First-tier Tribunal (Tax)
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URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00648.html
Cite as: [2011] STI 307, [2010] UKFTT 366 (TC), [2010] SFTD 1257
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[2010] UKFTT 366 (TC)
TC00648
Appeal number: SC 3223 2008
Regulation 80, PAYE Regulations – Section 8, Social Security Contributions (Transfer of Functions, etc) Act 1999 – whether sums paid into a share scheme were earnings of the staff for whom they were paid – whether the shares purchased as part of the scheme were restricted securities within the meaning of Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 – whether the share scheme was within the scope of that Chapter
FIRST-TIER TRIBUNAL
TAX
UBS AG
Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS Respondents
TRIBUNAL: Dr David Williams (tribunal judge) David Earle (member)
Sitting in public at 45 Bedford Square, London WC1 on 8, 9, 11, 16 and 18 February 2010
Kevin Prosser QC, instructed by Pinsent Masons LLP, solicitors, for the Appellant
Paul Lasok QC, Mario Angiolini and Anneliese Blackwood of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2010
DECISION
Preliminary
1 The tribunal heard this appeal as one of a number of appeals that raised similar issues in respect of similar (but not identical) schemes and with reference to similar (but not identical) facts. By agreement between all concerned this tribunal heard this appeal and another appeal concerning the same issues of law consecutively. While the facts and evidence of the two cases were not identical they called into question the interpretation and application of the same provisions in the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), Part 7, in respect of the same year (the tax year 2003-04). It was agreed that two other cases raising similar points would be stood over while these appeals were decided.
2 This decision directly concerns only the appeal by UBS AG (“the Bank”) against decisions of the Respondents (“HMRC” which includes the Commissioners of Inland Revenue as predecessors in title to the current Respondents) about a scheme to pay bonuses to employees of the Bank in the tax year 2003-04. As a result of this agreement, the tribunal had the advantage of hearing full argument on the issues of law from leading counsel for the Bank in this appeal and leading counsel for another bank in the other appeal. Mr Lasok QC led counsel for HMRC in both cases. It was agreed on all sides that the tribunal would take into account all arguments in both cases in reaching its decision, and that it would set out its full decision on the issues of law in one of the decisions alone, applying that to the other decision (and, as appropriate, to the decisions stood over).
3 The tribunal decided to give its full decision in respect of this appeal, which was the second of the two appeals heard by it, as it was during the hearing of this appeal that it received the benefit of the arguments of counsel for both parties in the previous appeal. Representatives of the Bank in this appeal (including, for part of the time, counsel) attended the hearing of argument in the first appeal, while representatives of HMRC were present throughout both hearings. The tribunal is grateful to all concerned, and particularly to all counsel, for allowing the efficient handling of these appeals in this way.
4 In this decision the tribunal therefore examines all the arguments put to it about the legislation relevant to determine the tax and National Insurance contribution liability, if any, under the relevant legislation in respect of the benefits received by the employees in these cases. The tribunal intends no discourtesy in presenting the arguments put before it by counsel for the appellants in both cases as if they were presented for the Bank in this case. In order to protect any rights of appeal, the tribunal emphasises that it takes its views on the relevant issues of law based on all arguments presented to it during the full hearing of both sets of appeals. Failure to reflect any specific argument is not intended to indicate that the tribunal did not hear or consider the argument, or that it found any particular conflict in the cases presented for the appellants in the two cases, save where it specifically comments otherwise.
5 For this reason, the decision is divided into parts, the first part dealing with the issues of law of relevance to the cases generally, and the balance of the decision then dealing with the specific issues of fact and law in issue in this appeal.
PART 1: GENERAL ISSUES
The issues in the appeal
6 This appeal concerns the extent to which, if at all, sums paid by the Bank to its directors and employees under an Executive Share Investment Plan (“the Scheme”) create a liability on the Bank to pay to HMRC:
(a) income tax by reason of a decision made under regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 (“Regulation 80”), reflecting a liability to income tax under Part 7 of ITEPA, and
(b) primary and secondary Class 1 National Insurance (“NI”) contributions by reason of a decision made under section 8 of the Social Security Contributions (Transfer of Functions, etc) Act 1999 (“the 1999 Act”).
7 The decision made under section 8 of the 1999 Act sought to impose liability on the Bank in respect of both primary contributions and secondary contributions, rather than impose them directly on primary contributors. There are therefore no other appellants against the section 8 decision.
8 The sums concerned were awarded to individual employees by reference to bonuses related to the tax year 2003-04. It is common ground that the tribunal is not concerned in this decision with the precise amounts paid or individual liability of specific individuals, but only with the issues of principle that arise. As there is no contended liability, save for that of the Bank, and no individual sums in question the tribunal agreed with the parties that this decision did not require the identification of any specific individual employed by, or an officer of, the Bank. (In this decision “employee” is to be read as including “officer” where relevant.) This decision has been written on that basis.
The contentions of the parties
9 In outline, the Bank arranged for certain bonus sums that were to be payable to identified individual employees to be paid into the Scheme and not directly to any employee. Those sums were used to purchase interests in shares. Employees were given the right to draw down the values of their shares and withdraw sums from the Scheme up to the amount of the individual bonus over a period, and if this right was used the employee received a cash sum at that time. The Scheme was wound up at the end of a specific period, and sums paid to employees who had not previously received sums at that point. The appeals concern the proper designation of the sums paid into and out of the Scheme for income tax and NI contribution purposes.
10 The Bank contends that:
(a) Employees received nothing taxable when the sums were paid into the Scheme. This is because the sums paid in were not, and could not be regarded as, earnings of any individual employees at that stage;
(b) Employees received shares in respect of the sums paid in, but no income tax or NI contribution liability arose in respect of the receipt of those shares because they were “restricted securities” exempted from liability by section 425 of ITEPA;
(c) The restrictions were removed from the shares while held by or for the employees but there was no liability to income tax or NI contributions by reason of section 429 of ITEPA;
(d) Employees disposed of their shares by redemption at various times, but there was no income tax liability or NI contribution liability by reason of the redemption.
11 It may be that there was a liability on individuals to capital gains tax, and the individual liabilities of specific employees might be affected by double taxation agreement provisions relevant to individuals. In particular, individuals could make use of the two year taper relief for capital gains tax to reduce individual liability. But capital gains tax and double taxation relief were matters for those individuals alone and were not a liability of the Bank. While the Scheme was designed to allow individuals to use the capital gains tax relief if an individual wished to do so, and double taxation relief might be available, that does not affect this appeal. Accordingly those issues are not explored further.
12 HMRC contends that:
(a) the sums were earnings received by employees for the purposes of section 62 of ITEPA and section 3 of the Social Security Contributions and Benefits Act 1998 (“the 1998 Act”) before those sums were paid into the Scheme, and liability to income tax and NI contributions therefore arose at that stage;
(b) if that was not so, then the shares received by the employees were not restricted securities within section 425, and
(c) if that was not so, then the values of individual shareholdings were not exempted from income tax or NI contributions by reason of any provision in ITEPA, and
(d) if that were not so, then the Scheme is to be ignored as merely a preordained arrangement without real effect and the transactions are to be taxed as if there were cash payments directly to the employees.
13 HMRC also contended that aspects of the arrangements entered into by the Bank were shams, and that the Bank was challenged to prove all its contentions about the Scheme.
14 As this indicates, HMRC challenged the actions and evidence of the Bank at every stage, inviting the tribunal to make findings or draw adverse conclusions against the Bank at each stage. The tribunal was therefore asked to examine the Scheme in considerable detail and was given detailed documentary evidence with supporting witness evidence.
How the issues arise
15 In order to set the scene against which the tribunal considers the issues of law it is necessary to sketch the provisions made, or alleged to be made, by the Bank for the employees. The tribunal must examine the actual details of each case thoroughly on some points, but it is useful first to set out the outline of the general approach taken in this and the other appeal heard by the tribunal.
16 The starting point is that the Bank had the aim of setting up a competitive bonus scheme for its employees in the tax year 2003-04. The planning to achieve that aim took into account that many employees were not domiciled in, or long term residents of, the United Kingdom. The immediate purpose was to take steps to remove income tax and NI contribution liabilities from the bonus when received by an employee. The competitive advantage to the Bank in paying its employees is obvious. There was also the less obvious advantage to the Bank in removing its liability to secondary National Insurance contributions as well. The Bank decided to achieve its aim by organising a scheme that made use of the provisions of Chapter 2 of Part 7 of ITEPA, as replaced by new provisions in Schedule 22 to the Finance Act 2003.
17 Generalising across this appeal and the other appeal heard by the tribunal, and in broad outline, the steps involved in the Scheme, as HMRC saw it, were as follows. (The tribunal’s detailed findings about the individual scheme are below, and this is not to be taken as part of those findings). The following steps were taken:
(1) The Bank decided that it would give certain employees amounts by way of bonuses in addition to other earnings for the year. It was asserted by the Bank that this was done in such a way that the amounts did not constitute earnings of the employees.
(2) Company Z was created in an offshore jurisdiction. Company Z was not controlled by the Bank.
(3) A special class of shares was created in Company Z; the shares in that class (“the restricted shares”) were subject to non-permanent restrictions.
(4) The Bank - or another company or special purpose vehicle - purchased the restricted shares.
(5) The purchaser received the restricted shares, passing legal title to a nominee and allocated beneficial interests in the restricted shares to the employees identified at (1) in amounts equal in value to the amounts that the Bank had decided would be payable as bonuses to those employees.
(6) Exemption from a charge to tax on the acquisition of the beneficial interests in the restricted shares by those employees at step (5) was asserted under section 425 of ITEPA.
(7) A short while later, the restrictions were removed from the restricted shares. Exemption from a charge to tax on those employees on this event was asserted under section 429 of ITEPA.
(8) A further short while later, those employees became entitled to redeem their beneficial interests in the restricted shares. Arrangements were made so that the restricted shares could be redeemed by Company Z when timely applications were made. The redemptions took place at a value that was, or was contended to be, slightly less than the price paid by the Bank or special purpose vehicle for the restricted shares. Many employees redeemed their restricted shares at this time.
(9) Employees were entitled not to redeem their restricted shares on this occasion but, if they wished, could hold them in the Scheme for the two years necessary to mitigate a charge to capital gains tax. Some did so and then redeemed their restricted shares.
(10) A short while after the two year period ended, the rest of the shares that were previously restricted were redeemed at the initiative of Company Z, and Company Z ceased any activity.
(11) In due course Company Z was wound up.
The legal questions
18 The following legal issues arise from the challenge by HMRC to each aspect of the scheme implemented by the Bank:
(a) Were the bonus sums allocated for individual employees earnings for income tax and NI purposes at any stage, aside from any allocations into or from the Scheme?
(b) How are the relevant provisions of Part 7 of ITEPA, and in particular sections 423 to 429 of that Act, to be interpreted and applied?
(c) Can the tribunal ignore the details of the Scheme by reference to the facts as a whole, and treat the value received as earnings of individuals without regard to the Scheme?
19 It was common ground between all parties that there is no material difference between the provisions imposing income tax liability on the bonus sums, and the provisions imposing liability to National Insurance contributions. With the agreement of the tribunal the arguments were confined to the legislation imposing charges to income tax. The tribunal takes the same approach in this decision.
Were the sums money earnings before being paid into the Scheme?
20 It is not in dispute that the sums paid into the Scheme were paid in for the benefit of individuals who were for current purposes employees of the Bank. The disputes were limited to the nature of the sums credited to the Scheme in the name of the individuals, the shares allocated to those individuals, and the sums received from the Scheme by those individuals.
21 The tribunal therefore assumes that any sums that can be attributed to individuals before those sums were paid into the Scheme, or by reason of the attribution of shares to the individuals by the Scheme, or by reason of sums paid from the Scheme on redemption of shares are, if income at all, employment income within the meaning of section 7 of ITEPA.
22 The first issue requiring decision is whether the sums paid into the Scheme for individuals constituted money earnings of individuals before those sums were paid into the Scheme.
