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URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00152.html
Cite as: [2009] UKFTT 199 (TC), [2009] SFTD 602

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Ebsworth v Revenue & Customs [2009] UKFTT 199 (TC) (29 July 2009)
INCOME TAX/CORPORATION TAX
Anti-avoidance

 


Appeal number SC/3183/2008

Income Tax – Transactions in securities – s 703 TA – Circumstance D – Tax Advantage in consequence? – Escape clause shown to apply on the facts – Appeal allowed

FIRST-TIER TRIBUNAL

TAX

MR. A J EBSWORTH Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (Income Tax) Respondents

TRIBUNAL: TRIBUNAL JUDGE ADRIAN SHIPWRIGHT

Sitting in public in London on 6 and 7 May 2009

Alun James, Counsel, instructed by Baker Tilly, Bury St Edmunds for the Appellant

Akash Nawbatt instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

1. This is an appeal by Mr. Ebsworth, the Appellant, against a notice ("the Notice") issued under section 703 Income and Corporation Taxes Act 1988 ("TA") dated 29 May 2007.

The Issue

2. The issue, in this case, is, essentially, whether the Notice was properly issued. This raises a number of questions including the following:

(1) Whether the transactions were undertaken for tax avoidance purposes?

(2) Are the conditions for the application of section 703 fulfilled?

(3) Was there a tax advantage?

(4) If there was a tax advantage was that in consequence of a transaction in securities or the combination of liquidation and a transaction in securities

(5) What was the value of BSAS 2?

(6) What was Mrs. Ebsworth's position?

(7) Does the escape clause apply?

The Law

The Legislation

3. The relevant legislation is found in sections 703, 704 and 709 TA^[1].
4. In so far as is relevant they read as follows:

"703 Cancellation of tax advantage

(1) Where—

(a) in any such circumstances as are mentioned in section 704, and

(b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,

a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions.

(2) For the purposes of this Chapter a tax advantage obtained or obtainable by a person shall be deemed to be obtained or obtainable by him in consequence of a transaction in securities or of the combined effect of two or more such transactions, if it is obtained or obtainable in consequence of the combined effect of the transaction or transactions and the liquidation of a company. ...

704 The prescribed circumstances

The circumstances mentioned in section 703(1) are—...

C—(1) That the person in question receives, in consequence of a transaction whereby any other person—

(a) subsequently receives, or has received, an abnormal amount by way of dividend; or

(b) subsequently becomes entitled, or has become entitled, to a deduction as mentioned in paragraph B (1) above,

a consideration which either—

(i) is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend, or

(ii) is received in respect of future receipts of the company, or

(iii) is, or represents the value of, trading stock of the company,

and the person in question so receives the consideration that he does not pay or bear tax on it as income.

D—(1) That in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in paragraph C(1) above such a consideration as is therein mentioned.

(2) The companies to which this paragraph applies are—

(a) any company under the control of not more than five persons, and

(b) any other company which does not satisfy the conditions that its shares or stocks or some class thereof (disregarding debenture stock, preferred shares or preferred stock), are listed in the Official List of the Stock Exchange, and are dealt in on the Stock Exchange regularly or from time to time,

so, however, that this paragraph does not apply to a company under the control of one or more companies to which this paragraph does not apply.

(3) Subsections (2) to (6) of section 416 shall apply for the purposes of this paragraph. ..."

709 Meaning of "tax advantage" and other expressions

(1) In this Chapter "tax advantage" means a relief or increased relief from, or repayment or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.

(2) In this Chapter—

"company" includes any body corporate;

"securities"—

(a) includes shares and stock, and

(b) in relation to a company not limited by shares (whether or not it has a share capital) includes also a reference to the interest of a member of the company as such, whatever the form of that interest;

"trading stock" has the same meaning as in section 100(1);

"transaction in securities" includes transactions, of whatever description, relating to securities, and in particular—

(i) the purchase, sale or exchange of securities;

(ii) the issuing or securing the issue of, or applying or subscribing for, new securities;

(iii) the altering, or securing the alteration of, the rights attached to securities;

and references to dividends include references to other qualifying distributions and to interest.

(3) In section 704—

(a) references to profits include references to income, reserves or other assets;

(b) references to distribution include references to transfer or realisation (including application in discharge of liabilities); and

(c) references to the receipt of consideration include references to the receipt of any money or money's worth.

The Authorities

5. I was provided with copies of the following authorities which I have carefully read and considered:

Addy v HMR.C 51TC 71

IRC v Parker 43 TC 396

IRC v Joiner 50 TC 449

IRC v Laird Group Plc [2003] STC 1349

Williams v IRC 54 TC 257

IRC v Brebner 43 TC 705

Lewis v IRC [1999] STC(SCD) 349

Clark v IRC [1978] STC 614

The Evidence

6. I was provided with a volume of documentation. This was an agreed bundle of

documents. The documents were all admitted in evidence no objection having been taken to any of the documents.

7. I heard oral evidence from Mr. Ebsworth. A witness statement was provided for him. He was cross-examined.
8. I found Mr. Ebsworth a careful and honest witness who tried to help the Tribunal. I accept his evidence in full.
9. I reached this conclusion having seen and heard him give his evidence and, in particular, having seen the way he conducted himself in the witness box especially under cross-examination.
10. I have carefully considered and reflected on the matters drawn to my attention by HMRC concerning his evidence and in cross-examination. Having done so I still accept Mr. Ebsworth's evidence in full.
11. I am not persuaded by HMRC's suggestions particularly the suggestion that his evidence was "self-serving". I specifically reject the suggestion that "the Appellant's explanations as to why the transactions were undertaken were convenient but essentially self-serving" and find as a fact that was not the case.
12. A Statement of Agreed Facts was provided by the parties. So far as relevant it read as follows:

"[1] Mr. Ebsworth, the Appellant, was and is respectively the majority shareholder and managing director of Business Systems Applications and Solutions Limited ("BSAS1") and BSAS Telecoms Limited ("BSAS2"). BSAS1 was held as to 51% by Mr. Ebsworth and 49% by Mrs. Ebsworth.

[2] Up to 2001, BSAS1, which was based in Newmarket, had two divisions, namely the network division and the hardware division.

[3] The network division dealt with the sale of landline telecommunication networks to business users. In simple terms, it provided customers with an alternative to British Telecom, to use for their day-to-day telephone calls. The company it represented was Worldcom, which had a large global telephone network. WorldCom was a USA-based telecoms business akin to BT and Cable & Wireless. WorldCom came to the UK when the telecoms market was opened up by Offcom in the mid 1990s.

[4] This division (which has also been referred to as the WorldCom distributor business) was very profitable as it received monthly, ongoing commissions for each and every one of its customers, based on a percentage of the telephone expenditure of the customers in that given month.

[5] Under the agreement between BSAS1 and Worldcom, BSAS1 was entitled to a commission equal to a percentage of the call income (around 10-13%) relating to customers acquired by BSAS1. By 2001 BSAS1 was generating around £80k per month commission (being gross commission before costs and expenses etc.) from approximately 1200 customers, based on monthly turnover of around £687k.

[6] An additional key feature of the agreement was that WorldCom had the right on a fixed date towards the end of 2001 (31 October) to take over and operate the customer base itself (and end the payments of commission) in return for a lump sum termination payment to BSAS1. This payment, known as the balloon payment, was based on a formula relating to a percentage of turnover and its amount would not be known until on or after the 20^th of the month following 31 October 2001.

