The Fisher case
On 4 March 2020, the Upper-Tier Tribunal ('UTT') handed down its judgment in the appeal of Fisher v HMRC [2020] UKUT 62 (TCC), following the First-Tier Tribunal’s ('FTT') 2014 decision.
The appeal involved a couple, Stephen and Anne Fisher, and their son Peter Fisher, and the sale and transfer of their UK resident tele-betting business to a Gibraltar resident company. Anne Fisher was a UK resident Irish national, whereas Stephen and Peter Fisher were UK resident and UK nationals.
The three family members were shareholders and/or directors of both companies and had made the decision to follow many of their competitors and move their operations out of the UK in order to reduce their liability to betting duty.
Context
The Transfer of Assets Abroad ('TOAA') code was introduced in 1936 and considerably extended in 1981 and 2005.
The purpose of the code is straightforward – to prevent UK individuals transferring income-producing assets to a person outside the UK (a 'person abroad'), but in some shape or form continuing to enjoy that income. However, dating as it does from 1936, the legislation leaves a lot to be desired and catches many more situations than might be thought to amount to tax avoidance. The width of the provisions – and their compatibility with EU and other law – has been frequently questioned.
In this context, the 2014 decision of the FTT raised further concerns for business owners and tax practitioners as to the scope of the TOAA code. However, the decision of the UTT helps to answer three of the key outstanding questions:
- Do the TOAA rules only apply to individuals who transfer assets out of the UK? Or can they apply to corporate-transferors as well?
- Are the rules – even after Brexit - compatible with EU fundamental freedoms, including free movement of capital and freedom of establishment? And do these freedoms only work for 'foreigners' or can they apply solely to UK nationals as well?
- If a transfer has both a commercial motive but also some tax-saving intentions does this get the transferor out of the TOAA rules under the, so-called, 'motive defence'?
The First-Tier Tribunal Decision
The FTT decision in 2014 held that the TOAA code did apply on the transfer of the UK resident company to a Gibraltar resident company and that, as a result, a tax charge in the UK would be payable on the profits of the Gibraltar company.
The FTT decided on the three following main points which were later considered on appeal:
1. The three family members were treated as 'quasi-transferors', who had jointly procured the transfer and, as such, the whole of the transfer was attributed to each of them. The profits of the Gibraltar company would be taxable under the TOAA rules, as this new business was an 'associated operation' of the UK company funded by the transfer of assets abroad. In other words, income had become payable to the Gibraltar company as a result of the transfer of assets from the UK company.
2. The taxpayers attempted to argue that, if the TOAA rules were applicable, the motive defence would be available to each of them as the purpose of the transfer to Gibraltar was not to avoid tax (in the form of betting duty) but was instead to ensure the survival of their business (on the basis that their competitors were moving their companies to Gibraltar and they would have lost business had they not done the same).
The FTT disagreed and found that the avoidance of betting duty was, in fact, the main purpose of the transfer.
3. For Stephen and Peter Fisher, the EU laws on freedom of establishment, which permit the national of a member state to work or provide services in any other member state, were not applicable to transfers from the UK to Gibraltar, on the basis that the UK is responsible for Gibraltar’s external relations under EU law.
However, as Anne Fisher was an Irish national, the EU’s freedom of establishment laws were engaged. As such, in her case the TOAA code must be interpreted more narrowly to apply only to a transaction which was a wholly artificial arrangement to avoid the payment of tax. As the Gibraltar company was a genuine trading entity duly paying tax in Gibraltar, this could not be considered as a wholly artificial arrangement (being a bona fide transfer at market value of an ongoing business from one company to another).
As such, the application of the TOAA code restricted Anne Fisher’s freedom of establishment in an unjustifiable manner. Its application was also disproportionate, as it would have led to her being liable to an income tax charge on the profits from the Gibraltar company at a higher rate than if the same business was carried out in England, and to her paying tax in England on profits from a genuine business which had already been taxed in Gibraltar.
As such, the denial of the motive defence to Anne Fisher in these circumstances would be disproportionate to any legitimate objective which the TOAA legislation sought to achieve. The motive defence would therefore succeed in her case.