23 The relevant rule for these purposes is the rule determining when money is earned, or treated as earned, by an employee in section 18 of ITEPA:
“18 Receipt of money earnings
(1) General earnings consisting of money are to be treated for the purposes of this Chapter as received at the earliest of the following times—
Rule 1
The time when payment is made of or on account of the earnings.
Rule 2
The time when a person becomes entitled to payment of or on account of the earnings.
Rule 3
If the employee is a director of a company and the earnings are from employment with the company (whether or not as director), whichever is the earliest of—
(a) the time when sums on account of the earnings are credited in the company’s accounts or records (whether or not there is any restriction on the right to draw the sums);
(b) if the amount of the earnings for a period is determined by the end of the period, the time when the period ends;
(c) if the amount of the earnings for a period is not determined until after the period has ended, the time when the amount is determined.
(2) Rule 3 applies if the employee is a director of the company at any time in the tax year in which the time mentioned falls.
(3) In this section “director” means—
(a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body,
(b) in relation to a company whose affairs are managed by a single director or similar person, that director or person, and
(c) in relation to a company whose affairs are managed by the members themselves, a member of the company,
and includes any person in accordance with whose directions or instructions the directors of the company (as defined above) are accustomed to act.
(4) For the purposes of subsection (3) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity.
(5) Where this section applies—
(a) to a payment on account of general earnings, or
(b) to sums on account of general earnings,
it so applies for the purpose of determining the time when an amount of general earnings corresponding to the amount of that payment or those sums is to be treated as received for the purposes of this Chapter.”
24 “General earnings” is defined by section 7(3) of ITEPA as including earnings within Chapter 12 of Part 3 of ITEPA. That is a reference to section 62 of the Act. This provides:
“62 Earnings
(1) This section explains what is meant by “earnings” in the employment income Parts.
(2) In those Parts “earnings”, in relation to an employment, means—
(a) any salary, wages or fee,
(b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or
(c) anything else that constitutes an emolument of the employment.
(3) For the purposes of subsection (2) “money’s worth” means something that is—
(a) of direct monetary value to the employee, or
(b) capable of being converted into money or something of direct monetary value to the employee.
(4) Subsection (1) does not affect the operation of statutory provisions that provide for amounts to be treated as earnings (and see section 721(7)).”
25 The question is whether on the facts either Rule 1 or Rule 2 applies to anything allocated to an individual that is properly regarded as “earnings” within this definition. In other words, for earnings to be received, and therefore taxable, there must be either a payment of - or on account of - the earnings, or the individual must become entitled to a payment of or on account of those earnings even if they are not paid. Rule 3 is not relevant to this appeal.
26 Paid to whom? The Act is silent on this point. However, the tribunal regards it as trite law that a payment does not cease to be a payment of earnings to an individual because it is paid to a third party. Receipt by the Scheme is therefore enough to trigger the timing rule if – but only if – the sums are earnings when received by the Scheme.
27 The question of law is therefore whether the sums are to be regarded as general earnings of individuals when received by the Scheme. It was robustly asserted for the Bank that no individual had any entitlement to any bonus sum before or when it was received by the Scheme either as a matter of any individual contract or of the terms of the Scheme or more generally of employment law.
28 It was common ground that there are no special rules applying for income tax purposes to this question. It is one to be determined by general law. Mr Lasok QC also accepted for HMRC that there was little help in the case law on the question of the entitlement of an individual to a bonus. The question is therefore to be answered in accordance with the general principles of contract and employment law on all the evidence.
Restricted securities: the provisions of Part 7 of ITEPA
29 The main ground of disagreement between the parties arises on the assumption that the sums paid to the Scheme were not general earnings of individuals. On that assumption, individuals first became entitled to something of value caught within the wide definition of earnings when those individuals were allocated shares under the Scheme. The Bank argued, however, that these shares were restricted securities within the exemptions provided by Part 7 of ITEPA.
30 The scope of part 7 is signposted by section 417 of ITEPA, as revoked and replaced by Schedule 22 to the Finance Act 2003:
“(1) This Part contains special rules about cases where securities, interests in securities or securities options are acquired in connection with an employment.
(2) The rules are contained in—
Chapter 2 (restricted securities),
Chapter 3 (convertible securities),
Chapter 3A (securities with artificially depressed market value),
Chapter 3B (securities with artificially enhanced market value),
Chapter 3C (securities acquired for less than market value),
Chapter 3D (securities disposed of for more than market value),
Chapter 4 (post-acquisition benefits from securities),
Chapter 5 (securities options),
Chapter 6 (approved share incentive plans),
Chapter 7 (approved SAYE option schemes),
Chapter 8 (approved CSOP schemes),
Chapter 9 (enterprise management incentives), and
Chapter 10 (priority share allocations).
(3) The following make provision for amounts to count as employment income—
Chapters 2 to 6, and
Chapter 8.
(4) The following make provision for exemptions and reliefs from income tax—
Chapters 2 and 3, and
Chapters 5 to 10.
(5) Chapter 11 contains supplementary provisions relating to employee benefit trusts.
(6) Section 5(1) (application of employment income Parts to office-holders generally) does not apply to Chapters 6 to 10; and section 549(5) makes provision about its application to Chapter 11.”
31 It is common ground that if and in so far as Part 7 is relevant to the Scheme shares then it is because the shares are, or are not, restricted securities within the provisions of Chapter 2 of Part 7. No other Chapter of the Part was put in issue in the appeals.
32 Chapter 2 comprises sections 422 to 434. Sections 422 and 423 define the extent to which the Chapter applies to restricted securities:
“422 Application of this Chapter
This Chapter applies to employment-related securities if they are—
(a) restricted securities, or
(b) a restricted interest in securities,
at the time of the acquisition.
423 “Restricted securities” and “restricted interest in securities”
(1) For the purposes of this Chapter employment-related securities are restricted securities or a restricted interest in securities if—
(a) there is any contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies, and
(b) the market value of the employment-related securities is less than it would be but for that provision.
(2) This subsection applies to provision under which—
(a) there will be a transfer, reversion or forfeiture of the employment-related securities, or (if the employment-related securities are an interest in securities) of the interest or the securities, if certain circumstances arise or do not arise,
(b) as a result of the transfer, reversion or forfeiture the person by whom the employment-related securities are held will cease to be beneficially entitled to the employment-related securities, and
(c) that person will not be entitled on the transfer, reversion or forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion or forfeiture) at the time of the transfer, reversion or forfeiture.
(3) This subsection applies to provision under which there is a restriction on—
(a) the freedom of the person by whom the employment-related securities are held to dispose of the employment-related securities or proceeds of their sale,
(b) the right of that person to retain the employment-related securities or proceeds of their sale, or
(c) any other right conferred by the employment-related securities,
(not being provision to which subsection (2) applies).
(4) This subsection applies to provision under which the disposal or retention of the employment-related securities, or the exercise of a right conferred by the employment-related securities, may result in a disadvantage to—
(a) the person by whom the employment-related securities are held,
(b) the employee (if not the person by whom they are held), or
(c) any person connected with the person by whom they are held or with the employee,
(not being provision to which subsection (2) or (3) applies).”
33 Some of the terms used in this Chapter are common to other Chapters in the Part. Common provisions are set out in sections 420 to 421L in Chapter 1 of Part 7.
Section 421B contains some definitions relevant to Chapter 2. In particular, section 421B(2)(a) provides a definition of the time when a security is acquired, of relevance to section 422. Sections 421B provides:
“(1) Subject as follows (and to any provision contained in Chapters 2 to 4) those Chapters apply to securities, or an interest in securities, acquired by a person where the right or opportunity to acquire the securities or interest is available by reason of an employment of that person or any other person.
(2) For the purposes of subsection (1)—
(a) securities are, or an interest in securities is, acquired at the time when the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest (and not, if different, the time when the securities are, or interest is, conveyed or transferred), and
(b) “employment” includes a former or prospective employment.
(3) A right or opportunity to acquire securities or an interest in securities made available by a person’s employer, or by a person connected with a person’s employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless—
(a) the person by whom the right or opportunity is made available is an individual, and
(b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.
(4) Chapters 2 to 4 cease to apply to securities, or an interest in securities, when subsection (5), (6) or (7) is satisfied.
(5) This subsection is satisfied immediately after the securities are, or the interest in securities is, disposed of otherwise than to an associated person.
(6) This subsection is satisfied immediately before the death of the employee.
(7) This subsection is satisfied 7 years after the first date after the acquisition on which the employee is an employee of none of the following—
(a) the employer,
(b) (if the securities are, or the interest in securities is an interest in, securities issued by a company) the company by which they are issued, or
(c) a person connected with a person within paragraph (a) or (b).
(8) In this Chapter and Chapters 2 to 4—
“the acquisition”, in relation to employment-related securities, means the acquisition of the employment-related securities pursuant to the right or opportunity available by reason of the employment,
“the employment”, in relation to employment-related securities, means the employment by reason of which the right or opportunity to acquire the employment-related securities is available (“the employee” and “the employer” being construed accordingly unless otherwise indicated), and
“employment-related securities” means securities or an interest in securities to which Chapters 2 to 4 apply (ignoring any provision of any of those Chapters which limits the application of the Chapter to a particular description or descriptions of employment-related securities).”
34 Section 420 deals with the most important definitions:
“(1) Subject to subsections (5) and (6), for the purposes of this Chapter and Chapters 2 to 5 the following are “securities”—
(a) shares in any body corporate (wherever incorporated) or in any unincorporated body constituted under the law of a country or territory outside the United Kingdom,
(b) debentures, debenture stock, loan stock, bonds, certificates of deposit and other instruments creating or acknowledging indebtedness,
(c) warrants and other instruments entitling their holders to subscribe for securities (whether or not in existence or identifiable),
(d) certificates and other instruments conferring rights in respect of securities held by persons other than the persons on whom the rights are conferred and the transfer of which may be effected without the consent of those persons,
(e) units in a collective investment scheme,
(f) futures, and
(g) rights under contracts for differences or contracts similar to contracts for differences.
(2) In subsection (1)(e) “collective investment scheme” means arrangements—
(a) which are made with respect to property of any description, including money, and
(b) the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
(3) In subsection (1)(f) “futures” means rights under a contract for the sale of a commodity or other property under which delivery is to be made at a future date at a price agreed when the contract is made; and for this purpose a price is to be taken to be agreed when the contract is made—
(a) if it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract, and
(b) in a case where the contract is expressed to be by reference to a standard lot and quality, even if provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.
(4) For the purposes of subsection (1)(g) a contract similar to a contract for differences is a contract—
(a) which is not a contract for differences, but
(b) the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property or an index or other factor designated in the contract.
(5) The following are not “securities” for the purposes of this Chapter or Chapters 2 to 5—
(a) cheques and other bills of exchange, bankers' drafts and letters of credit (other than bills of exchange accepted by a banker),
(b) money and statements showing balances on a current, deposit or savings account,
(c) leases and other dispositions of property and heritable securities,
(d) rights under contracts of insurance (within the meaning of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001), and
(e) options.
(6) The Treasury may by order amend subsections (1) to (5).
(7) An order under subsection (6) may include any appropriate consequential provision (including provision amending any enactment).
(8) In this Chapter and Chapters 2 to 5—
“interest”,
in relation to securities (or shares), means an interest in them less than full
beneficial ownership and includes an interest in proceeds of their sale, but
does not include a right to acquire them,
“securities
option” means a right to acquire securities, and
“shares”
includes stock.”
35 Section 432 applies the following definitions to Chapter 2 alone:
“(1) In this Chapter—
“interest”,
in relation to securities,
“securities”,
“securities
option”, and
“shares”,
have the meaning indicated in section 420.
(2) In this Chapter “market value” has the meaning indicated in section 421(1).
(3) For the purposes of this Chapter sections 421(2) and 421A apply for determining the amount of the consideration given for anything and section 421I applies for determining the amount of the consideration given for the acquisition of employment-related securities.
