACM were received by a person abroad and that R had the power to enjoy that income. R appealed.
Held
The appeal was allowed.
1) R was not the transferor within the provisions of s739. Those provisions applied only to a person who made or was associated with a transfer (per Lord Wilberforce in Vestey v IRC 54 TC 503, at 587), procured the transfer (per Cohen LJ in Congreve v IRC 30 TC 163, at 197) or, exceptionally, as a matter of fact had an influence over another so strong that he was the transferor of the other ‘s shares (per Dr Avery Jones in Carvill v IRC [2000] STC (SCD) 143).
HMRC argued that, although C transferred his shares in ACM to FVI, that transfer was procured by R. The Tribunal accepted that R orchestrated the purchase side of the transaction but held that C was in an equally powerful position to that of R. It was stretching the meaning of the word ‘procure ‘ beyond breaking point to say that R ‘s control of the arrangements meant that he dictated to whom C should sell his shares. R was not the transferor or a quasi-transferor of C ‘s shares in ACM.
HMRC also argued that the transfer by R of the nominal sum to the trustee of the R Trust was a transfer of assets abroad and that the steps taken in achieving the sale and purchase of C ‘s shares in ACM were associated operations in relation to the initial transfer, within s741 of ICTA. The Tribunal held that the objective of s739 was to deter the transfer abroad of income producing assets which the transferor already owned or controlled so that he might avoid future UK taxation on the income from those assets. This argument of HMRC did not fall within that objective and was rejected.
2) As R was not the transferor, it was not necessary to consider the motive defence offered in s742 of ICTA, but the Tribunal did so for the sake of completeness. This required a determination of whether the arrangement, as orchestrated by R, amounted to unacceptable tax avoidance or was merely acceptable tax mitigation (per Lord Nolan in Willoughby v IRC 70 TC 57). It was held that the interposition of a non-resident trust between R and the shares in ACM, which were UK property, did have a tax avoidance motive and R could not take advantage of the motive defence.
3) Also for the sake of completeness, the tribunal considered R ‘s argument that the imposition of s739 potentially infringed the principle of free movement of capital between Member States of the EU, or were capable of doing so. The relevant transactions put forward for this purpose were the sale of C ‘s shares to FVI, the payment of dividends by ACM to FVI and the transfer of the nominal sum to the trustee of the R Trust.
The first question was whether there was any discrimination caused by the provisions of s739 and this was answered by making theoretical comparisons between the position if the relevant companies were based in the UK and the position R found himself in as a result of s739. If FVI had been established in the UK, any dividends it received from ACM would not have been subject to tax but, because it was resident in Cyprus, which was a Member State, if s739 applied any dividends it received would be subject to income tax in R ‘s handa; a clear discrimination. The tribunal concluded that the provisions of s739 potentially infringed the principle of free movement of capital.
The second question was whether the infringement was justified by its being aimed at tax avoidance and proportionate, rather than penal, in its pursuit of that objective. It was held that, although s739 was justifiable on the ground that it was targeted at tax avoidance, it put R in a worse position than he would have been had he formed FVI in the UK and was therefore penal in nature.
Accordingly, the provisions of s739 were not compatible with the EU principle of free movement of capital and the only effective remedy was to disapply s739.
JUDGMENT JUDGE PHILIP GILLETT: [1] This is an appeal against two closure notices dated 7 November 2017, issued by the Respondents (‘HMRC’) under s28A Taxes Management Act 1970. These closure notices assessed Mr Andreas Rialas to additional income tax of £430,774.40 in respect of 2005-06 and £663,292.00 in respect of 2006-07. [2] These additional amounts …Continue reading "Rialas v HMRC [2019] WTLR 1251"