First-tier Tribunal (Tax)

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Cite as: [2009] UKFTT 141 (TC)

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[2009]UKFTT 141 (TC)

TC00109

Appeal number SC/3225/08 PRELIMINARY ISSUE – written reasons for dismissing the application

FIRST-TIER TRIBUNAL TAX BLUE Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents

TRIBUNAL: TRIBUNAL JUDGE JOHN AVERY JONES CBE

Sitting in public in April 2009

David Goldberg QC, instructed by Freshfields Bruckhaus Deringer LLP, for the Appellant

Malcolm Gammie QC instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

This is an application the Appellant represented by Mr David Goldberg QC, to order a preliminary issue. The Respondents ("HMRC") were represented by Mr Malcolm Gammie QC. I declined his application and he asked me to give written reasons.

Mr Goldberg gave the following factual background in his skeleton:

(1) "At various times between 6 April 1997 and 5 April 2000, options over shares in a company called Green ("Options") were granted by the Blue Employee Benefit Trust to various persons working for the Blue Group ("Grantees")

(2) In the 26-month period between 6 April 1997 and June 1999 ("the First Period"), all the Grantees were employed by Yellow. Most (but not all) of the Grantees were seconded by Yellow to the Appellant but none of the Grantees were employed by the Appellant in the First Period. In the 10-month period from June 1999 to 5 April 2000 ("the Second Period") some 214 (representing approximately two-thirds) of the Grantees were employed by the Appellant.

(3) The value of the Options exercised by the Appellant's employees was relatively modest as compared to the value of the Options exercised by Yellow employees.

(4) The Respondent claims that the exercise of the Options gave rise to a liability to national insurance contributions ("NICs"), and has made decisions covering both the First Period and the Second Period ("the Decisions"), in respect of a sample of two nominated Grantees, that the Appellant is labile to pay primary and secondary Class 2 contributions in respect of earnings, being income from the exercise of unapproved share options. The Decisions are in respect of Grantees who were employees of the Appellant in the Second Period but not in the First Period. Although the Decisions relate only to two employees, the sums in relation to NICs which the revenue is seeking to recover by County Court proceedings is very great indeed: if the Appellant wins on the threshold issue its maximum liability will be very much reduced."

Mr Goldberg contends that there should be a preliminary issue consisting of (1) was the Appellant the employer of the Grantees who exercised Options? and (2) if the Appellant was not their employer, were they employed by a "foreign employer" so that the Appellant was a "host employer." The significance of these is that normally the person liable to pay NICs is the employer (s 7(1) Social Security Contributions and Benefits Act 1992). However, if the employer is a foreign employer (a person who does not fulfil the conditions as to residence or presence in Great Britain prescribed under s 1(6)(a) of the Act) the person liable is the host employer (the person to whom the personal service of the person employed is made available).

Mr Goldberg contends that if this is done this may resolve the appeal in relation to the First Period and may enable the parties to settle the case in relation to the Second Period because the amounts in issue will then be relatively modest.

Mr Gammie for HMRC points out that HMRC has on 13 March 2009 issued section 8 decisions against Yellow and will take steps to protect the debt by proceedings in the County Court. If those decisions are appealed and the appeals joined with this one, as they should be, one or other company must be the employer and so the preliminary issue is unnecessary. Mr Goldberg says that HMRC are out of time to take County Court proceedings and will not be able to amend the existing proceedings to say that they named the Appellant by a mistake (rule 19.5(3)(a) of the Civil Procedure Rules 1998).

I consider the 10 questions that Neuberger J in Steele v Steele (27 April 2001) considered should be asked in determining whether to have a preliminary issue.

(1) Will the determination of the preliminary issue dispose of at least one aspect of the case? Yes, because it may dispose of all the issues for the First Period and will reduce the issues for the Second Period.

(2) Might the determination of the preliminary issue significantly cut down the cost and time of the trial? I do not think this will necessarily be the case because if the same employees have to give evidence at both the hearing of the preliminary issue and the appeal, the total court time may not be reduced. I accept, however, that it will reduce the preparation time and hence the cost if the ambit of the appeal is reduced. However, as the scheme was initiated in 1997 it is likely that things done then will still be relevant even if the appeal is concerned only with the Second Period.

(3) How much effort will be involved in identifying the relevant facts? I consider that this will be considerable. If the issue is who is the employer the factual compass includes whether the Appellant is an implied employer and whether Yellow has a presence in Great Britain.

(4) To what extent can it be determined on agreed facts? It cannot.

(5) Will the point that the facts are not agreed impinge on the value of the preliminary issue? I think that the value will be reduced if the same witnesses need to be called in both the preliminary issue and the substantive appeal.

(6) Will the hearing of the preliminary issue fetter the Court in achieving a just result? I do not think so.

(7) Will the determination of the preliminary issue increase costs or delay the trial? It may reduce some costs but it will delay the substantive appeal until after the preliminary issue has been determined. The facts relate to a scheme initiated in 1997 and continued in 1998 and 1999 (no doubt with variations) and they are already extremely old (I am not concerned with which party is responsible for the delay). The substantive issue is I understand a Ramsay one and it is important that the evidence is still available.

(8) To what extent might determination of the preliminary issue be irrelevant? If both the Appellant and Yellow are parties to the ultimate appeal (and HMRC can enforce the debt against Yellow) the question of who is the employer will be irrelevant because one of them must be. We shall not know whether HMRC can enforce any debt against Yellow for some time.

(9) Might resolution of the preliminary issue lead to an application to amend the pleadings? Not applicable.

(10) Is it just to order a preliminary issue? I consider this below.

I regard the following factors as particularly important. First, the facts go back to 1997 to 2000. Even if the preliminary issue proceeded, the substantive appeal may still concern 1999-2000 for which facts of 1997 when the scheme was first set up may be relevant. Secondly, there is a considerable factual dispute some of which relates to the proposed preliminary issue and some the substantive appeal and these are likely to overlap in at least the identity of the witnesses. Third, the question of whether the Appellant or Yellow is the employer may not matter but it is unclear at the moment whether this is the case. Taking all the aspects together and bearing in mind the overriding objective in rule 2 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 of dealing with the case fairly and justly, one aspect of which is avoiding delay, I consider that there should not be a preliminary issue but that the parties should proceed quickly with the substantive appeal and avoid any possible further delay on top of the existing considerable delay. I hope the parties will be able to agree directions for the appeal.

JOHN F AVERY JONES

TRIBUNAL JUDGE

RELEASE DATE:3 April 2009