(4) In this Chapter—
“the
acquisition”,
“the
employee” (except in section 429),
“the
employer”,
“the
employment”, and
“employment-related
securities”,
have the meaning indicated in section 421B(8).
(5) In this Chapter “associated person” has the meaning indicated in section 421C.
(6) In this Chapter—
“associated
company”, and
“employee-controlled”,
have the meaning indicated in section 421H.
(7) In this Chapter—
“restricted
interest in securities”, and
“restricted
securities”,
have the meaning indicated in sections 423 and 424.
(8) In this Chapter “restriction”, in relation to securities or an interest in securities, means provision relating to the securities or interest which is made by any contract, agreement, arrangement or condition and to which any of subsections (2) to (4) of section 423 applies.
(9) In this Chapter “variation”, in relation to a restriction, has the meaning indicated in section 427(4).
(10) In this Chapter “convertible securities” has the same meaning as in Chapter 3 of this Part (see section 436).”.”
36 The pattern of the provisions in Chapter 2 is to provide a default rule under which restricted securities are exempted from any charge to tax upon acquisition under the Chapter, although it may arise under other Chapters of the Part. Section 425 accordingly provides that there is no charge in respect of acquisition in certain cases. The tribunal refers to this as a default rule because section 425(3) to (5) allow employers and employees jointly to elect that the rule does not apply. That did not happen in this case. The exemption from income tax on acquisition is in section 425(2), which under subsection (1) applies:
“… if the employment-related securities—
(a) are restricted securities, or a restricted interest in securities, by virtue of subsection (2) of section 423 (provision for transfer, reversion or forfeiture) at the time of the acquisition, and
(b) will cease to be restricted securities, or a restricted interest in securities, by virtue of that subsection within 5 years after the acquisition (whether or not they may remain restricted securities or a restricted interest in securities by virtue of the application of subsection (3) or (4) of that section).”
37 Having removed a charge from the acquisition of the shares, section 426 then imposes it on a later chargeable event. Read in the context of the Chapter, the approach is to postpone the charge, not to provide an exemption. What is a chargeable event is defined by section 427, while section 428 defines the amount of charge. However, these sections do not apply if section 429 applies, as section 426(5) makes that section expressly subject to section 429. It is, however, necessary to note the terms of sections 426 and 427 as they provide for the time at which the exceptions in section 429 are to be considered:
“426 Charge on occurrence of chargeable event
(1) This section applies if a chargeable event occurs in relation to the employment-related securities.
(2) The taxable amount determined under section 428 counts as employment income of the employee for the relevant tax year.
(3) The “relevant tax year” is the tax year in which the chargeable event occurs.
(4) Section 427 explains what are chargeable events for the purposes of this section.
(5) This section is subject to section 429 (case outside charge under this section).
427 Chargeable events
(1) This section applies for the purposes of section 426 (charge on occurrence of chargeable event).
(2) Any of the events mentioned in subsection (3) is a “chargeable event” in relation to the employment-related securities.
(3) The events are—
(a) the employment-related securities ceasing to be restricted securities, or a restricted interest in securities, in circumstances in which an associated person is beneficially entitled to the employment-related securities after the event,
(b) the variation of any restriction relating to the employment-related securities in such circumstances (without the employment-related securities ceasing to be restricted securities or a restricted interest in securities), and
(c) the disposal for consideration of the employment-related securities, or any interest in them, by an associated person otherwise than to another associated person (at a time when they are still restricted securities or a restricted interest in securities).
(4) For the purposes of this Chapter there is a variation of a restriction relating to the employment-related securities if any restriction in relation to them is removed or varied.”
38 Section 429 (case outside charge under section 426) provides:
“(1) Section 426 (charge on occurrence of chargeable event) does not apply if—
(a) the employment-related securities are shares (or an interest in shares) in a company of a class,
(b) the provision by virtue of which the employment-related securities are restricted securities, or a restricted interest in securities, applies to all the company’s shares of the class,
(c) all the company’s shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and
(d) subsection (3) or (4) is satisfied.
(2) For the purposes of subsection (1)(c) shares are affected by an event similar to that which is a chargeable event in relation to the employment-related securities—
(a) in the case of a chargeable event within section 427(3)(a) (lifting of restrictions), if the provision mentioned in subsection (1)(b) ceases to apply to them,
(b) in the case of a chargeable event within section 427(3)(b) (variation of restriction), if that provision is varied in relation to them in the same way as in relation to the employment-related securities, or
(c) in the case of a chargeable event within section 427(3)(c) (disposal), if they are disposed of.
(3) This subsection is satisfied if, immediately before the event that would be a chargeable event, the company is employee-controlled by virtue of holdings of shares of the class.
(4) This subsection is satisfied if, immediately before that event, the majority of the company’s shares of the class are not held by or for the benefit of any of the following—
(a) employees of the company,
(b) persons who are related to an employee of the company,
(c) associated companies of the company,
(d) employees of any associated company of the company, or
(e) persons who are related to an employee of any such associated company.
(5) For the purposes of subsection (4) a person is related to an employee if—
(a) the person acquired the shares pursuant to a right or opportunity available by reason of the employee’s employment, or
(b) the person is connected with a person who so acquired the shares or with the employee and acquired the shares otherwise than by or under a disposal made by way of a bargain at arm’s length from the employee or another person who is related to the employee.”
39 Section 421H (meaning of “employee controlled etc”) provides further definitions relevant to section 429(4):
“(1) For the purposes of Chapters 2 to 4 a company is “employee-controlled” by virtue of shares of a class if—
(a) the majority of the company’s shares of that class (other than any held by or for the benefit of an associated company) are held by or for the benefit of employees of the company or a company controlled by the company, and
(b) those employees are together able as holders of the shares to control the company.
In this subsection “employee” includes a person who is to be or has been an employee.
(2) In this section and Chapters 2 to 4 “associated company” has the same meaning as, by virtue of section 416 of ICTA, it has for the purposes of Part 11 of ICTA.”
40 The meaning given to “associated company” by section 416 ICTA is:
“(1) For the purposes of this Part, except paragraphs 2 and 9(1)(a), (2)(a) and (3)(a) of Schedule 19, a company is to be treated as another’s “associated company” at a given time if, at that time or at any other time within one year previously, one of the two has control of the other, or both are under the control of the same person or persons.
(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—
(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or
(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or
(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.
(4) For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.
(5) For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.
(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection; and such attributions shall be made under this subsection as will result in the company being treated as under the control of five or fewer participators if it can be so treated.”
The proper interpretation of Chapter 2 of Part 7 of ITEPA
41 The Bank contends that the shares in the Scheme were restricted securities but that the conditions of section 429(1) are satisfied by the Scheme, and that therefore the charge to tax under section 426 does not apply. HMRC contends that section 429(1) is not satisfied, or at any rate that the additional alternative conditions in section 429(3) and (4) are not satisfied. Section 426 therefore does apply.
42 Part of the reason for the disagreement lies in the different approaches that the parties consider that the tribunal should take to the interpretation of these provisions.
In considering this aspect of the case, the tribunal had two advantages. The first was that it heard argument from leading counsel for the appellants in both the appeals on the point, as well as the arguments of leading counsel for HMRC on both those submissions. It also had the advantage that the Supreme Court handed down a decision dealing with Part 7 of ITEPA during the hearing of the appeals.
43 In their skeleton arguments, the parties were on common ground in stating that the task of the tribunal was to interpret the relevant provisions purposively. But their arguments ceased to be on common ground when they submitted what they considered the purpose or purposes to be and how far the tribunal could pay attention to those purposes. As this was an issue considered by the Justices in the Supreme Court in a recent decision, the tribunal turns first to that decision.
44 The judgment of the Supreme Court in Grays Timber Products Ltd v HMRC [2010] SC 4, was handed down during the hearing of these appeals. The tribunal respectfully adopts as guidance all the relevant parts of the Judgments of Lord Walker, giving the leading judgment, and Lord Hope, giving the other judgment, noting that Lords Rodger, Brown and Kerr were in complete agreement with both judgments.
45 The introductory part of Lord Walker’s judgment explained:
[2] That issue depends primarily on the correct construction and application of
Chapter 3D of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) as inserted by the Finance Act 2003, Schedule 22. Chapter 3D consists of only three sections which are, by comparison with other chapters in Part 7 of ITEPA 2003 (as amended), relatively simple and straightforward. [His Lordship then set them out.] It is common ground that Mr Gibson’s shares were “employment-related securities”. He was an “associated person” and no issue arises as to any other “associated person”. The main area of controversy is “market value”, which is defined by reference to the Taxation of Chargeable Gains Act 1992.
[3] However Chapter 3D forms part of a complex code with fairly deep and
tangled legislative roots. Many of the submissions made on behalf of Timber
Products (which has been the appellant at every stage in these proceedings) relied on the need for the expression “market value” to be given a uniform meaning throughout the different chapters comprised in Part 7 of ITEPA 2003. It is therefore appropriate to attempt at least an outline sketch of Chapter 3D’s larger context, without going far into complexities which are not directly relevant.
[4] Part 7 of ITEPA 2003 is headed “Employment income: income and
exemptions relating to securities.” Its provisions reflect three different, and to
some extent conflicting, legislative purposes. First there is Parliament’s
recognition that it is good for the economy, and for social cohesion, for employees to own shares in the company for which they work. Various forms of incentive schemes are therefore encouraged by favourable tax treatment (those in force in 2003 are covered in Chapters 6 to 9 inclusive of Part 7).
[5] Second, if arrangements of this sort are to act as effective long-term
incentives, the benefits which they confer have to be made contingent, in one way or another, on satisfactory performance. This creates a problem because it runs counter to the general principle that employee benefits are taxable as emoluments only if they can be converted into money, but that if convertible they should be taxed when first acquired. That principle was stated by Lord Radcliffe in Abbott v Philbin [1961] AC 352, 379:
“I think that the conferring of a right of this kind as an incident of
service is a profit or perquisite which is taxable as such in the year of
receipt, so long as the right itself can fairly be given a monetary
value, and it is no more relevant for this purpose whether the option
is exercised or not in that year, than it would be if the advantage
received were in the form of some tangible form of commercial
property.”
That was a case about share options, which are now dealt with separately in
Chapter 5, but it illustrates the general approach that applied in the days when the taxation of employee benefits was very much simpler than it is now.
[6] The principle of taxing an employee as soon as he received a right or
opportunity which might or might not prove valuable to him, depending on future events, was an uncertain exercise which might turn out to be unfair either to the individual employee or to the public purse. At first the uncertainty was eased by extra-statutory concessions. But Parliament soon recognised that in many cases the only satisfactory solution was to wait and see, and to charge tax on some “chargeable event” (an expression which recurs throughout Part 7) either instead of, or in addition to, a charge on the employee’s original acquisition of rights.
[7] That inevitably led to opportunities for tax avoidance. The ingenuity of
lawyers and accountants made full use of the “wait and see” principle embodied in these changes in order to find ways of avoiding or reducing the tax charge on a chargeable event, which might be the occasion on which an employee’s shares became freely disposable (Chapter 2) or the occasion of the exercise of conversion rights (Chapter 3). The third legislative purpose is to eliminate opportunities for unacceptable tax avoidance. Much of the complication of the provisions in Part 7 (and especially Chapters 3A, 3B, 3C and 3D) is directed to counteracting artificial tax avoidance. There is a further layer of complication in provisions which regulate the inevitable overlaps between different chapters. It is regrettable that ITEPA 2003, which came into force on 6 April 2003 and was intended to rewrite income tax law (as affecting employment and pensions) in plain English, was almost at once overtaken by massive amendments which are in anything but plain English.
