Court of Appeal overturns Upper Tribunal decision, narrowing taxpayers’ defences against anti-avoidance transfer of assets abroad charges.

In one of the most noteworthy tax cases of recent years concerning the transfer of assets abroad (TOAA) code, the Court of Appeal (CA) made a groundbreaking decision in finding that taxpayers who were trying to save their business and had no intention of trying to avoid income tax were nevertheless caught defenceless, finding themselves taxed on their offshore company’s profits.

UK residents operating even fully commercial businesses abroad should beware their arrangements could be similarly caught. If the commercial rationale for a transfer of a business to another jurisdiction is that the new jurisdiction has lower tax rates than the UK, HMRC may refer to this case to argue that the motive defence should not apply, even if the business might otherwise fail.

The TOAA code

The main purpose of the TOAA code is to prevent UK resident individuals from avoiding income tax by transferring income producing assets to a ‘person’ (typically a company or a trust) outside the UK. The rules work, in part, by treating the income arising to the person abroad as taxable income of the transferor.

It is possible to avoid the application of the TOAA code if a ‘motive defence’ is claimed. To make this claim successfully, HMRC must be satisfied either that the avoidance of taxation was not the purpose or one of the purposes of the relevant transactions, or that the transfer and any associated transactions took place for genuine commercial reasons and not for the purpose of avoiding a tax liability.

Background

In Fisher v HMRC [2021] EWCA Civ 1438, three UK resident taxpayers (mother Anne, father Stephen and son Peter) transferred their gambling business from a UK company to a Gibraltar company. This was because it was commercially advantageous to offer customers a reduced rate of betting duty. Competitors had also relocated their businesses outside the UK. The taxpayers believed they had no choice but to follow suit on the understanding that customers of betting companies show little brand loyalty, typically taking their custom to the cheapest provider.

The taxpayers were directors and shareholders of both companies, so paid tax in the UK on salary and dividends. HMRC sought to tax them on the entire profits of the Gibraltar company, in proportion to their shareholdings, on the grounds that they had made a transfer of assets abroad. Much of this profit had been reinvested in the business.

CA decision

Although the actual ‘transferor’ in this case was the company, the CA considered that even though Stephen and Peter each held minority interests so did not control the company, they did act together to procure the transfer. Only two of the three judges agreed on this point. In relation to Anne, it was found that she had entrusted her responsibilities to Stephen and Peter, and so could not be a quasi-transferor. The TOAA code would, therefore, apply to Stephen and Peter but not to Anne.

This decision can be contrasted with another recent case (HMRC v Andreas Rialas [2020] UKUT 367), where HMRC was unsuccessful in showing that an individual was able to procure a transfer of assets abroad by a joint, albeit unconnected, shareholder.

The CA also found that, although there had arguably been no avoidance of income tax due to the salary and dividend payment, there was no requirement for income tax to actually be avoided for the TOAA rules to apply. The legislation may be headed “prevention of avoidance of income tax”, but it does not follow that the rules cannot operate in the absence of any actual avoidance of tax.

Most notably, the CA disagreed with the Upper Tribunal’s (UT’s) finding that the taxpayers had a valid motive defence. Although the main purpose of the transfer was to save the business, this was only possible by avoiding the betting duty. The two were inseparable, so there was a tax avoidance motive. It was noted that it “will rarely, if ever, be the case that a transferor wishes to avoid liability to tax for the sake of it; in normal circumstances, a transferor will be intending to use the avoidance of tax to attain another objective”. If a taxpayer could simply look beyond tax avoidance to its consequences then the motive defence would typically be available, which is both illogical and not Parliament’s intention.

Finally, the CA also rejected the contention that the TOAA code in this case infringed the EU freedom of establishment principle, because the UK and Gibraltar were parts of a single Member State.

It remains to be seen if this case will be appealed further to the Supreme Court, especially given the dissenting judgement on the procurement issue.

Fisher v HMRC [2021] EWCA Civ 1438

www.bailii.org/ew/cases/EWCA/Civ/2021/1438.html

www.bailii.org/uk/cases/UKUT/TCC/2020/367.html

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority
Smith & Williamson Investment Management LLP is part of the Tilney Smith & Williamson group.
© Tilney Smith & Williamson Limited 2022