[7] The idea behind the structure of the agreement was that it allowed WorldCom to build up a customer base quickly through incentivising their distributors to add additional customers whilst still giving themselves the ability at a certain point in the future to buy the customer base for a lump sum and then operate it themselves.

[8] The other division in BSAS1 was the hardware division, which has been referred to as the telephone and switch business. This dealt with the sale, supply and maintenance of telephony hardware. Put simply it supplied the actual business telephone handsets.

[9] Mr. and Mrs. Ebsworth separated in April 1998.

[10] BSAS2 was incorporated on 21 December 2000. BSAS2 was set up with the shares held by Mr. and Mrs. Ebsworth in the same proportions as for BSAS1.

[11] On 21 September 2001, BSAS2 having not by that stage traded, Mrs. Ebsworth transferred her shares in BSAS2 to Mr. Ebsworth.

[12] As from 31 October 2001 WorldCom terminated its agreement with BSAS1 in return for the balloon payment.

[13] A written agreement dated 30 January 2002 was entered into between BSAS1 and BSAS2 for the transfer of the business of BSAS1 effective as from 1 November 2001.

[14] By agreement dated 3 December 2001, the balloon payment to BSAS1 was agreed in the sum of £2,164,050. Within the same agreement BSAS2 agreed to enter into a new arrangement with Worldcom.

[15] In February 2002 BSAS1 was placed into members' voluntary liquidation. Capital distributions were made to Mr. and Mrs. Ebsworth by the liquidator in July and August 2002 and a final distribution was made in January 2003. Mr. Ebsworth received around £800,000 and Mrs. Ebsworth received around £769,000.

[16] Mr. and Mrs. Ebsworth signed a formal separation agreement in January 2002.

[17] Worldcom, having been placed under Chapter 11 of the US bankruptcy code in early 2002, terminated the contract with BSAS2 in November 2004".

13. Much was made, particularly in cross-examination, of certain of the notes made by Mr. Ebsworth's tax advisers. For the reasons discussed below I did not find them particularly illuminating in reaching my decision as they were what one would expect from a tax adviser engaged to advise on tax rather than as a commercial or other adviser. For the sake of completeness some of them (as agreed with the parties) are set out in the Appendix. Taking tax advice does not of itself make tax avoidance one of the main objects of the transactions concerned^[2].

Common Ground

14. It was common ground that Circumstance D of section 704 applied as BSAS 1 fell within section 704D TA as a company under the control of five or fewer participators which was not listed. In other words, it was what is often referred to as a "D Company".
15. It was also common ground that the formation of BSAS 2 and the gift of the shares in BSAS2 by Mrs. Ebsworth to Mr. Ebsworth before BSAS2 had started business were transactions in securities for these purposes.
16. It was accepted that the onus was on the Appellant to prove its case but that it was for the Respondents to show that there was a tax advantage by the reason of the transaction in securities.
17. It was common ground that no section 703 TA notice had been served on Mrs. Ebsworth.

Findings of Fact

Introductory

18. From the evidence I make the following findings of facts.
19. I find as matters of fact for the purposes of this appeal the matters set out in the Statement of Agreed Facts (set out at 9 above).
20. As noted above I found Mr. Ebsworth a careful and honest witness. I accept his evidence in full and in particular his evidence as to why the transactions were carried out. I so find as a matter of primary fact.
21. Much was made by HMRC as to the witnesses the Appellant had chosen to call or not call. Interesting as it may be to speculate on this I can only decide the case on the evidence before me and I do so. In the circumstances of this case I draw no inferences one way or the other from the decision of either party to call or not to call witnesses. It for each party to decide how it wishes to run its case. It should be noted for the sake of completeness that the Respondents did not call any witnesses. They could have called those that the Appellant did not call had they wished to. The case can only be decided on the evidence before the Tribunal^[3].

The Company ("BSAS 1")

22. The company was a husband-and-wife company with two divisions i.e. hardware and network. Mr. Ebsworth owned 51% of the share capital and Mrs. Ebsworth owned the other 49% of the shares. As found below it was essentially an "incorporated partnership"^[4] between the spouses.
23. BSAS 1's derivation was from a division of a very successful photo copier company selling particularly Minolta products. It operated on the basis of securing maintenance contracts as well as sales to ensure continued return. Mr. Ebsworth was the main driver.
24. This became the hardware division of the company which "put simply … supplied the actual business telephone handsets" (paragraph [8] of the Agreed Statement of Facts). It had very high overheads as it required a significant number of engineers with the necessary equipment including cars to obtain and carry out the work. It was essentially a break even business. This was particularly because of its very high costs mentioned above. It did seem to be a steady repeat business though not a profitable one.
25. The company was essentially an "incorporated partnership" between husband and wife. Mr. Ebsworth was the main business driving force. Mrs. Ebsworth dealt with the accounts and finance of the business (mainly from home) as she had in previous enterprises. She was the Company Secretary.
26. The other division, the network division, dealt with WorldCom/MCI. This division (i.e. the network division) was very profitable. I was told that at its peak it had 20 or so staff.
27. The network division was the dominant division. It was clearly the considerably more valuable division as it made considerable profits rather than being a break even business and I find this as a fact.

WorldCom

28. WorldCom was a US-based telecoms business which came to the UK when the UK telecoms market was deregulated in the mid-1990s. It was put into "Chapter 11" in early 2002. I understand that this is an insolvency procedure in the United States which allows protection from creditors whilst a business is reorganised. WorldCom's management thus had bigger concerns than BSAS 1 at the time. This makes Mr. Ebsworth's view of WorldCom's lack of clarity as to what it wanted and in its dealings even more credible. WorldCom failed in 2002.

Mr. and Mrs .Ebsworth

29. Mr. and Mrs. Ebsworth had been married for a number of years and worked together in the business. Following marital difficulties they separated in about 1998. The divorce process was proceeding at the time the matters under consideration here took place. Divorce can influence people's behaviour and subjective thinking and their wants and requirements.
30. After the separation Mrs. Ebsworth lived some distance away. She was not interested in continuing or being involved in business with Mr. Ebsworth.
31. By 2000 both the Ebsworths were with other partners. Mrs. Ebsworth wanted her money out of the company as, in particular, she wanted to purchase a house with her partner.
32. The money could not come out until the balloon payment was received. However, she wished to ensure that her investment was protected until such time as BSAS 1 could be liquidated and she could receive her distribution in the liquidation as informally agreed between the Ebsworths. It was thought that her position would be better if she had shares in BSAS 2. I accept this evidence and find it as fact.
33. Unfortunately, at this period Mrs. Ebsworth contracted cancer. She received treatment for this in Cambridge although she was then living near Leicester. She had been active in the business, seemingly for one or two days a week, until she became ill. Understandably her role change when she began receiving treatment.
34. At Paragraph 23 of his Witness Statement Mr. Ebsworth said "... there had therefore for some time been an informal understanding the company would be liquidated once the balloon payment was received as it would not have any ongoing purpose and this gave the fairest method of splitting the value of the company between ourselves". There was no contradictory evidence and I accept this evidence and so find.
35. At paragraph 11 of his Witness Statement Mr. Ebsworth said "Following the separation Mrs. Ebsworth decided she wanted to reach a financial settlement with me and exit the business. She was aware at that time that WorldCom would terminate the distribution agreement and make a lump sum balloon payment. We were therefore of the firm view that WorldCom would make a termination payment at the end of 2001 at which point the trade BSAS 1 would effectively ceased. We therefore reached an informal understanding towards the end of 2000/very early 2001 that, assuming matters with WorldCom went as we thought, we would liquidate BSAS 1 and each receive our share of the value of BSAS 1... this was considered to be the only practical route on the basis that BSAS 1 would no longer have a purpose following receipt of the balloon payment". I accept this evidence and so find as a matter of fact.
36. Mr. Ebsworth said in his Witness Statement at paragraph 25:

"A purchase of own shares was considered and rejected for a number of reasons:

Firstly in BSAS 1 have been used for the new contract, then it would have been necessary for Mrs. Ebsworth to have been a party to the various discussions with WorldCom over the purchase due to her shareholding in BSAS 1. Given the difficult discussions over the separation, this would not have been practical; [Note at paragraph 24 of his statement he says Mrs. Ebsworth viewed a new contract with WorldCom as a high risk which would have added to the practical difficulties]

There would have been major difficulties in agreeing the overall amount payable for the shares. In practice this could not have been agreed immediately due to the necessity to produce accounts to determine the net assets and liabilities including the large corporation tax payment. This process had to be carried out in any case prior to the liquidation and took over two months with the matter being dealt with as speedily as possible. Given that the trading and any transactions relating to the new business would need to being separated out in the fact that Mrs. Ebsworth would probably have needed to have taken her own advice to ensure that the accounts were properly drawn up and properly isolated the transactions relating to her part of the business, this would have delayed matters further. Given the long-term agreement to liquidate the company, this was simply a route that she would not want to take;

Becoming a shareholder in the new business would have increased the risk substantially from Mrs. Ebsworth's point of view. If the business purchased from WorldCom had been very unprofitable then the company may not have been in a position to pay the full amount for her shares. Mrs. Ebsworth's view was that it would not be profitable and hence her reluctance to invest. I may in those circumstances have used the funds to cover the trading losses of the new business rather than repurchase the shares from Mrs. Ebsworth. She therefore would have been left with a risk that her shares would not have been repurchased, either at all or for unless the price. This would have made a purchase of own shares very unattractive compared to the liquidation where she had certainty of receiving the proceeds calculated by a fair method without taking any commercial risks.

WorldCom were in a poor financial position at this time and indeed the company failed in early 2002. There were significant commercial risks at this time as to payments being received etc which significantly increase the level of commercial risk. Given the need for Mrs. Ebsworth to survive on a relatively fixed income when she had received her share of the separation payment and her health position, becoming involved with the new business through having a buyback of shares would have been risky and unattractive. As mentioned above given her sizeable shareholding this route could [not^[5]] have proceeded without her support;

Alternatively, if the business had performed well then Mrs. Ebsworth may have declined to sell her shares at the agreed price and insisted on a greater level of consideration.

She simply did not wish to be involved in the ownership of the new business and therefore remaining as a shareholder was not something that she would have accepted. Given the size of her shareholding, the purchase of the customer base from WorldCom would have required her approval as it would have required a Special Resolution. She would have had no reason to agree to this Given that she would have been taking on additional risk with no benefit. She did not believe that new business will be profitable given the low margins".

37. This evidence was not refuted. I accept it and find the content of this evidence as a matter of fact. This further shows that the transactions did not have as their main object to one of their main objects the enabling of a tax advantage to be claimed.

BSAS 2

38. BSAS2, according to the Agreed Statement of Facts:

"[10] ...was incorporated on 21 December 2000. BSAS2 was set up with the shares held by Mr. and Mrs. Ebsworth in the same proportions as for BSAS1.

[11] On 21 September 2001, BSAS2 having not by that stage traded, Mrs. Ebsworth transferred her shares in BSAS2 to Mr. Ebsworth".

39. The hardware division of BSAS1 that BSAS2 acquired was a break even business with no real value. I find this as a primary fact. The Appellant's evidence and propositions on this were not disturbed by the Respondents and I accept them. No contrary valuation evidence was led by the Respondents.
40. It seems that BSAS2 was "set up" just in case and Mrs. Ebsworth seems to have been given a shareholding so she was not to be disadvantaged seemingly as far as her divorce settlement might be concerned. There was no Machiavellian motive or even tax based motive that emerged from the evidence. It seems to be something that was done seemingly without much deep thought.
41. I find on the balance of probabilities (having carefully considered all the relevant evidence and surrounding circumstances including the subjective intentions of those involved) that BSAS2 was not set up with tax avoidance as its main or one of its main purposes.
42. An agreement that was made between BSAS1 as the Vendor and BSAS 2 as the Purchaser recorded that the Vendor had sold and transferred and the Purchaser had purchased the trading business of the vendor comprising the assets set out in clause 2.1 of the agreement.
43. Clause 2.1 provided:

"The Vendor sold with full title guarantee and the Purchaser had purchased the business as a going concern with effect from the transfer data comprising the following assets:

		£
(a)	The goodwill	1.00
(b)	The equipment	58,567.00
(c)	The stock	45,000.00
(d)	The motor vehicles	117,855.00
(e)	The benefit (subject to the burden) of the business contracts	1.00
(f)	The business information	1.00
(g)	The records and	1.00
(h)	The third party rights	1.00
		221,427.00

44. Accordingly, the goodwill, the benefit (subject to the burden) of the business contracts, the records and the third party rights were bought for £5.00. There was no evidence to contradict this. I accept this element particularly in the light of the certificate of value included at clause 22 of the agreement. Further, there was no evidence led to challenge or contradict this and I so find.
45. Consequently, I find the hardware division had no substantial value. This fits in with Mr. Ebsworth description of the division not being profitable because of the large overheads in procuring business and maintaining a customer base across the southeast of England.
46. Mr. Ebsworth also gave evidence that the hardware division was continued to avoid redundancies etc which I accept.

Overview

47. This is a case that depends on its own particular facts. Having carefully reviewed the evidence with the advantage of seeing and hearing Mr. Ebsworth give evidence I find as Primary Facts that in the particular circumstances of this case:

(1) the purpose of carrying out the transactions in question was to separate the personal and commercial interests of Mr. Ebsworth and Mrs. Ebsworth in a simple and commercially logical way given that:

(a) they were separated and were divorcing; and

(b) she lived some distance away and was undergoing treatment for cancer; and

(c) the network business had reached a conclusion^[6]. The business had reached the end of that phase.

(2) The particular phase of personal and commercial life had come to an end. Liquidation was the simple and commercially logical way of "closing the book" on that phase and making "a clean break".

(3) In particular it fitted in better to Mrs. Ebsworth's requirements and what she was willing to agree to and was clear, simple and well-known. She could block a Special Resolution as she held 49% of the shares in the company.

48. Accordingly, the main purpose or one of the main purposes of the transactions in question was not the avoidance of tax and I so find.
49. I further find as a primary fact that the transactions were bona fides commercial transactions.
50. In addition, I find that, in the particular circumstances of this case, the transactions were in the normal course of managing investments. It was part of sorting out the end of Mr. and Mrs. Ebsworth's personal and commercial relationship. It may or may not have been done in a tax efficient manner with tax advice but in the particular circumstances the main purpose was not the avoidance of tax and I so find.

The Submissions of the Parties

The Appellant's Submissions in outline

51. In essence, the Appellant submitted that:

(1) There was no tax advantage shown by HMRC who kept changing the way they presented this aspect of the case.

(2) Even if there was a tax advantage it was not obtained in consequence of a transaction in securities or the combined effect of a transaction or transactions in securities and liquidation.

(3) Even if there were a tax advantage in consequence of the transactions in question what was done falls within the "Escape Clause".