[8] This case is, it seems, the first case concerned with any of the provisions of
Part 7. Timber Products’ appeal from a revised determination dated 3 November 2005 was dismissed by a single Special Commissioner (Mr Demack) by a written decision released on 21 March 2007. Timber Products’ appeal to an Extra Division of the Inner House of the Court of Session (Lord Kingarth and Lord Mackay of Drumadoon, Lord Osborne dissenting) was dismissed on 13 February 2009. The reasoning of the majority of the Inner House was rather different from that of the Special Commissioner, and counsel for Timber Products has sought to deploy further arguments in this Court.”
46 Lord Hope concluded his reasons for agreeing with Lord Walker as follows:
“[56] The provisions that are set out in the various Chapters that appear in Part 7 of ITEPA 2003 are complex, and it is not easy to draw conclusions as to how the charging provisions in each Chapter are to be applied if the overall aim is to achieve consistency. I am in any event not persuaded that it would be right to approach these provisions on the basis that the overriding consideration is that each Chapter should be applied consistently with all the others. As the commentator on the Finance Act 2003 in Current Law Statutes observed, if there is any theme in the Act it is one of anti-avoidance and the closing down of perceived tax loopholes. This suggests that the correct approach is to take each Chapter according to its own terms without trying to draw conclusions from the way the common definition of “market value” is applied elsewhere in Part 7. I would adopt that approach. It is worth noting too that the interval between the enactment of ITEPA 2003, which received the Royal Assent on 6 March 2003, and the enactment of the Finance Act 2003 was very short. ITEPA 2003 was a product of the “Tax Law Rewrite Project”, which was set up specifically to rewrite most direct legislation in user friendly language. It is regrettable that the substituted provisions in the Finance Act 2003 depart from that approach. That, however, was probably inevitable if the Revenue was to achieve the aim of combating tax mitigation planning which is plain from these provisions. As for Chapter 3D, which is the only Chapter with which we need to concern ourselves in this case, it is as Lord Walker said in para 2 relatively simple and straightforward. I see no escape from the conclusion that the enhanced payment that Mr Gibson received was caught by it and that it is taxable accordingly.”
47 For the above reasons, the tribunal was taken to no other authorities specifically on Part 7, other than, if they are authority, the explanatory notes issued on the relevant provisions in the Finance Bill 2003, and Budget Resolutions 30 and 31 put before the House of Commons to give effect to those provisions. The key points in the explanatory notes cover similar ground to the general observations of Lord Walker as set out above. More generally, the tribunal is guided in its consideration of these documents by the judgment of Arden LJ set out below.
48 The tribunal was also taken by counsel for both appellants to the recent judgment of Arden LJ in Astall v HMRC [2009] EWHC 1010, although to different passages in her helpful judgment. The tribunal therefore sets out the relevant passages more fully.
[43] Mr Prosser puts forward a supplementary argument based on the fact that paragraph 3 of schedule 13 was amended by the Finance Act 1999 so as to broaden the occasions for redemption relevant to determining whether a security is a RDS. All such occasions are made relevant. An explanatory note prepared by the Revenue at the time of the Finance Bill 1999 makes this clear: it states that there had been a device to avoid the income charge by arranging an artificial option to redeem early at par. Mr Prosser submits that this note shows that the approach of the Special Commissioner that account should be taken only at the terms that the parties intended to operate was wrong as a matter of construction. I propose to deal with this point briefly. As we pointed out to Mr Prosser, there are difficulties about this explanatory note. It is undated; it is unclear at what stage of the Parliamentary process the note was produced, it is not accompanied by clause 59 to which it relates, and we are not told whether the note appeared in any explanatory notes published with the Act itself. Leaving those points on one side, I consider that the note provides no real assistance even for the purpose of establishing the context for the enactment and the mischief to which the amendment was directed (which in this case constitute the limited purposes for which such a note can be used as an aid to interpretation: see R (Westminster City Council) v National Asylum Service [2002] 1 WLR 2956 at [2] to [6] per Lord Steyn). It did not purport to set out the meaning of clause 59 on a comprehensive basis and it is expressed in very general terms. Mr Ewart seeks to counter Mr Prosser's reliance on it by submitting that it supports the Revenue's case that its true meaning is that regard should be had only to those occasions on which there is a real possibility of redemption. I accept this submission. In my judgment, it would be contrary to the policy implicit in the note to treat it as supporting the argument that, once the artificiality referred to in the note is removed, Parliament intended account to be taken of all other events on which redemption could take place, irrespective of their artificiality.
[44] Is a purposive interpretation of the relevant provisions possible in this case? In my judgment, there is nothing to indicate that the usual principles of statutory interpretation do not apply and accordingly the real question is how to apply those principles to the circumstances of this case. In my judgment, applying a purposive interpretation involves two distinct steps: first, identifying the purpose of the relevant provision. In doing this, the court should assume that the provision had some purpose and Parliament did not legislate without a purpose. But the purpose must be discernible from the statute: the court must not infer one without a proper foundation for doing so. The second stage is to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.
49 Counsel for both appellants both submitted that the task of the tribunal in these appeals was to look at the clear, broad wording of the relevant sections of Chapter 2 of Part 7 and to apply them. The wording was, as Mr Prosser QC put it, “formulaic and highly prescriptive … containing extremely wide definitions and highly detailed and comprehensive rules.” Mr Goy QC dealt with each relevant provision on a more specific basis, submitting that each element in the Chapter should have appropriate weight, and suggesting that the proper conclusion of the tribunal on the question of purpose should be similar to that of Proudman J in Mayes v HMRC [2009] EWHC 2443, when she concluded at [45] that:
“I cannot extract from the legislation any underlying or overriding purpose enabling me to conclude that parts of the scheme may be ignored.”
50 For HMRC, Mr Lasok QC based his argument on the view of his clients that the schemes were “designed to abuse the provisions of Part 7 of ITEPA so as to avoid a charge to income tax and NICs on remuneration to employees”. In his view the interpretation of Part 7 involves consideration of the line of cases that started with Ramsay v IRC [1982] AC 300, and included in particular Barclays Mercantile Bank Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684 and IRC v Scottish Provident Institution [2004] UKHL 52, [2004] 1 WLR 3172 and the decisions followed and approved in those decisions. He returned to this approach at several points in his argument, contending that the tribunal should approach the scheme constructed by the Appellants on the basis that they did not reflect normal commercial business dealings and were simply devices which sought to abuse the relevant sections.
51 The tribunal’s view is that it is required by the relevant provisions to look at Chapter 2 as a whole, with appropriate attention being paid to the fact that it is one chapter in a code of legislation drafted as a whole (with some common phraseology and definitions), and passed by Parliament as a whole. It therefore respectfully follows the view of Lord Walker and notes his comments about Part 7 as a whole, while noting that the Supreme Court was looking more specifically at Chapter 3D (categorised by His Lordship as a chapter “especially” aimed at eliminating unacceptable tax avoidance) while the tribunal’s focus is Chapter 2 (not so categorised). Nonetheless, in the view of the tribunal, the passages set out above from the Supreme Court’s decision frame the tribunal’s view with respect to the first of the two stages identified by Arden LJ in Astall at [44].
52 Chapter 2 is one of the series of parallel subsidiary sets of rules dealing with specific, practical situations within the general Part 7 code of rules dealing with securities provided to employees in connection with their employments. As Lord Walker recognised, the general code reflects a long tradition of issuing shares to employees as an “effective long-term incentive”. As these appeals show, there is nothing in Chapter 2 requiring that the securities be held long term, or for any specific period. The policy of “wait and see” is applied regardless of the period between acquisition and realisation. Nor is there anything requiring a necessary connection between the shares issued to the employees and their employing companies. Nor, unlike the parallel codes dealing with other situations covered by Part 7, is there anything expressly prohibiting the use of the provisions with the sole or main aim of reducing the short-term tax burden on the employer or the employee rather than as a long-term incentive.
53 Chapter 2 is a subset of rules within a code enacted as a whole. In the view of the tribunal it is to be read as a set of rules to be read together and not as a series of individual sections that either charge tax or exempt from income tax as a series of disconnected free-standing rules to be interpreted separately. In that sense, the rules in Chapter 2 serve a single purpose. The tribunal therefore rejects any argument that individual parts of those rules should be read any more broadly than other parts or that there is any sound reason to give particular phrases a wide interpretation. Both the purpose of the rules and their meaning are to be derived from the full context of the rules as a whole. And, in the view of the tribunal, as a whole they are to be viewed as providing rules to deal with a real, practical situation facing employers and the tax authorities. This is the problem of deciding whether and when any benefit received from restricted shares by employees by reason of their employment is liable to income tax at any stage rather than capital gains tax on disposal. The rules contain limits, as may be expected, but the limits are to be read as an integral part of the rules.
54 The tribunal therefore takes the view that the purpose of each provision in Chapter 2 is to be derived from the context of the chapter as a whole. The purpose is to make provision that, unless the employer and employee jointly decide otherwise, and subject to defined exceptions, amounts derived from securities that are within the definition of restricted securities are to be charged to income tax not on acquisition by an employee (as the underlying rules of income tax provide) but on the occurrence of a later chargeable event, rather than being charged to capital gains tax on disposal by the employee. The tribunal does not consider it relevant to its interpretation and application of Chapter 2 that an individual who acquires assets that fall within Chapter 2 can, subject to entirely separate capital gains tax provisions, claim exemption from capital gains tax on disposal of those assets in certain circumstances.
55 Following the guidance of Arden LJ, the tribunal must apply the provisions, so interpreted, to the “actual facts”. The tribunal does not accept that the Scheme is an “abuse” of the legislation if it is found to comply with the provisions of Chapter 2 but results in an outcome that was not desired by HMRC. As Arden LJ reminded us, there is no general doctrine of abuse of legislation, or of tax legislation, in the United Kingdom. However, the tribunal agrees with Mr Lasok QC that in examining whether the Scheme is within Chapter 2 it must look at the reality of what is happening and not be restricted only to a step by step approach to events that ignores the business reality of any step, or that multiple steps are in reality parts of a single event. Nor should it restrict its focus to one step at a time exclusive to the other steps or parallel events. That is, in the tribunal’s view, a matter of “second stage” application of the tests to the facts rather than interpretation of the legislation. But the tribunal accepts from the authorities that it must be alert to a situation where the arrangements, viewed as a whole, do not create the required assets (restricted securities) or events. See the conclusion at [25] of Lord Nicholls delivering the opinion of the House of Lords in IRC v Scottish Provident).
PART 2: THE SCHEME
Witness evidence
56 The following witnesses gave evidence.
57 For UBS, oral evidence of fact was given by four employees of UBS at the relevant times:
57.1 Geoffrey Hayward was a senior member of the UBS HR staff in London who took part in the planning and delivery of the Scheme. He gave evidence of the purposes behind the development and design of the Scheme. He also gave evidence about the times at which the decisions were taken about the awards of bonuses to UBS employees under the Scheme. But he was not involved in the detailed implementation of the Scheme.
57.2 Jonathan Ferrara was the senior member of the UBS staff in Jersey who was asked by colleagues to become the UBS director of ESIP Ltd, and did so. He gave evidence of his briefings about and involvement in the ESIP Ltd board meetings and decisions taken by the company.
57.3 Nicholas Anderson was the UBS employee in charge of the tax department in the United Kingdom at the times relevant to the appeal. He gave evidence of his own involvement and that of others, including the lawyers and tax advisers acting for UBS at the time, in the design of the Scheme and the drafting of relevant documents. He was also questioned, both with regard to this appeal and more generally, on the practice of pre-drafting company board minutes and the use of those pre-drafts. He was also questioned on the relationship between UBS and Mourant.
57.4 Rebecca Jackson gave evidence by video-link from New York. She was a member of the Human Resources team in London at the relevant times. She acted as a key resource in implementing the scheme but had no decision making powers.
58 Each of the witnesses commented on the difficulties of recalling in detail the events challenged in the appeal. This was particularly so in the evidence of Rebecca Jackson. The tribunal accepts those reservations as understandable given both the time since the events occurred and the nature of the details being questioned. The key issue of fact before the tribunal was whether the documents produced by the Appellant were genuine both in the sense that they were contemporary records and that they recorded meetings and discussions that actually occurred. The tribunal accepts the evidence of all the UBS witnesses as honest attempts to answer, without any concealment or sidestepping, the challenges to their witness statements to the best of the individual’s recollection. It was also clear in each case that the witness had both made his or her witness statement and given his or her evidence informed by the documents. With those points taken into account, the tribunal accepts the evidence of each witness.