The Upper-Tier Tribunal Decision
The decision of the FTT was appealed by the Fisher family, with judgment handed down by the UTT on 4 March 2020. The UTT’s decision that the TOAA code had been interpreted too widely by the FTT provides welcome relief for directors and shareholders of companies. In particular, the UTT ruled that:
1. The TOAA code does not apply to the transaction.
According to the Tribunal, the effect of applying the TOAA code to a situation where the actual transferor is a company, and the individual involved is only a shareholder or director of that company, 'would be to widen the ambit of the section to such an extent as to depart altogether from the language used in the state and the purpose it serves'.
Such an application would be incorrect. As a starting point, it must be that the TOAA code does not apply to transfers by companies (although the Tribunal recognised that there may be justification for lifting the corporate veil and attributing a transfer to an individual where that individual is responsible for effecting the transfer).
However the Tribunal rejected the idea that Parliament’s intention was for the code to be applied to all transfers made by companies in which a shareholder or director with any level of control can enjoy the income of the transferred assets.
The Tribunal found that this could not be correct and would be capable of producing anomalous and invidious results. In the case of the Fishers, the UTT considered that they, as directors, had carried out the transfer for and on behalf of the company.
Although it is possible to conceive of a situation where a transfer made by a company may be treated as having been made by an individual with control, in which case the company would be a mere agent or instrument for effecting the transfer, that was not the case in this instance.
2. The motive defence would have been available to all three appellants
Given the UTT’s decision that the TOAA code did not apply to the facts of the current case, there was no need to consider the application of the motive defence or the restrictions on the freedom of establishment.
Helpfully however, the UTT did turn its mind to these points. The Tribunal held that, had the TOAA code applied, the motive defence would have been available to all three appellants. This defence is available in cases where it can be shown that the 'transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation'.
The FTT did not dispute that the transfer and associated operations were a 'bona fide commercial transaction' but had taken umbrage with the second limb of the test, i.e. that the transaction was not designed for the purpose of avoiding liability to taxation.
The concept of tax avoidance is, in the Tribunal’s words, a 'slippery one'. Lord Nolan’s exploration of the concept in the case of IRC v Willoughby is helpful, as he considered that tax avoidance is separate from tax mitigation and concluded that tax avoidance 'is a course of action designed to conflict with or defeat the evident intention of parliament'. Whilst the transfer of the company to Gibraltar did have the effect of avoiding UK tax (in the form of betting duty), the UTT found that this was not the main purpose of the transaction. Instead, as a result of the high rates of betting duties driving punters to place their bets with bookmakers outside of the UK, the appellants felt that they had no choice but to follow their competitors and move the business offshore.
Therefore, the main purpose of the transaction was to ensure the survival of the business; the avoidance of betting duty was simply the means of achieving this main purpose. As such, the motive defence would have been available to the appellants, had it been required.
3. The application of EU law extends to the spouse of an EU national
The Tribunal also considered whether the application of the TOAA code would have breached the EU right of freedom of establishment for both Anne and Stephen Fisher.
The UTT confirmed the FTT’s view that Anne Fisher’s EU rights had been breached, but disagreed that this was not also the case for her husband.
If Stephen Fisher were not able to rely on the EU right to freedom of establishment and avail himself of the motive defence, he would be liable to a higher level of income tax in the UK. Further, in order to avoid the application of the TOAA code, Stephen Fisher would have to move outside of the EU or to Gibraltar. These implications would have a detrimental impact on the financial position of, as well as placing an emotional burden on, both Anne and Stephen Fisher as a married couple.
The UTT concluded therefore that Stephen Fisher could also rely on EU law. However, the same was not the case for Peter Fisher, a financially independent adult whose personal tax position would not directly impact his parents’ financial position. EU Treaty rights therefore did not extend to him.
Comment
The UTT’s approach to the TOAA code is welcomed as an appropriate and reasonable interpretation of Parliament’s intentions when the legislation was introduced. Further, the Tribunal’s recognition that a transaction can result in a reduction in the taxpayer’s tax liability without tax avoidance being the main purpose is welcomed. Although this case is, of course, fact specific, the UTT’s view provides reassurance to taxpayers and practitioners alike that the TOAA code may not be applied in a broad-brush manner to transfers made by companies in which the shareholders and/or directors have a power to enjoy income arising from the transaction.
If you would like to discuss this further then please contact John Barnett or Helen MacLeod.