52. In more detail, he submitted:

(a) This was a straightforward liquidation which was the appropriate way of enabling Mr. and Mrs. Ebsworth to bring their joint commercial enterprise to an end.

(b) No value was attributed to the subsidiary hardware business, nor did Mrs. Ebsworth wish to have anything to do with that or any new business of Mr. Ebsworth's.

(c) A corporate vehicle other than BSAS1 was therefore required for that business, but other than that BSAS2 was of no real relevance.

(d) There is no scope for the application of s703 ICTA as a technical matter because the tax advantage, if there was one, was not generated by any transaction in securities in relation to BSAS2 as alleged, but by the liquidation; further, the liquidation was commercially driven and the "escape clause" is clearly in point.

(e) No "tax advantage" has been obtained in this case, because there was no alternative course against which the tax consequences of the liquidation can be judged which HMRC have identified.

(f) The classic statement in relation to "tax advantage" is in IRC v Parker (1966) 43 TC 396, HL per Lord Wilberforce at 441:

'The paragraph, as I understand it, presupposes a situation in which an assessment to tax, or increased tax, either is made or may possibly be made, that the taxpayer is in a position to resist the assessments by saying that the way in which he received what it is sought to tax prevents him from being taxed on it, and that the Crown is in a position to reply that if he had received what is sought to be taxed in another way he would have had to bear tax. In other words, there must be a contrast as regards the "receipts" between the actual case where these accrue in a non-taxable way with a possible accruer in a taxable way, and unless this contrast exists the existence of the advantage is not established.'

(g) No such contrast exists in the present case. HMRC assert that, instead of liquidating BSAS 1, Mr. Ebsworth could have taken a dividend, either together with Mrs. Ebsworth or, following a purchase or a contingent purchase of Mrs.Ebsworth's shares by BSAS1, in his own right. However, the reality here is that any course of action could only be taken by agreement with Mrs. Ebsworth and neither a dividend nor a purchase of own shares met Mrs.Ebsworth's commercial objectives, which were entirely separate from Mr. Ebsworth's and which required an exit from the Company as soon as the balloon payment came in without any involvement in the meantime in any other business activity.

(h) The Appellant further contends that, if there is a tax advantage, it was not obtained in consequence of a transaction in securities or the combined effect of a transaction or transactions in securities and a liquidation.

(i) The CGT treatment for the monies received by Mr. Ebsworth, which HMRC regard as a tax advantage, was obtained for the simple and sole reason that they were a capital distribution in the liquidation of BSAS 1 taxable under s122 TCGA. A liquidation is not a "transaction in securities" for this purpose: see CIR v Joiner 50 TC 449 and IRC v Laird Group plc [2003] STC 1349.

(j) In the Appellant's submission, the evidence establishes that there was no such scheme as alleged or at all, and in particular as follows:

(i) BSAS 2 was not incorporated to succeed to the trade of BSAS 1. It was formed to acquire the unprofitable telephone and switch – "hardware" – business of BSAS 1, which only Mr. Ebsworth was interested in continuing and which was of no value. It is submitted that the stripping out of a valueless asset is irrelevant for present purposes.

(ii) The transfer by Mrs. Ebsworth of her shares in the shell company, BSAS2, had nothing to do with any such scheme as is alleged. Mrs. Ebsworth, although a shareholder in BSAS2 originally, was only such to protect her interest in the BSAS1 business. It was always intended that she would relinquish that interest when the time was right and she duly did so in late 2001 to enable Mr. Ebsworth to use BSAS2 for the existing "hardware" business and any new business of his.

(iii) BSAS 2 was never at any stage intended to and did not in fact succeed to the WorldCom trade of BSAS 1. Whilst certain assets and employees were transferred, the main trade of BSAS 1 – the "network" business – effectively came to an end with the termination of the contract with Worldcom. Indeed, the essence of the balloon payment arrangement was that WorldCom were buying back the customer base, the network business, generated by BSAS1 on its behalf. The new contract with WorldCom entered into by BSAS 2 was a new business and an entirely different arrangement.

(k) HMRC's case also fails as a matter of analysis. This was a straightforward

liquidation of a company, which on its own generated the alleged tax advantage inherent in the capital gains' treatment. The creation of BSAS2 and the subsequent movement by Mrs. Ebsworth of her BSAS2 shares were not essential elements in generating that treatment. They were relevant only to Mr. Ebsworth's desire to continue with the hardware business and to develop his own network business. Neither was necessary to the liquidation; in particular, the hardware business, being valueless, could simply have been discontinued – there would have been no reduction in the return to the shareholders

(l) In this case all the transactions in question were carried out for bona fide commercial reasons. None of them had as their main object, or even in fact an object, the avoidance of tax. Mrs. Ebsworth wanted to cease her involvement with the business and extract the value of her entire investment. Her desired method of achieving this was a liquidation. On the evidence, it is clear that there was no alternative route which could meet Mrs.Ebsworth's entirely legitimate commercial aspirations for the reasons set out below.

(m) A simple dividend of the balloon monies by BSAS 1 was never an option. It would have left Mrs. Ebsworth with ongoing ownership of her shares in BSAS 1. Given her desire and need to separate her financial affairs from those of Mr. Ebsworth and her view that any new business with WorldCom or otherwise was of high risk, this route was impractical.

Accordingly, the appeal should be allowed.

HMRC's Submissions in outline

53. In essence, HMRC submitted that the transactions were a scheme undertaken for tax avoidance purposes so that section 703 clearly applied and the appeal should be dismissed.
54. The Appellant's explanations as to why the transactions were undertaken were convenient but essentially self-serving.
55. In more detail, HMRC submitted:

There was obviously a tax advantage here. There had been no payment of income tax on distributable profits.

(a) It was obtained by a combination of a transaction in securities and the liquidation.

(b) These were not bona fide commercial transactions.

(c) The main purpose was the obtaining of a tax advantage.

(d) The evidence supports this.

(i) The "Purpose" of meeting 28 November, 2001 was to discuss the minimising of tax on balloon payment.

(ii) One of the main objects was to enable the liquidation so as to pay less tax on the balloon payment.

(iii) Mr. Ebsworth needed BSAS2 to liquidate BSAS1.

(e) This is shown in the Contemporaneous Documents which are the best evidence and the head of the case for HMRC.

(f) The author of the tax planning documents could give the best evidence but he was not called by the Appellant nor were others who could have been of assistance.

(g) BSAS 1 had cash and a nominal trade when liquidated the trade that was to continue having been extracted beforehand so that capital treatment could be sought.

(h) There was an obvious tax advantage here (see the file note of 12 December 2000 and Viscount Dilhorne (with whom Lord Diplock, Lord Salmon, Lord Russell of Killowen and Lord Keith of Kinkel agreed) in Williams 54 TC 257 at 308-9).

(i) This case is covered by what was said by Lord Wilberforce in Joiner 50 TC at page 480ff (particularly H-I), namely:

"What has to be shown is that the Appellant received in non-taxable form a consideration which is or represents the value of assets which were, or apart from anything done by the company in question would have been, available for distribution by way of dividend. This exactly fits the present case. The Appellant's argument that the liquidation - resulting in the tax free distribution - was not something "done by the company" but only something "done by the shareholders" does not accord with the conception in the Companies Act that liquidation is decided by a resolution of the company or with the fact of distribution by the company. I pass then, to the second point: whether the tax advantage was obtained "in consequence of a transaction in securities or of the combined effect of two or more such transactions" (s. 460(1) (b)). This provision may be applicable either by itself or as expanded by s. 460(2), which provides that a tax advantage shall be deemed to be obtained in consequence of a transaction in securities or of the combined effect of two or more such transactions "if it is obtained. In consequence of the combined effect of the transaction to or transactions and of the liquidation of a company". The case was decided, against the taxpayer, by Goulding J. on the expanded section, and by the Court of Appeal on the subsection without the expansion, but the latter indicated that they also would have agreed with the view of Goulding J".