59 The tribunal refused an application by the Appellant at a late stage to admit further evidence and call further witnesses from third parties. In the event, the decisions of the tribunal did not turn on the issues understood to have been supported by that evidence. It therefore records the refusal but does not address the matter further.
60 The Appellant also called two expert witnesses, David Bowes and Dr David Ellis. Mr Bowes gave expert evidence about the valuation of the shares in ESIP Ltd as at 29 January 2004. Dr Ellis gave expert evidence as an economist of the likelihood of the occurrence of the trigger event (that is, the level of the FTSE 100 Index exceeding the stated amount between 29 January 2004 and 19 February 2004). The tribunal accepted the evidence of both witnesses as competently given expert evidence. It deals with the questions, in so far as they are relevant to the decision of the tribunal, in its general consideration of the facts.
61 HMRC called one expert witness, David Croft. He gave evidence on both the valuation question and the likelihood question. He also gave evidence on the hedging arrangements using call options made in parallel with the Scheme. He did so as an experienced businessman with direct experience in these issues. His expertise was questioned by Mr Prosser QC. The tribunal notes that he is not a professional share valuer, but that he had considerable practical expertise in dealing with share values and similar issues. It therefore finds value in his evidence, subject to the relevance of specific professional expertise to some parts of his evidence. But the tribunal accepts Mr Prosser’s point, put to the witness in cross-examination, that he had gone beyond the evidence properly to be given by an expert witness in some of the comments made in his expert report. He had, in the report, made comments on other aspects of the appeal as described to him in his brief. The tribunal excludes from its consideration any evidence by this witness that is not directly focussed on the questions of valuation at the relevant date, the trigger event, and the hedging arrangements.
62 The tribunal accepts from the expert evidence, and finds, that the trigger event created a genuine uncertainty. It was not likely to occur, but there was a genuine possibility that it could occur. It also finds that the existence of the trigger event, and of the effect that this would have on ownership of the shares in question, was such as to reduce the market value of the shares when they were acquired by the beneficiaries by a small amount but not so small an amount that it could be ignored as irrelevant to the tests to be applied. It also finds that the hedging arrangements would normally meet most of the reduction in receipts that an individual might otherwise experience in the event of the trigger event occurring and might, in remote circumstances, result in a gain to that individual.
Documentary evidence
63 Extensive documentary evidence was put before the tribunal. It is satisfied that it had before it all the key documents about the scheme save for communications with all individual employees. It is satisfied that it saw appropriate examples of such documents. It also had before it several streams of emails, including streams of emails about the design and development of the Scheme, and of the reaction of employees to the Scheme.
64 The tribunal was invited by Mr Lasok QC to find that specific documentation presented by the Appellant was a sham. The tribunal considers that point below.
65 Aside from the specific challenge made by Mr Lasok QC as to a sham, the tribunal finds the events listed in the chronology annexed to this decision to have occurred as stated in that chronology. It finds that the documentation presented to it was the documentation used and relied on in developing and implementing the Scheme. While it accepts that HMRC have shown that some of the documents such as board minutes were pre-drafted and some signatures and events did not occur precisely when they should have occurred, the tribunal considers these happenings to be the kind of human error that normally occurs when detailed plans are put into effect, and not evidence that the events did not occur or that the documents were not genuine records.
66 The tribunal finds as follows with regard to the persons involved in the Scheme:
ESIP Ltd This was the company established for the purposes of the Scheme. It was a Jersey company. Its shareholding is detailed below. It is the SPV referred to in early drafts of the Scheme. At the relevant times it had three directors. Two were appointed by Mourant and the third, Mr Ferrara, by UBS.
Juris Ltd. A Jersey resident company owned and controlled by Mourant, and independent of UBS. This company acted as nominee for the ESIP Ltd non-voting shares purchased by UBS as part of the Scheme.
Lively Ltd A company similar to Juris Ltd.
Mourant A Jersey-based trust company, part of the Mourant Group, and unrelated to UBS. It controlled both Juris Ltd and Lively Ltd. It acted as trustee to the Sidemore Trust.
RBS Jersey A Jersey subsidiary the Royal Bank of Scotland
Sidemore Trust A charitable trust established under Jersey law with Mourant as trustee.
UBS UBS AG, the employer and provider of the bonus funds.
UBS Master Employee Trust A trust established by UBS but
operating under independent trustees
PART 3: ANALYSIS
67 There are four critical dates in the chronology:
(a) the date on which the employees earned their bonuses
(b) 26 January 2004, when the shareholders of ESIP Ltd adopted a new
Memorandum and articles for the company creating non-voting shares (“NVS”)
(c) 29 January 2004, when NVS in ESIP Ltd were allocated to employees
(d) 19 February 2004, when the restricted period ended
68 The tribunal must find as fact the first of those dates. HMRC contended it was 23 January 2004, in which case it predated 26 January, when the shares were created and when the Scheme started. The Appellant contended that it was either 29 January, when the shares were allocated to employees, or some later date in February.
69 The tribunal finds that the other dates are as stated, and must examine what happened on those dates.
Did employees earn their bonuses before 29 January 2004?
70 The tribunal has set out the relevant law in Part 1. It is not a question to be decided by the provisions of Part 7, but a general question of law or fact to be determined in accordance with general rules of contract law and, if relevant, employment law.
71 The core of the argument for HMRC was that the Appellant must have allocated individual sums to employees as their entitlement to bonuses before the Scheme started. This was necessary because only certain individuals could subscribe to the Scheme. To be a subscribing employee, the employee had to have earned a minimum of £20,000 as a bonus for 2003. So the individual bonus entitlement of an employee had to have been determined before the individual could be allowed to enter the Scheme. And Mr Lasok contended on the evidence of the documents produced that this allocation occurred on 23 January 2004.
72 The tribunal agrees with Mr Lasok QC that 23 January 2004 was when the relevant committee within the Appellant had agreed the list of those entitled. There was no evidence that any individual, once on the list, had been removed, or that anyone else had any discretion to remove anyone from the list or alter the amount any individual received. That is, however, not the relevant issue. The relevant issue is when the employee became entitled to be paid the bonus: see rule 2 in section 18 of ITEPA.
73 The tribunal saw in evidence information issued to employees at the relevant time, and correspondence between the Appellant and various individuals about their appointments to posts within the Appellant, including examples of letters of appointment. It was informed of the other bonus systems run by the Appellant. It also saw the presentational material shown and distributed to employees about the Scheme and it heard the evidence of the witnesses. Subject to one point to which the tribunal returns below, it is satisfied that the evidence gives a consistent clear picture that indicates that the employees were not entitled to, or to be paid, their bonuses until the February pay day, and it saw and heard no evidence to suggest that employees thought otherwise. As the evidence included streams of emails between employees and the Appellant’s HR team, the tribunal considers that had there been any significant view by any relevant person that there was entitlement as HMRC suggests, then it would have seen evidence of this. The tribunal would also expect this to be the case, consistently with what it understands to be the general law, namely that an employee seeking to show entitlement to a “discretionary” bonus being awarded after the event must show that he or she has clear entitlement in law to be paid that bonus.
74 That finding applies to all relevant employees (said to number 426 in total) save for a small number, said to involve about 10 employees. These were employees who were appointed on terms that guaranteed them a bonus during the first year of appointment. The tribunal saw examples of these letters of appointment, and was informed by both parties that the Appellant had disclosed all relevant correspondence to HMRC about those appointed on these terms. The tribunal did not ask to see all the letters, because it is deciding this case as a matter of principle. It does not therefore need to make a finding listing those individuals.
75 In these cases, the tribunal finds that the terms of the letters it saw made it completely clear that the employee was entitled to the bonus identified not as a matter of discretion but as a matter of entitlement. That is the only natural and reasonable conclusion from the use of the phrase in the letters that the tribunal saw:
“... in your case the actual incentive award for 2003 is guaranteed to be not less than £...”.
The letter continues:
“You will not be eligible to receive your incentive award if you or the bank have served notice of termination prior to the incentive payment date. In the case of your guaranteed incentive award, you will be entitled to receive the award if your employment has terminated because of total disability, death, retirement or redundancy.”
76 The first point that emerges from this is that an employee who receives a guaranteed bonus may also receive additional bonus. In so far as the bonus is in addition to the amount stated to be guaranteed, then the guarantee does not apply to it. Any additional amount must be considered in the same way as the full bonuses provided to those with no guarantee.
77 The second point is that the guarantee is just that, save for the limitation. It is to be received unless either the employee himself or herself serves notice to quit, or the employer serves notice for some reason other than the four reasons stated. The tribunal did not examine the contracts of the employees in detail to establish what grounds were available to an employer of such an employee. In the absence of evidence the tribunal assumes that the general law applies and that the employer has the same rights as any employer to dismiss without notice for gross misconduct, but would otherwise be liable for any wrongful or unfair dismissal. However, in reality, if an employee is given notice in these circumstances (but not redundancy) then the entitlement to receive any further sums from the employer would be lost in any event or alternatively open to recovery by other means.
78 In principle, and subject to evidence of contracts not seen by the tribunal, the tribunal finds that the guaranteed part of the bonus should be regarded as precisely that. It is fully satisfied that the letters reflected specific negotiations with specific individuals, and notes that the letters also say that the provisions apply “exceptionally in your case...”. Accordingly, to that extent, the general rules did not apply.
79 On that basis, the tribunal finds and decides that once the Appellant had identified a specific sum as the bonus for 2003 for that individual, as it did on 23 January 2004, then to the extent that the sum identified was or included a guaranteed amount, the employee had an enforceable right to be paid that sum. It follows that it is then irrelevant for the purposes of Part 7 that the individual then decides to put his or her money into the Scheme, if the Scheme allows this to be done. The liability to pay income tax and National Insurance contributions has already arisen. That is not a matter of concern to the tribunal in this appeal.
80 The tribunal therefore finds that those employees given a guaranteed bonus for 2003 were entitled to that bonus once it was identified, and the tribunal finds that this occurred before the day on which the Scheme started, 29 January. The employees concerned had earned their bonuses for ITEPA purposes before the sums were paid into the Scheme. The tribunal therefore finds that HMRC succeeds on this aspect of the appeal.
81 As this is a decision in principle, the tribunal makes no finding identifying the relevant individuals or the amounts that those individuals were guaranteed. The tribunal therefore gives liberty to the parties, should it prove necessary to them, to bring the matter back to the tribunal for a full decision. The tribunal also accepts that there may have been terms not in evidence to the tribunal that should have been taken into account in this analysis in respect of specific individuals whose details were not before the tribunal, and the liberty to apply also relates to any such issues.
82 More generally, the tribunal finds that the evidence set out above about guaranteed bonuses is also evidence that these provisions were exceptional. The evidence further confirms the general finding of the tribunal that in all other cases no bonuses were earned by employees before the start of the Scheme on 29 January 2004.
The restricted securities
83 On 26 January 2004, the shareholders of ESIP Ltd passed a special resolution amending the memorandum and articles of association of the company. The tribunal has already found that these events occurred and that these alterations took place as evidenced for the Appellant.
84 The purpose of the amendments was to put in place the specific form of share structure that had been planned as the central element of the Scheme, namely a class of shares (NVS shares) that were to be restricted securities for the purposes of Part 7 of ITEPA, but with a specific and time limited restriction.
85 The definition of a restricted security is in section 423(1) of ITEPA. Section 422 provides that the securities must be restricted securities at the time of their acquisition. There are two conditions or, rather, one general condition and a set of other conditions one of which must also be met:
“(a) there is any contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies, and
(b) the market value of the employment-related securities is less than it would be but for that provision.”
86 Section 422 provides that these conditions must be met at “the time of the acquisition”. Section 421B(1) and (2) provide the relevant definitions for this rule. Chapter 2 applies to securities:
“... acquired by a person where the right ... to acquire the securities or interest is available by reason of an employment of that person or any other person.
(2) For the purposes of subsection (1)—
(a) securities are, or an interest in securities is, acquired at the time when the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest (and not, if different, the time when the securities are, or interest is, conveyed or transferred) ...”
87 It was not in dispute that the employees acquired their interests in the shares in the Scheme by reason of their employments. The tribunal finds that the day on which the employees acquired their interests in the shares was 29 January 2004.
88 Two questions therefore arise: were there restrictions in place at the time of acquisition by the employees? If there are restrictions in place, did they affect the market value of the shares?
89 The new Memorandum of ESIP Ltd authorised a change in the share capital. Article 2 (“share capital”) of the Articles provided the details. The most important of the provisions of Article 2 relevant to this appeal (with abbreviations added) are:
“(1) The Company shall have an authorised share capital of UK £27,000 divided into (i) 2,600,000 Voting Ordinary Shares with a par or nominal value of UK £ 0.01 each (“VOS”) and (ii) 100,000 Non-Voting Shares with a par or nominal value of UK £0.01 each (“NVS”)
...
(6) The unissued NVS shall be at the disposal of the directors and (save as otherwise directed by the Company in general meeting) they may allot or otherwise dispose of them to such persons at such times and generally on such terms and conditions as they think proper, subject nevertheless to this Article 2, and provided that no shares shall be issued at a discount.
(7) Subject to Article 2(15) the rights attaching to a NVS of the Company shall be as follows:
...
(d) Some or all of the NVS may be redeemed by the Company at any time after the expiry of the Restricted Period at a price per NVS equal to the Redemption Value divided by the number of NVS in issue at the relevant date (“the Redemption Price”) ...
(e) On the First Optional Redemption Date some or all of the NVS held by a Holder shall be redeemable on notice to the Company given by the Holder during the Notice Period at a price equal to the Redemption Price ...
...
(14) Unless a sale has previously occurred under this Article 2(14), if the closing value of the Index on any date during the Restricted Period is greater than the Trigger Level, the legal and beneficial interest in each NVS in issue shall be immediately and automatically sold to the Purchaser for a consideration equal to the Forfeiture Price. Any such sale shall be regarded as effecting the transfer of beneficial ownership of such NVS at that time, and shall be completed by the transfer of the registration of that NVS into the name of the Purchaser as soon as practicable after that time (in all cases notwithstanding the fact that the Forfeiture Price has not yet been paid to the Holder), and the Forfeiture Price shall be paid in full by the Purchaser to the Holder of the NVS no later than 30 April 2004.
If the preceding paragraph applies:”
[the paragraph then sets out administrative provisions]
“During the Restricted Period, unless an automatic sale for a consideration equal to the Forfeiture Price has taken place in accordance with the above provisions of this Article 2(14), any interest (whether legal or beneficial) in a NVS shall not be transferable for Consideration in any circumstances and in the event of any purported transfer of such NVS or interest therein for Consideration such purported transfer shall be null and void and the purported transferee shall not be entitled to be registered as a Holder of that NVS.
(15) Notwithstanding the preceding provisions of these Articles and anything else expressed or implied in these Articles, at any time at which the Holder of beneficial owner of any NVS is a Group Company, that NVS shall, except to the extent that the Group Company is the Purchaser and has acquired the NVS pursuant to Article 2(14), confer the following rights and for the avoidance of doubt the provisions set out in Article 2(7) to 2(14) (other than Article 2(13) shall not apply to that NVS:”
[The sub-paragraphs that follow remove rights to dividends and distributions and to receive notices of or vote at any meetings save those affecting NVS rights, entitle the holders of the shares to recover only the nominal value of the shares on winding-up and prohibit any transfer or redemption.]”
90 The “Restricted Period” is defined elsewhere as being the period from 1 pm on 29 January 2004 to 19 February 2004. The “Index” is the London Stock Exchange share index usually referred to as the FTSE 100. (This was decided by the directors of ESIP Ltd, and is common ground). The “Trigger Level” is the FTSE 100 level of 4947.15. (This was also determined by the directors). The “Forfeiture Price” was 90 per cent of the then Market Value. The “Purchaser” was UBS Employee Benefits Trust Ltd. The “Market Value” was the price estimated in good faith by the directors to be obtainable on a sale of the NVS in the open market between a willing seller and a willing buyer with no restrictions applying.
91 In other words, if at any time between 1 pm on Thursday 29 January 2004 and Thursday 19 February 2004 (that is, three weeks later) the level of the FTSE 100 index exceeded 4947.15, then the automatic forfeiture provision applied. As a result the employee would receive in due course only 90 per cent of the amount he or she would otherwise receive on redeeming the share.
92 Was this a “contract, agreement, arrangement or condition which makes provision to which any of subsections (2) to (4) applies” for the purposes of section 423 of ITEPA? The full text of the section is set out above.
93 For the Appellants, Mr Prosser QC submitted that the NVS were real shares with real economic consequences. Further they were shares to which the provisions in the articles and the resulting trigger applied as an arrangement or condition and that subsection (2) applied to them. This requires:
“(a) ... a transfer, reversion or forfeiture of the employment-related securities, or (if the employment-related securities are an interest in securities) of the interest or the securities, if certain circumstances arise or do not arise,
(b) as a result of the transfer, reversion or forfeiture the person by whom the employment-related securities are held will cease to be beneficially entitled to the employment-related securities, and
(c) that person will not be entitled on the transfer, reversion or forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion or forfeiture) at the time of the transfer, reversion or forfeiture.”
Article 2 brought the shares within the subsection because it caused a forfeiture to occur if the FTSE 100 index crossed the trigger level, and the resulting sum received by an employee was only 90 per cent of what would otherwise be received. He fortified this argument by the expert evidence of Dr Ellis that there was a genuine possibility that the FTSE 100 would rise to the level required and that therefore the trigger condition was a genuine one. This was supplemented by the expert evidence of Mr Bowes to confirm that the result was a reduction in the market value.
94 Mr Lasok QC first contended that the shares were not restricted securities on the general ground that the provisions of Part 7 did not apply to tax avoidance schemes. More specifically, Mr Lasok QC raised two arguments why, in his submission, the shares in ESIP Ltd were not restricted securities. The first submission was that there was little or no likelihood of the condition operating. The second was that any reduction in value resulting was de minimis and could be ignored. The tribunal, he submitted, must also take into account that the Scheme was designed with a call option working in parallel to the forfeiture provision so as to ensure that the employees lost nothing if the trigger event occurred.
95 The tribunal has little trouble in accepting that the NVS were real shares. It was possible for an employee to hold them for over two years, and some did so. If they did so, they received dividends from the sums invested in ESIP Ltd and invested by it. Those shares were securities. The more significant question is whether they were restricted securities.
96 The tribunal notes three aspects of the forfeiture provision that deserve consideration. The first is that the actual trigger was not a matter in any contract or agreement between the Appellant and/or the employees with each other or any third party. Nor was it an inherent part, as a matter of law, of the Scheme or of the rights of the holders of the non-voting shares. It was created as a decision of the directors of ESIP Ltd. However, in reality, they did not just produce their ideas out of thin air – earlier versions of the form of trigger used had been discussed in some detail since the idea of the Scheme first emerged, and the actual form used had been discussed thoroughly by those responsible within the Appellant. If it is seen in that context, it was certainly an aspect of an arrangement, namely the arrangement under which the Scheme was created.
97 The second aspect is the period for which the restriction operated. It was precisely three weeks. It was not argued for HMRC that this period was of itself too short to amount to a restriction. Rather, this went to the question whether the restriction caused any loss in value. The tribunal agrees that the period of itself does not remove the fact that there was a restriction. But it is relevant in assessing both market value and the Scheme as a whole.
98 In the view of the tribunal, the period is a factor to be taken into account in assessing the nature of the trigger event, and not a separate issue. The trigger event was, adopting the analysis of Dr Ellis, a 6.5 per cent rise in the FTSE 100 index in the three week period. That, of course, has little to do with the relationship between employer and employee, not least because the Appellant’s shares were not even in the FTSE 100. But, as Mr Prosser QC rightly contended, there is nothing in Chapter 2 that states the purpose of any restriction. It does not have to be employee-related.
99 In the view of the tribunal, the trigger event and the period chosen are to be seen alongside the call option arrangements to which Mr Lasok QC drew attention. It is clear that from the earliest inception of the thinking that went on about ESIP Ltd, there was a constituent element that involved using a device to neutralise the effect of any trigger event. The proposal was that the trigger event should be hedged so that if the share prices rose above the level set, then an arrangement should be in place to compensate the company for the loss it would suffer in the enforced sale of its shares. As a result, the company’s loss of funds would be made good so that the payout to the shareholders of the NVS would not be affected significantly by the reduction caused by the forced redemption.
100 In an email dated 22 August 2003 and marked as of high importance from Nicholas Anderson (who gave evidence to the tribunal) to others in UBS, Mr Anderson outlined issues involved in what was then called NECAP. At the time it was proposed to use the UBS share price as the basis for the trigger event. Among other points in the email it is stated:
“3. The value of “X” [the trigger price] above needs to be chosen so that there is a 10% chance of it being hit ...
4. We would then want to hedge the employee’s market risk by buying out of the money [given to the SPV] call options within the SPV itself (not by the employees themselves). What we are thinking of is that the SPV would purchase sufficient ... call options that, if the ... share price does hit [the trigger level] within the one month, the option payout is sufficient to compensate employees for their obligation to sell the SPV shares at 90% of FMV.”
101 That thinking remained a central strand of the Scheme. It was presented to senior management of UBS in December 2003 by Geoffrey Hayward’s second in command in these terms (taken from a copy of the Powerpoint presentation slides in the papers):
“Trigger Event”
If the FTSE rises by specified amount (equating to 5-10% probability) during
first 3 weeks after award, shares will automatically be sold back to UBS for 90% of fair value. To hedge this risk, SPV spends 3 of its 100 available cash in purchasing call options. Remaining 97 is placed on 3 week deposit.
“Trigger Event” Occurs (<10% chance)
-Option gain will increase SPV’s NAV to 112. Hence employees’ shares are sold to UBS for 112 x 90% = 100. Funds are paid to employees on 31March 2004. This takes form of capital gain.
“Trigger Event” Does not Occur (>90 % chance)
-SPV will invest its remaining 97 of cash in UBS shares (either actual or synthetic). The shares will automatically be redeemed on 1 March 2006.”
102 This remained the thinking and was built into the various timelines for the Scheme that were disclosed by UBS to HMRC. The most relevant of these developing documents (of which the tribunal saw a series) is that of 22 January 2004, sent just ahead of the start of the main events of the Scheme. It was sent by Rebecca Jackson to Jonathan Ferrara after he had agreed to take on the UBS directorship of ESIP Ltd. The timeline is detailed and shows the series of events to take place. Those relevant to this point (the purchase of the call options) are:
“Mon 26 Jan. ESIP Ltd board meets. Geoffrey reports that he has met with UBS the previous day. UBS has indicated that it intends to offer to subscribe for NVS on certain terms (draft terms presented to meeting). Notes that he has received a presentation from UBS London Equities proposing hedging strategy which directors should consider to meet the terms of subscription. Directors agree these are sensible but await offer from UBS.
Could be 27th Document 17: ESIP Ltd board minute reflecting above.
Wed 28 Jan
In late pm (near LSE closing time) London HR sub-committee meets and submits offer (with FTSE trigger number).
Fixed. Document 12: HR sub-committee minutes reflecting above.
Document 13: Letter from UBS London to ESIP LTD setting out subscription offer for B shares
...
Thu 29 Jan ...
ESIP Ltd board meeting to decide to place order for FTSE options with UBS London Equities.
Document 17: ESIP Limited board minutes reflecting above.