(j) There were various options that the Ebsworths could have used. They included:

(i) A purchase of Mrs. Ebsworth's shares by the company before the balloon payment was received;

(ii) A purchase of Mrs. Ebsworth's shares by the company after the balloon payment was received.

As Mrs. Ebsworth was "exiting the business" HMRC would give her capital treatment. Mr. Ebsworth was "staying in" so HMRC would not give him capital treatment.

(k) It was "in consequence" because it was all part of the scheme. There was a tax advantage obtained by reason of the use of BSAS 2 which allowed the business to be continued. The TUPE position supports this.

(l) The evidence she?? the transaction and she wished to start again shows this was not a bona fide commercial transaction (see e.g. Meeting Note 4 December consulted BDO to discuss tax minimization).

(m) The simple commercial route was the purchase of Mrs. Ebworth's shares by the company.

Accordingly, the appeal should be dismissed.

Discussion

Introduction

56. The arguments of the parties raise a number of questions including the following:

(a) Whether the transactions were undertaken for tax avoidance purposes?

(b) Are the conditions for the application of section 703 fulfilled?

(c) Was there a tax advantage?

(d) If there was a tax advantage was that in consequence of a transaction in securities or the combination of liquidation and a transaction in securities?

(e) What was the value of BSAS 2?

(f) What was Mrs. Ebsworth's position?

(g) Does the escape clause apply?

57. I remind myself before considering these questions as to the onus of proof and related matters. The Special Commissioners in Lewis (trustee of Redrow Staff Pension Scheme) v Inland Revenue Commissioners [1999] STC(SCD) 349 said:
58. "9. (1) It is common ground^[7] in this appeal that the burden of proof as to facts lies upon the appellant and that the question, whether the … [transactions] were carried out for bona fide commercial reasons or in the ordinary course of making or managing investments and without the obtaining of a tax advantage as the main object or one of the main objects, is a subjective matter of intention, to be ascertained by looking at the transactions as a whole and in their proper context (see, for example, IRC v Brebner [1967] 2 AC 18 at 27, 43 TC 705 at 715 per Lord Pearce)". It was for the Respondents to show that there was a tax advantage by the reason of the transaction in securities.
59. I gratefully adopt and apply this. With that in mind I now turn to consider the questions raised.

Whether transactions undertaken for tax avoidance purposes?

60. I have already found that the main purpose of carrying out the transactions in question was to separate the personal and commercial interests of Mr. Ebsworth and Mrs. Ebsworth in a simple and commercially logical way and that the transactions were not ones the main purpose or one of the main purposes of the transactions in question was the avoidance of tax.
61. Accordingly, I find that:

a. the transactions were not undertaken for tax avoidance purposes; and

b. tax avoidance was not the main purpose or one of the main purposes of the transactions in question.

62. The fact that Mr. Ebsworth sought tax advice (with Mrs. Ebsworth) does not of itself mean that tax avoidance was a main object of the transactions. As Lord Upjohn said in Brebner 43 TC 718:

"My Lords, … when the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except upon the footing of paying the smallest amount of tax involved. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence".

63. My findings are accordingly made "… upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence".

I find as a matter of fact none of the main objects was the avoidance of tax in the circumstances of thee case.

64. I have considered this question first as it sets the context in which the other questions need to be considered.
65. I further find that there was no scheme for BSAS 2 to succeed BSAS 1 and no scheme with one of its main purposes to avoid tax. The "scheme", if there was one, was to "close the book" on that period of business and personal life.

Are the conditions for the application of section 703 fulfilled?

66. The necessary conditions for Sections 703 TA to apply are:

(a) one or more of the circumstances in section 704 is fulfilled; and

(b) in consequence of a transaction in securities or of the combined effect of two or more such transactions;

(c) a person is in a position to obtain, or has obtained, a tax advantage.

67. However, there is an "Escape Clause". If the taxpayer shows that the transaction or transactions:

(a) were carried out either:

(i) for bona fide commercial reasons; or

(ii) in the ordinary course of making or managing

investments; and

(b) none of them had as their main object, or one of their main objects, to

enable tax advantages to be obtained.

68. It is accepted that there was a transaction in securities and so that BSAS 1 was a D company.
69. The issue then becomes was there a tax advantage in consequence of the transaction in securities etc.
70. The transaction in securities here is said to be the issue of the shares in BSAS2 and/or the transfer of the shares by Mrs. Ebsworth of her shares in BSAS2 before it had started trading. As noted above it was also common ground that the formation of BSAS 2 and the gift of the shares in BSAS2 by Mrs. Ebsworth to Mr. Ebsworth before BSAS2 had started business were transactions in securities for these purposes.
71. Accordingly, the conditions that:

(a) there be a transaction in securities; and

(b) one or more of the circumstances in section 704 TA is fulfilled;

are met. This is common ground.

72. This leaves the questions:

(a) Was there a tax advantage?

(b) If so as it obtained in consequence of a transaction in securities or the combination of liquidation and a transaction in securities?

(c) Does the Escape Clause apply?

Was there a tax advantage?

73. Section 709 TA provides that there is a tax advantage if there is a relief or increased relief from, or repayment or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.
74. By section 703(2) TA one can look at the combined effect of transaction(s) in securities and the liquidation of a company in determining whether a tax advantage was obtained in consequence of a transaction in securities.
75. Parker and Cleary are the classic cases on this but they are concerned with a different situation and do not provide much guidance in the current circumstances.
76. In simplistic terms Mr. Ebsworth received capital in the liquidation rather than income as a dividend. Consequently, there was a lower rate of tax payable on what was received than if received as a dividend.
77. However, the section requires a comparison to be made. The issue then is what is that comparator?
78. Is it to be the liquidation of BSAS1 in which the balloon payment would be paid out and the hardware division distributed to the Ebsworths in specie? Mrs. Ebsworth could then have given or sold her share in the hardware division to Mr. Ebsworth. This would have been a "normal liquidation" so that section 703 TA would have been inapplicable (cf Joiner and HMRC Manuals). There would have been no tax advantage and so section 703 TA could not apply.
79. HMRC suggested the comparison should be with some sort of buy back of Mrs. Ebsworth's shares in the company. They were not clear in precisely formulating their argument nor how the mechanics would work in this proposition. The position changed during the hearing and indeed there was an adjournment of the parties to consider this so that the Appellant would have a fair chance to meet the case that against him. Either way^[8] there was a potential commercial risk to Mrs. Ebsworth and it was not explained why she would have agreed.
80. It seems HMRC's preferred route would be a purchase by the company of the shares in it held by Mrs. Ebsworth before the receipt of the balloon payment.
81. It is assumed that the Articles permitted the purchase of own shares or altered to do so (see section 162 Companies Act 1985). There was no evidence before me on this point.
82. It was not clear how this would be financed before funds were received bearing in mind in particular section 160 Companies Act 1985. Is borrowing presumed to be available? I did ask for clarity on this but the mechanics were not explained.
83. Is clearance to be presumed^[9]? Section 219 (1) TA provides

" (1) References in the Corporation Tax Acts to distributions of a company shall not include references to a payment made by a company on the redemption, repayment or purchase of its own shares if the company is an unquoted trading company or the unquoted holding company of a trading group and either—

(a) the redemption, repayment or purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the company or by any of its 75 per cent subsidiaries, and does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is—

(i) to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or

(ii) the avoidance of tax; and

the conditions specified in sections 220 to 224, so far as applicable, are satisfied in relation to the owner of the shares;…"

84. The other category is to do with payment of Inheritance Tax and is not in point here.
85. What benefit to the trade here is to be presumed? And to what trade?