Order placed by phone by ESIP Ltd to UBS London Equities for purchase of FTSE options.”
103 The UBS offer was made as planned. It contained the requirement foreseen in the December presentation that ESIP Ltd keep 97 per cent of the capital for investment but use 3 per cent for the purchase of options. That was agreed and the options were purchased. The papers also contain documents showing the thinking behind the level of options required. These include drafts of an index call warrant in the name of UBS Investment Bank. The proposal is for a settlement amount of 14.112% on settlement date (20 February 2004) if the FTSE closes above the barrier level on any day between and including 28 January 2004 and 19 February 2004. Someone has annotated this with the handwritten comment:
“Change forced sale payout from 100% - 99% (demonstrate participants have lost some value) – premiums will reduce,”
104 The tribunal finds that the events occurred as planned. The agreement between UBS and ESIP Ltd that led to the subscription was duly accepted by both parties, and ESIP Ltd duly agreed to hedge at the level agreed with UBS London Equities. (The evidence is that a complex option was agreed, but the details do not matter.) The final terms were a premium of £2.2 million for a payout if the event had materialised that would have left employees with 99.2 per cent of their entitlement. The money given to ESIP Ltd by UBS was therefore split 97/3 as planned.
105 It is clear to the tribunal from this that there is a close interlinking between the trigger event chosen, the period of the restrictions chosen, and the method of hedging chosen. The aim was at first that there should be a complete offset between the loss to an employee if the trigger event occurred with the result communicated to senior management that there would be no reduction in value in the payout to the employee. He or she would receive the same whether or not the trigger event occurred. At some point someone thought a deliberate near miss was better than an exact hit in terms of offsetting the loss. As the trigger event did not occur, this was not tested.
106 It is also clear to the tribunal that the reality was that the Scheme as a whole was carefully designed so that employees could not suffer any significant loss if the trigger event was realised. The reality of the risk was that an employee stood about a 10 per cent chance of losing 0.8 per cent of the bonus amount to be weighed against the opportunity to remove a 41 per cent tax charge. (The tax charge is not relevant, however, to the quantification of the value to be realised under the Scheme.)
107 In that context, little turns on the evidence of Dr Ellis (or the evidence from Mr Croft) about the precise extent of the risk. The specific risk taken as the trigger event was, the tribunal finds, deliberately chosen as an objective, limited risk that a counterparty was prepared to offset entirely. The premium was priced at 3 per cent in total in the call option. Dr Ellis estimated risk on differing bases but between, at the extreme (in rounded terms), 6 per cent and 12 per cent. Mr Croft’s evidence put the risk in the same area.
108 Mr Lasok QC robustly urged the tribunal to look at events with that in mind, and to find that as a result the securities were not restricted. That requires an examination of the tests in the legislation.
109 A market value criterion is applied twice in the relevant parts of the definition of a restricted security. Section 423(1), as we have seen, lays down the general condition that the condition imposing the condition must be such that “ the market value of the employment-related securities is less than it would be but for that provision. Section 423(2) imposes three conditions, the third of which is that the employee:
“... will not be entitled on the transfer, reversion or forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for transfer, reversion or forfeiture) at the time of the transfer, reversion or forfeiture.”
The terminology here is prescriptive: the market value must be less than it otherwise would be as viewed at the time of acquisition, and the amount received by the employee must be less than the market value. So this must be tested both at onset and on delivery.
110 There is however a difference in the phraseology of the onset test (section 423(1)(b)) and the delivery test (section 423(2)(c)): the former is related specifically to the market value of the securities, while the latter is wider. It refers to the entitlement of the employee that arises at the time of the forfeiture. The tribunal is prepared to accept that the amount received by an employee if the trigger event occurred was structured so that the market value of the NVS was reduced. But it does not accept that this is the only amount to which the employee would have been entitled under the Scheme at the time of a forfeiture. The employee would also have been entitled to the appropriate share of the sums received on exercising the options. UBS had required ESIP Ltd to invest in the options, and the agreement had taken into account the sums receivable. Further, the employees had all been informed of this, and had themselves entered the Scheme with this information in mind. The amounts receivable by the employees on the event of forfeiture occurring were therefore, as the presentation claimed, bar a small marginal difference, the same as if the forfeiture did not occur. Any difference was not a matter of the market or an unknown amount, but a precisely quantified amount known in advance as a result of a decision taken quite deliberately to structure the option so that it just undershot the amount required to balance the transaction completely.
111 Further, while the tribunal received limited evidence about the circumstances that might apply had there been a forfeiture, it noted the evidence of Mr Croft that the details of the option were such that there were circumstances in which the amount received on forfeiture could exceed the main level of return under the option, so raising the possibility that the effect of the forfeiture happening could be a gain, not a loss. Mr Croft stated that there was a very low probability of this occurring. Although the general context is that of a possibility – far short of a probability – that the trigger level of the FTSE might be met, the tribunal nonetheless puts limited weight on that aspect of Mr Croft’s evidence as compared with the general position. At the same time, it does not consider that this evidence was challenged successfully. It was a matter that it was appropriate for HMRC to put before the tribunal in this form, and while the tribunal had reservations about aspects of Mr Croft’s evidence, as noted above, it does not consider that those reservations deprive this aspect of his evidence of relevance nor does it make the evidence on this issue unsafe. It is a marginal additional aspect of the general reality of the situation that no significant loss would occur if the trigger level was crossed. That situation is a probable marginal loss of under 1 per cent in the improbable event that the trigger level was crossed with a remote possibility of a gain. That is to be compared with the picture presented by the Appellant of a 10 per cent loss.
112 Taking all the evidence into account, the tribunal finds as fact that, on a straightforward interpretation of the language of the statute, the test in section 423(2)(c), namely that an employee “ will not be entitled on the ... forfeiture to receive in respect of the employment-related securities an amount of at least their market value (determined as if there were no provision for ... forfeiture) at the time of the ... forfeiture” is not met.
113 It was not argued for the Appellant that any other aspect of the tests in section 423 was met on the facts. Accordingly, the tribunal finds that the securities were not “restricted securities” within the meaning of Chapter 2.
114 It follows that the appeal must fail.
115 The tribunal considers that, nonetheless, it should consider the other issues raised in the appeal, and on which it received evidence, in case it is wrong in law on that issue. However, it emphasises that the primary basis of its decision is that (a) the appeal fails with respect to the guaranteed bonuses of a small number of the employees because those employees received the guaranteed bonuses as earnings before the sums were paid into the Scheme, and (b) the appeal fails more generally with regard to all other bonuses in that the non voting shares used in the Scheme were not restricted securities because on the tribunal’s findings of fact they did not comply with all the requirements of section 423.
The significance of section 429
116 Had the Appellants been successful in establishing that the shares were restricted, then they would next have contended, as Mr Prosser QC submitted, that they were entitled to exemption from the charge that would arise under section 426 of ITEPA by reason of section 429. This on the grounds that all four of the conditions of section 429(1) were met, namely that:
“( a) the employment-related securities are shares (or an interest in shares) in a company of a class,
(b) the provision by virtue of which the employment-related securities are restricted securities, or a restricted interest in securities, applies to all the company’s shares of the class,
(c) all the company’s shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and
(d) subsection (3) or (4) is satisfied.”
The submission was that section 429(4) was met, namely that:
“... immediately before [the chargeable] event, the majority of the company’s shares of the class are not held by or for the benefit of any of the following—
(a) employees of the company,
(b) persons who are related to an employee of the company,
(c) associated companies of the company,
(d) employees of any associated company of the company, or
(e) persons who are related to an employee of any such associated company.”
117 The tribunal interprets this as referring primarily to the shares (or, more generally to any securities or interests in securities) held by the potential taxpayer, that is, the person who may, but for section 429, be regarded as the earner for the Chapter 2 charge. The focus of this and similar appeals is on the employer, and the contended liability of the employer to collect income tax from the employee under the PAYE Regulations, and collect and account for NI contributions under the modified PAYE Regulations that apply to contribution liability. But the drafting of Part 7 is framed with the individual taxpayer in mind. “The” employment-related securities are therefore those held by an individual employee, not the employees as a group. It follows that the test in subsection (1) is to be applied by comparing an individual’s entitlements to those of the others also holding shares of that class.
118 In this case, the class of shares is the NVS, the non-voting shares. Who held those immediately before the chargeable event? This is defined by sections 426 and 427. The chargeable event is the time when the shares cease to be restricted shares – that is, following the closure of the period in which the trigger could operate up to 19 February 2004. The circumstances that would activate the charge under section 426 at that time are defined in section 427(3):
“... the employment-related securities ceasing to be restricted securities, or a restricted interest in securities, in circumstances in which an associated person is beneficially entitled to the employment-related securities after the event...”
119 Mr Lasok QC submitted that UBS was an associated person with ESIP Ltd at that time. “Associated person” has the same meaning for these purposes as in section 416 of ICTA (see section 421H of ITEPA). That definition is set out above. His argument was that in reality UBS controlled ESIP Ltd. ESIP Ltd did what it was told by UBS, and it did not exercise any initiative of its own.
120 Mr Prosser QC strongly resisted that argument, and relied on the evidence of his witnesses, and in particular Mr Ferrera, as the basis for his submission that ESIP Ltd was an independent company. The evidence showed that two of its three directors were not appointed by UBS or associated with it, but were appointed by the independent company, Mourant, who by its nominees held the other voting shares in ESIP Ltd. They had held real meetings and made real decisions.
121 While the language of the timeline details cited above from the internal UBS memorandum sent to Mr Ferrera after he had agreed to become a director, and the extent to which events followed the timeline, certainly justify Mr Lasok QC in raising the argument and seeking to test the evidence thoroughly, the tribunal agrees with Mr Prosser QC. It follows from its general finding that its starting point in the analysis is that events occurred as the operative documents (and not merely the timelines) suggested.
122 The tribunal does not consider that it needs to examine the corporate structure of ESIP Ltd beyond the general finding that the NVS were held by UBS and the UBS employee benefit trust as detailed in the chronology in the annex to this decision. When the shares were sold, the sale was to UBS. That was not in dispute. The sole area of dispute was whether UBS was an associated person with ESIP Ltd within the section 416 meaning. The tribunal regards this as relatively straightforward. On the basis of its main findings of fact, it sees nothing unusual or untoward about the relationship between the two companies, and it saw no evidence to suggest there was control of the kind envisaged by section 416. It does not consider therefore that it need enter into a detailed analysis of the section. It finds on the facts that the evidence does not show that UBS and ESIP Ltd are associated persons.
Did the arrangements involve a sham?
123 Mr Lasok QC also contended that there was a specific element of sham in the arrangements establishing ESIP Ltd, and that as a result there was control by UBS of that company. His contention was that Article 2(15) of the new articles of association of the company, adopted on 26 01 2004, was a sham. He clarified this submission by agreeing that he was not alleging fraud specifically on the part of UBS or any other identified person, and that he was not alleging fraud in the Snook sense (that is, by reference to the decision in Snook v London and West Riding Investments Ltd, [1967] 2QB 786). Rather, his submission was that this particular provision should be viewed in the same way as the documents in question in Antoniades v Villiers [1990] AC 417.
124 Mr Lasok QC relied on the acceptance by Mr Prosser QC in opening that if it were not for Article 2(15), when UBS acquired the NVS in ESIP Ltd, and before it gave them to the employees, it would have obtained control of ESIP Ltd in the section 416 sense.
125 The relevant provision (repeated from above) is:
“(15) Notwithstanding the preceding provisions of these Articles and anything else expressed or implied in these Articles, at any time at which the Holder of beneficial owner of any NVS is a Group Company, that NVS shall, except to the extent that the Group Company is the Purchaser and has acquired the NVS pursuant to Article 2(14), confer the following rights and for the avoidance of doubt the provisions set out in Article 2(7) to 2(14) (other than Article 2(13) shall not apply to that NVS:”
[The sub-paragraphs that follow remove rights to dividends and distributions and to receive notices of or vote at any meetings save those affecting NVS rights, entitle the holders of the shares to recover only the nominal value of the shares on winding-up and prohibit any transfer or redemption.]”