It is assumed that Mrs. Ebworth had held her shares for more than five years. There was no evidence before me either way. I have assumed for the purposes of this Decision that she had^[10]. There is also the issue of substantial reduction under section 221 TA notwithstanding that they were no longer living together. Is it clear that if Mrs. Ebsworth decided to take the distribution in capital form that that is not tax avoidance when she could have taken a dividend as income notwithstanding the general purpose of the legislation?

86. It seems to me that the purchase of own shares is not as clear cut as HMRC attempted to suggest. It was not as easy and well-known and as clear cut as the normal liquidation carried out and I so find.
87. It would have helped if HMRC were clear what it was they thought was the proper comparator rather than changing their views during the hearing. It does not make it easy for the Appellant and has fairness implications if the Appellant does not know the case he has to meet. Presumably, HMRC knew what it was when the Notice was issued?
88. The simplest route and most commercially sensible route in my view would have been to liquidate BSAS1 and for Mr. Ebsworth to buy Mrs. Ebsworth's share of the hardware business after the Balloon payment. It was simple, gave Mrs. Ebsworth her clean break and exit, and brought an end to the old phase of business and is the appropriate comparator. I so find in the circumstances of this case. If so there is no tax advantage.
89. If I am wrong on this then it is not clear to me that a purchase of own shares should be the comparator in the circumstances of this case.
90. On the assumption that it is wrong I turn to consider the next question.

If there was a tax advantage was that in consequence of a transaction in securities or

the combination of liquidation and a transaction in securities

91. The issue here becomes what should one make the comparison with so one can

identify the tax advantage. It can then be considered if the tax advantage was in consequence of a transaction in securities or the combination of liquidation and a transaction in securities.

92. The only transactions in securities in issue here are the issue of shares in BSAS2 and the transfer of shares in BSAS2 by Mrs. Ebsworth to Mr. Ebsworth.
93. Do either of these transactions alone or with the liquidation of BSAS1 give rise to a tax advantage? The tax advantage alleged comes from BSAS1 not BSAS2. It is the liquidation of BSAS1 that gives the capital rather than income treatment of what was distributed from BSAS1. The issue or transfer of shares in BSAS2 have no impact on this.
94. HMRC suggested that the liquidation of BSAS1 could not have gone ahead unless BSAS2 or a similar company had been formed. This is not the case. BSAS1 could simply have been liquidated and the hardware division distributed in specie.
95. This was the case of a "normal liquidation" not one involving a change of share rights through a liquidation agreement and the need for another company to keep the business from which capital profits had been extracted going as in Joiner.
96. There seems to be a shortage of cases analysing what is meant by a tax advantage arising "in consequence of" a transaction in securities. The cases seem to show that to be "in consequence of" the transaction in securities must be part of the arrangements that lead to the tax advantage. I have not been able to discern any clear test to apply. In the present circumstances if one applies a "but for" to the issue and transfer of shares and the suggested tax advantage there is no obvious causal connection. It is irrelevant whether or not the issue or transfer of shares in BSAS2 takes place for the liquidation of BSAS1 to result in capital treatment.
97. Accordingly, I find that any alleged tax advantage (assuming there to be one) is not "in consequence of" the issue or transfer of the shares in BSAS2 in the circumstances of this case involving "a normal liqudation".

What was the value of BSAS 2?

98. From the evidence as led it seems that the hardware business was not at all valuable. Indeed I have already found that the hardware division had no substantial value.
99. Mr. Ebsworth said in evidence that they did not want the employees to lose their jobs and be made redundant. This partly explains why the hardware division business was carried on. The business was sold effectively for the value of the stock and cars and the nominal value from goodwill and other intangibles. This reinforces the lack of value and significance of the hardware division.
100. I do not consider that it was a valuable asset that had to be extracted so it could continue as part of the scheme to allow a liquidation which was not a "normal liquidation" to take place and I find this is a matter of fact.

What was Mrs. Ebsworth's position?

101. Mr. Ebsworth's evidence was that Mrs. Ebsworth wanted a clean break and certainty. This was achievable in a straightforward way through a liquidation. This fitted in with their informal agreement. To the extent that I have not already done so I find this as a primary fact.
102. Mrs. Ebsworth wished to separate her financial affairs from those of Mr. Ebsworth. She was with a new partner and wished to buy a house with him. She did not wish to continue to be involved with the business. She wished to have a clear simple clean break which the liquidation would give. One phase of her life was over and she wished to start again. She did not wish to have anything to do with the hardware business or any new business of Mr. Ebsworth's. In the circumstances this was understandable. This is not to be taken as meaning that BSAS2 was therefore necessary and part of the "Scheme". I have found that this was not the case and this does not change that.
103. I was referred particularly to the note of 12 January 2001 meeting (see the Appendix) and particularly the following paragraphs:

"the issues that they wished to be addressed … the following are the main issues:

- a divorce financial settlement

- to extract the net funds from company at lowest possible tax cost to the Ebsworths.

…

ME was asked was her financial expectations are on divorce. She admitted taking legal advice and expects: -

-1/2 the equity in the house c £300 k

- a fair price for her 49% interest in the business

- equalisation of pensions (TE = £400 k and any = £50 k)".

104. This seemingly showed all that Mrs. Ebsworth wanted and that there was a tax scheme. I do not consider this to be the case. Further, one would expect those advising Mrs. Ebsworth to want to protect her financial position as strongly as possible. The position in the notes of meeting etc is not inconsistent with the "clean break" approach. They did not show a scheme whose main purpose was the avoidance of tax and I so find as a matter of fact.
105. I consider that Mrs. Ebsworth did want the liquidation so as to provide a clean break with the previous phase of her life and to "get out" simply and cleanly. This was not as part of a tax scheme. Further without Mrs. Ebsworth's cooperation nothing could be done easily. She wanted "out" with her money as quickly and simply as possible.
106. I find that Mr. Ebsworth motivation was to make a clean break financially and in business terms with Mrs. Ebsworth who wanted liquidation. I so find having considered the evidence carefully and looked at the inferences to be drawn from it.
107. Mrs. Ebsworth position can be summed up as she wanted a termination event. A liquidation gave the divorcing wife what she wanted in terms of finality and cash and what was a commercially appropriate solution. This seems an entirely rational position for Mrs. Ebsworth to adopt and I so find.
108. Mrs. Ebsworth's requirements are very important in considering why things were done and the way they were done. She was a 49% shareholder whose cooperation was required and who would rightly want to protect her interests and was receiving legal advice.

Does the escape clause apply?

109. As noted above for the escape clause to apply it is necessary for the Appellant to show that:

(a) the transaction or transactions were carried out either

(i) for bona fide commercial reasons or

(ii) in the ordinary course of making or managing investments, and

(b) none of them had as their main object, or one of their main objects, to

enable tax advantages to be obtained.

110. It was not argued that the transactions were other than bona fide. In the circumstances and in the light of Clark v IRC [1978] STC 613 it seems hard to see how it could be. Fox J said in Clark:

"It seems to me, however, that the commissioners, in reaching their conclusion, did misdirect themselves as to the law. They state (in para 3(b) of their decision) that to satisfy the escape clause in s 460 'the commercial reason must be connected with the vendor's interests in companies concerned in or affected by the transaction'. That seems to me to be altogether too narrow an approach. Section [703], in my view, contains no such qualification. The section merely requires that the transaction must be 'carried out for bona fide commercial reasons'. That language is entirely at large. If the taxpayer can prove that the transaction was carried out for bona fide commercial reasons, he satisfies the requirement of the section. And 'carried out', l think, means carried out by the taxpayer…"

111. In Addy v HMRC ^[11]51 TC 71 Goff J. said of what became section 703 TA:

"That provision, it will be observed, contains two limbs and places on the taxpayer the onus of establishing both. The relevant findings of the commissioners are as follows. [His Lordship read paras 6(h) and 10(2) of the case stated and continued:] The fact that neither the taxpayer nor his wife took any part in the operation of the business of Oldco, Construction or Newco and neither had been involved in taking the decision to liquidate Oldco, is in my judgment irrelevant, because what has to be applied is a subjective test of the intention of those in control: see per Lord Pearce in IRC. v Brebner [1967] 1 All ER 779 at 781, [1967] 2 AC 18 at 27, 43 Tax Case 705 at 715, where he said:

'The "object" which has to be considered is a subjective matter of intention. It cannot be narrowed down to a mere object of a company divorced from the directors who govern its policy or the shareholders who are concerned in and vote in favour of the resolutions for the increase and reduction of capital. For the company, as such, and apart from these, cannot form an intention. Thus the object is a subjective matter to be derived in this case from the intentions and acts of the various members of the group; and it would be quite unrealistic, and not in accordance with the subsection, to suppose that their object has to be ascertained in isolation at each step in the arrangements.'"

112. I find that considered as a subjective matter of intention the main purpose or one of the main purposes was not the avoidance of tax or the obtaining of tax advantages. This is true whether one considers Mr. and Mrs. Ebsworth's motives or either of them or a wider combination of people. The predominant motive was to bring the business and personal ties to an end.
113. Consequently I find that the escape clause applies because the transactions were bona fides commercial transactions and/or were carried out in the ordinary course of making managing investments and none of them had as their main object or one of their main objects to enable tax advantages to be obtained.

Conclusion

114. This is a case that turns on its own particular facts. It is therefore of limited application to other cases.
115. I find that:

(a) The transactions were not undertaken for tax avoidance purposes;

(b) The conditions as to transactions in securities and section 704 TA conditions for the application of section 703 were fulfilled. The other condition of a tax advantage obtained in consequence of such transactions is more problematic.

(c) It is not clear on HMRC's argument that there was a tax advantage in the particular circumstances of this case. It is not clear what HMRC's comparator transaction producing a tax advantage in the particular special circumstances of this case was. The purchase of own shares route has problems that were wholly not explained or resolved during the hearing in the particular circumstances of this case. I am inclined to the view that no tax advantage was shown but do not decide the case on this basis.

(d) If there was a tax advantage it was not in consequence of a transaction in securities or the combination of liquidation and a transaction in securities. The issue and/or transfer of the shares were not necessarily or reasonably required for the liquidation to take place. There was no tax avoidance scheme of which it was part. This was a normal liquidation not a "Joiner" liquidation.

(e) The value of BSAS 2 shares and business was not significant in the context of the particular facts of this case.

(f) Mrs. Ebsworth quite rightly wanted to protect her financial position and wanted a clean break giving her the value of her shareholding. She had sufficient shares to ensure it was done her way. She wanted a liquidation as a simple and clean way of closing a chapter in her personal, financial and business life. She thought further involvement with WorldCom was risky and did not want to be involved in it.

(g) I consider and find that the escape clause does apply. This is because:

(i) The transactions were

a. bona fide commercial transactions^[12]; and/or

b. in the ordinary course of making or managing investments^[13]; and

(ii) None of them had as their main object, or one of their main objects, to enable tax advantages to be obtained.

116. I find that this was a normal liquidation and not one of the Joiner type. There was nothing here equivalent to the "liquidation agreement" in Joiner.
117. Accordingly, the appeal is allowed.
118. It should be noted by those reading this decision that this is a decision based on the particular individual circumstances of this case. The same result would not necessarily follow if the facts and circumstances were different. This is essentially a decision on the facts found from the evidence led.
119. I make no order as to costs. This is on the basis that it would be just and reasonable to apply the Special Commissioners' rules to a case that started under those rules and on that basis. There was no suggestion as to unreasonable conduct. Indeed, none could properly be made.

ADRIAN SHIPWRIGHT

TRIBUNAL JUDGE

RELEASE DATE:

APPENDIX

BDO

File Note

Re:BSAS

File number

Date: 4 December 2000

CC Colin Fish

Jody Burch

WORLDCOM DEAL

I met with Tony and Madeline Ebsworth on 28 November 2000 to discuss the planning required to minimise the tax implications of the balloon payment to be paid to BSAS by WorldCom Inc for the period to 31 October 2001. The actual payment date will be 60 days or so later.

The contract between WorldCom and BSAS, together with a sub-agreement between BSAS and its associate dealers, provides that a balloon payment will be made to the company at the cessation of the agreement and this will be the equivalent of approximately £ 2 ½ m (based on current projections of the WorldCom income derived by BSAS).

As things stand the £2 ½ m is taxable in the company as a trading receipt under Schedule D Case I and the extraction of these proceeds from the company will be taxable on the shareholders/directors.

It was agreed that with effect from 1 January 2001 a new company will be set up called " BSAS (Telecoms) Limited". The telephone and switch business, i.e. the non WorldCom part of the BSAS business, will be hived off into this new company. After discussing with Colin Fish whether or not to de-merge we agreed that it would probably make sense for the new company to effectively acquire this business from the existing BSAS company. I subsequently advised Tony Ebsworth that this was probably the way forward and stated that we would need a purchase and sale agreement drawn up by a solicitor. Tony is going to establish what the relative profitability of this part of the business has been historically and will also come up with a list of employees, assets and stock that will need to be transferred come the 1st January 2001.

The intention being that BSAS will only then have the WorldCom income in the company and after the receipt of the balloon payment the intention would be to wind up the company and effectively have a capital distribution attracting the 10% taper relief rate, post 6 April 2002.

The new company needs to be set up with the name of "BSAS (Telecoms) Limited" and Jody Burch will arrange this, as soon as possible.

Colin to review the proposal to ensure that the course of action to be followed has every chance of success, subject to any changes in legislation. SMD and CAEF to review the information provided by Tony Ebsworth regarding the assets, etc to be transferred and his calculation of the relative profitability of the switch/telecom as part of the business which is to be transferred out of the existing BSAS company. Hopefully we can then anticipate any queries that the Revenue might raise.

Stephen Dufferty/GH

4 December 2000

_________________________________________________________________

Gill Hook

12/12/2000 17.41

To: Stephen M. Dufferty /EA/BDOUK@BDOUKMAIL

CC: Colin Fish/EA/BDOUK@BDOUKMAIL

Subject: WorldCom deal

Memo from Colin Fish

Stephen,

Thank you for your note concerning BSAS Ltd. I would agree that the routes involving the purchase of the telephone and switch business by a new company will be the most tax efficient route in all probability.

This is broadly because, given that it is a relatively short timescale for the cessation of the WorldCom business, it is fairly unlikely at this stage that the Inland Revenue would give us clearance if this matter were disclosed.

The only points I would make from a tax point of view are that a new tapering period will start for the new company (not for the old company holding the WorldCom rights) and therefore should the telephone and switch business be sold in the near future, then a fairly high tax rate could apply. This is not a problem if the telephone and switch business is retained for at least 4 years. I suspect that as the business is not currently very profitable, that this will not be a major issue for the Ebsworths, however, they probably should be aware.

The second issue is that the rate of tax will be a little in excess of 10% as presumably once the balloon payment has been received by BSAS, the company will no longer be a trading company. We will therefore have around 3 1/2 years of business taper v a around half a year of non-business taper which would still give us a fairly low rate (properly somewhere towards 15%).

The other issue which we need to carefully consider is to avoid the company being an investment company after it has received the balloon payment. This will depend largely on the use to which the money is put. The key issue is that if the company does change its business, then a new period will start for tapering relief and a full 40% tax rate would arise. This may mean that it would be more prudent, depending on the timings of the receipt to extract the cash from the company prior to 5 Apr 2002, which would of course mean that we would be suffering a tax rate of around 20%. Presumably Tony maybe entitled to some retirement relief, together with possibly Madeline, in which case this may not be a major issue.

In practice, this does not affect the route which we take now as this will be a bridge which we need to cross when we extract the proceeds from the company.

In practice, the main liability will be the corporation tax liability and we should give some thought to ways of reducing this. In these circumstances I would normally prepare a spreadsheet setting out the projected tax under different scenarios to find the cheapest option. Can you let me know if you would like me to do this.

Kind regards

Colin

____________________________________________________________________

Handwritten Note on BDO Client Discussion Notepaper

Prepared by SMD

Client named BSAS Ltd

A meeting with SMD/CAEF/Mr. and Mrs. Ebsworth

Notes copied to CAEF

Date 12/1/01

Location 87 Guildhall Street

We met with Mr. and Mrs. E. today to discuss the tax planning in relation to their dealings with WorldCom and the best way to extract from the company the net proceeds from the "balloon" payment to be received in October 2001.

I stated that we must be clear as to the issues that they wish to be addressed and it was agreed that the following are the main issues:

- a divorce financial settlement

- to extract the net funds from company at lowest possible tax cost to the Ebsworths

- for Tony E to be able to continue to earn c £ 80 k per month commission from WorldCom post the balloon receipt. Without giving rise to a capital gain if BSAS is liquidated and a new company takes on the WorldCom contract.

ME was asked was her financial expectations are on divorce. She admitted to taking legal advice and expects: -

-1/2 the equity in the house c £300 k

- a fair price for her 49% interest in the business

- equalisation of pensions (TE = £400 k and ME = £50 k)

We discussed a number of options regarding the tax planning:

- May 2002 - after ME is 50, company to purchase her shares (capital route).

Delay receipt from WorldCom for balloon until that time. Wait until [write into]? a final divorce settlement therefore giving reason for own purchase.

-CAEF to look at company reorganisation route; liquidate BSAS and new co. to take on ongoing business.

- we will also look at maximum pension contributions for both and converting part of the SSAS into a personal pension.

___________________________________________________________________

Tony Ebsworth 18/1/01 -- meeting

1 New company -- VAT reg JB to chase

-- revenue have set up no DSAS

2 AJE has prepared projections for Telecoms and WorldCom

Agreement with WorldCom expires 1/11/01

balloon based on October revenue -- payable 3 months later. Payment based on certain services provided to that date.

WorldCom wants an ongoing relationship + have increased services that BSAS can sell and be paid commission on.

WorldCom have terminated a number of dealers and would like BSAS to look after these from 1/1/01 -- brought out an amendment to existing agreement

AJE still to sign

Amendment says they will give BSAS x amount of this "orphan" base -- will pay some commission rates are existing BSAS customer base -- but will not form part of balloon. But will be ongoing.

WorldCom will introduce new commission plan shortly.

WorldCom one BSAS to look after own client base, orphan base + possible future orphan base after 1/1101. Negotiations will hinge on what commission to be paid to BSAS for existing customer base after the balloon pays on 1/11/01.

Intention to liquidate BSAS after 6/4/2002 to make best use of taper relief.

BSAS will have to pay part of balloon out to associate dealers.

How do we proceed after 1/11/01? -- re ongoing WorldCom commission, employing staff etc

Redundancy -- use £30 k to pay Shaun Bamford his lump sum (sales manager)

In February WorldCom wants to negotiate new deal re orphan base and other services. Put this into Telecom or new co that AJE/ME do not own run? (SMD to check with CAEF).

BSAS Western is an existing associate -- run by old friend of AJE. Could they trust this individual. put orphan/new services work through it

AJE's concern -- What Happens after Happens Post 1/11/01 [sic]

Company set up not under AJE's control in case Revenue cla____ that balloon is a revenue receipt

Balloon -- Associates 300 k

BSAS 2500 k

£2200 k

£1,5 00,000 net £450,000 potential tax saving if we

liquidate

AJE does not want to continue existing BSAS co to run new WorldCom contracts -- he will need 1/2m to pay ME off

Look at pension contributions to reduce tax liability

- SMD/CAEF

Look at possibility of a sale of company after BSAS balloon agreement with WorldCom re ongoing contracts. AJE does not really think a sale is viable

Keep money in -- purchase of own shares for Madeline

Note 1   See now Chapter 1 Part 13 Income Tax Act 2007    [Back]

Note 2   see Lord Upjohn on necessary inference in Brebner 43 TC 718 quoted below at 46    [Back]

Note 3   Ibid    [Back]

Note 4   cf Ebrahamini v Westbourne Galleries [1973] AC 360. No point as to liquidation and failure of substratum was taken by either side.    [Back]

Note 5   This seems necessary to make sense of the paragraph. It seems to be a slip – hence the correction.    [Back]

Note 6   The Statement of Agreed Facts says “[12] As from 31 October 2001 WorldCom terminated its agreement with BSAS1 in return for the balloon payment”. It is hard to see how that was to continue. This was compounded by WorldCom’s financial situation.    [Back]

Note 7   I believe it would be here but it was not specifically said to be the case by Counsel so it is not recorded as such. It was the basis on which the argument was conducted. Mr. James accepted that the onus was on the appellant to prove its case but it was for the respondents to show that there was a tax advantage by the reason of the transaction in securities. Mr. Nawbatt did not dissent.     [Back]

Note 8   i.e. before or after the balloon payment    [Back]

Note 9   Notwithstanding the automatic application of section 219 TA commercially in normal circumstances no one would go ahead without a clearance under section 225 TA    [Back]

Note 10   See section 220(5) TA    [Back]

Note 11   This case involved a reconstruction under which "Oldco" was placed in liquidation and, by an agreement dated 6 March 1968, its liquidator sold to a newly-incorporated company of the same name ("Newco") all its assets, undertakings, business and goodwill except shares in Newco and assets to the value of £78,000. Newco was, of course, specially incorporated for the purpose of the reconstruction. Apart from the assumption of Oldco's liabilities, the consideration consisted of the allotment to Oldco or to its members at the direction of the liquidator of shares in Newco credited as fully paid    [Back]

Note 12   I.e. were transactions carried out for bona fide commercial reasons    [Back]

Note 13   I.e. were transactions carried out in the ordinary course of making or managing investments    [Back]