In other words, it prevents several of the provisions of Article 2 from operating, on the facts, in the short period from the acquisition by UBS of the shares in ESIP Ltd until they were transferred to the nominee for the employees. One resulting risk, as identified by Mr Prosser QC, was that ESIP Ltd was wound up in that period. In his view UBS had enough shares, aside from the NVS, to prevent the necessary special resolution to do that. In his submission, UBS identified and took a risk about the events in that short period to avoid the problems that otherwise occurred.
126 Mr Lasok QC made his submissions on this point as part of a more general
assertion that UBS controlled ESIP Ltd. This must be considered, he submitted, in the same objective way as the agreement between the landlord and the tenants was considered by the House of Lords in Antoniades. The House of Lords had taken the view, he argued, that, viewing the clause objectively, that it simply could not be accepted that the clause was intended to operate. It was a formal provision in the lease, but in reality it was nothing other than a device to get round the law. In argument, Mr Lasok QC accepted that the argument he put forward was not an argument about fraud but rather an argument that represented the same broad approach as that explored in tax appeals from the case of Ramsay v IRC [1982] AC 300 and appeals that followed. No reference had been made to the tax cases in Antoniades but, he submitted, this was another part of the same approach. In Ramsay and the cases that followed, the focus was on statutory construction. In Antoniades it was on the construction of the rental agreement. Here the concern of the tribunal was with the articles of a company. That was more akin to Antoniades than Ramsay.
127 The tribunal heard extended argument on this point because Mr Prosser, QC made an application on behalf of the Appellant that HMRC be precluded from advancing a sham argument as the issue had not been raised in the statement of case.
The tribunal ruled during the hearing that it accepted from Mr Lasok QC’s submission to the tribunal that no direct allegation of fraud was made, and it was not therefore asked to consider any. But it considered that at least part of Mr Lasok QC’s argument was within the case stated in so far as he was arguing how the law should be applied to facts, including documents, that were in evidence. If and in so far as the argument involved an interpretation of a document, that was a matter of law and therefore not an allegation of a subjective nature.
128 The tribunal confirms that it does not regard any aspect of the articles of association of ESIP Ltd as involving any fraud (in the Snook sense or any other sense). It finds that Article 2(15) of those articles was a genuine provision in the articles properly accepted by the shareholders of the company by special resolution on 26 01 2004. It was not argued that the article was beyond the powers of the company or in any other way invalid as a matter of company law. It finds that the only scope for operation of that article was in the period of not more than a day between the acquisition of the NVS by Juris Ltd as nominee for UBS on 28 01 2004 and the transfer of the beneficial interests in those shares by UBS to named employees the following day. It does not accept, on the facts, that the provision was one to which the decision in Antoniades - that this was not a provision on which the parties intended to act - applies as it sees no basis in the evidence on which to form the view for which Mr Lasok QC contended that the parties would have ignored Article 2(15) if the circumstances that triggered it had come about. The tribunal therefore takes Article 2(15) into account in its decision that UBS did not control ESIP Ltd at any time.
129 It is therefore prepared to accept that if section 426 had applied to the shares, then any charge under that section would have been prevented by section 429.
The Scheme as a whole
130 The tribunal considers, on the same basis, that it should also examine the general challenge put by HMRC to the Scheme. This is that, viewed on all the evidence, it is a tax avoidance scheme such that it falls outside the proper scope of Chapter 2 of Part 7. The tribunal therefore records its findings on this issue.
131 The tribunal approaches this part of the decision on the basis that it has seen full documentation from the Appellant, and that the oral evidence presented on behalf of the Appellant confirmed the evidence in those documents.
132 It also approaches the issue taking into account the recent guidance of Arden LJ in Astall and in particular her guidance that the second general issue in a tax avoidance case is:
“to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.”
133 The tribunal has taken the specific view that the shares in question were not in fact restricted shares by reference to the precise tests on value to be applied. It also takes the view that the issue may be addressed in a broader way. It has set out above what it takes to be the object of the relevant legislation in Chapter 2 of Part 7 of ITEPA. What are the “actual facts” of the application of those provisions here?
134 If the Scheme worked, both UBS and the individual employees derived significant benefit from it. UBS would pay the relevant bonuses into the Scheme without having to account to HMRC either for income tax or NI contributions for the employees or its own liability for NI contributions on earnings of employees. In global terms, it would need to put 100 into the Scheme and not 112, and the employees would receive 100 rather than 59. (These are the figures directly arising from the Scheme. Employees might have other tax liabilities in respect of the 100 received. A full analysis would also have to look at the extent to which any costs incurred by UBS in connection with the Scheme could be set off as deductions from profits against other tax liabilities).
135 UBS required that the 100 it put in be divided as to 97 for the purchase of the NVS in ESIP Ltd and as to 3 for the purchase of call options by ESIP Ltd. This occurred. The effect was that, at the close of the relevant period, ESIP Ltd would either have shares unaffected by the trigger event, or shares affected by the trigger event plus the benefits from the options. The Scheme was originally so constructed that the values of the beneficial interests of individuals in the shares would have been the same under either of those two outcomes. This was then altered to create a small “loss”. The effect of the trigger event was the reduction in the value of the NVS by a predetermined amount. The options purchased were of such a value that the sums received under the options if the trigger event occurred totalled slightly less than the loss in the value of the shares, again by a predetermined amount. Both figures were artificial in the sense that neither was determined by, or could be influenced by, any event outside the control of those establishing the Scheme, or could alter once the shares and options were purchased. UBS as employer and the individual recipients as employees knew from the start of the Scheme that the employees, as shareholders, would receive the money paid in by UBS from one or both of the parallel elements a few weeks later save, in the unlikely occurrence of the trigger event, to a deliberately determined and insignificant extent.
136 On the evidence before it, the tribunal finds as fact that it is artificial to ignore the purchase of the options when viewing the Scheme as a whole. If the benefits that would be derived from the options are taken into account then there was, in real terms, no significant loss of market value to be suffered by the employees as a result of the restriction. In determining as a matter of fact that the reduction in value was insignificant, the tribunal has in mind that but for the scheme an employee would have received 59 from UBS if paid earnings but under the Scheme he or she would probably receive 100, possibly even more, and would receive over 99 in any event.
137 The reality is therefore as follows. Had the Scheme – or any other arrangement - not been in place, employees would have received as part of their pay in February 2004 a bonus amount determined by reference to receipts in 2003. That bonus would have been earnings. It would have been subject to deduction of income tax and NI contributions in the usual way under the PAYE Regulations, leaving in most cases a net sum of 59 per cent of the original entitlement. That is, indeed, what happened to those amounts of payable bonus not within the scope of the Scheme or which were earnings before being brought within the Scheme. It is also what would have happened had employer and employee agreed not to apply the provisions of chapter 2 as it is an optional, and not a mandatory, provision. Under the Scheme, employees received, about a month after the February pay arrangements (details in Annex), beneficial interests in shares with a right to encash the beneficial interests. If the rights were encashed, employees received the same sums as would have been received as earnings, but without any deduction of income tax or NI contributions. Alternatively, employees might less probably receive a lump of slightly less than that sum, but again with no deduction of income tax or NI contributions. There would then be a charge to capital gains tax, at the relevant rate, but no charge to NI contributions.
138 What was the purpose of the Scheme? Mr Lasok QC contended it was simply a tax avoidance scheme. Mr Prosser QC asked the tribunal to find that it had a commercial purpose aside from the tax avoidance purpose. Quite properly, he did not seek to deny the tax avoidance aspects of the Scheme, but he also pointed out the importance of the Scheme to employer/employee relations. The tribunal finds on the evidence that the predominant reason for the Scheme was the mitigation of the burden of income tax and both employer and employee NI contributions. Mr Anderson agreed in evidence that this was the only reason why an employee would agree to enter the Scheme. He and Mr Hayward suggested that the employer had other reasons for establishing the Scheme but agreed in evidence that the main reason was that of tax avoidance. The tribunal takes the view that any other benefit, such as goodwill between employees and employer, followed on from the way in which the Scheme reduced the exposure of all those involved to income tax and NI contributions and were not separate from it. It does not therefore consider that there are other primary purposes against which to assess the effect of the Scheme.
139 In other words, the Scheme delivered all employees within it a significant gain in the actual cash bonus receivable as compared with the receipt of earnings, whatever the outturn of the Scheme arrangements, although there was a possibility of an insignificant loss as between the outturns under the probable and improbable alternative outturns of the Scheme. Further, if employees so chose, the timetable of the arrangements was much the same as applied to the receipt of earnings. The tribunal does not consider that, in reality, the Scheme can be properly described as one providing restricted securities within the scope of Chapter 2 of Part VII of ITEPA.
140 The tribunal therefore takes the view that the Appellant fails in this appeal by reference to the application of Chapter 2 of Part 7 of ITEPA to the facts of the Scheme as a whole.
Conclusion
141 The appeal fails with regard to the bonuses guaranteed to a few specific individuals because, the tribunal finds, those guaranteed bonuses were earnings of the individuals before the relevant amounts were paid into the Scheme. In any event, the appeal fails with regard to all bonuses because, the tribunal finds, the Scheme did not create securities that were restricted securities within the definition in section 423 ITEPA. It also finds in respect of all bonuses that, following the guidance of Arden LJ in Astall and assessing the Scheme by reference to reality and not simply to its form, the Scheme is not within the scope of Chapter 2 of Part 7 of ITEPA.
142. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
David Williams
Tribunal Judge
Released: 6 August 2010
Issued (with corrections): 15 September 2010
ANNEX : CHRONOLOGY OF EVENTS RELEVANT TO THE APPEAL
Date Event
16 12 2003 Sidemore Trust identified as trust to invest in the SPV
18 12 2003 Draft of memorandum for investment in SPV
9 01 2004 Discussion of hedging arrangement
19 01 2004 ESIP Ltd incorporated
19 01 2004 Sidemore Trust authorised purchase of ESIP Ltd shares
20 01 2004 Juris Ltd and Lively Ltd subscribed to 100 1p shares in ESIP Ltd as nominees for Mourant as trustee of Sidemore Trust
20 01 2004 Declarations of trust by Juris and Lively, making Sidemore Trust sole shareholder in ESIP Ltd
20 01 2004 Directors appointed to ESIP Ltd board
20 01 2004 First ESIP Ltd board meeting (minutes signed by 22 01)
21 01 2004 Payment of £2 for shares in ESIP Ltd
23 01 2004 Date by which HMRC contends that bonuses had been allocated to employees by UBS
23 01 2004 Jersey Financial Services Commission consent to ESIP Ltd issuing 2.7 million £1 shares
26 01 2004 Special resolutions of ESIP Ltd shareholders adopting new
articles of association reclassifying existing shares
Share capital: 2.6 million 1p ordinary voting (VOS)
100,000 non-voting 1p (NVS)
26 01 2004 Mourant for Sidemore offer to subscribe to 16,998 VOS in ESIP Ltd
26 01 2004 ESIP Ltd accepts offer to subscribe
27 01 2004 UBS offer to subscribe £9,000 for 900,000 1p NVS if Mr Ferrara appointed director. Shares to go to Juris as nominee
28 01 2004 UBS gifted 100 VOS to UBS Employee Master Trust
28 01 2004 Juris agree to act as nominee for UBS
28 01 2004 UBS offered £91,880,000 to ESIP Ltd for NVS shares
(£1,000 for each 1p share) conditional on, ia, purchase of call options over FTSE 100 index and then rest invested in RBS
Jersey at interest until 20 02 2004
28 01 2004 ESIP Ltd board accept UBS subscription and issue 91,880 NVS to Juris
28 01 2004 Shareholding structure in place as follows:
Mourant for Sidemore 1.7M VOS
UBS 899,900 VOS
UBS Employee Master Trust 100 VOS
Juris for UBS 91,880 NVS
28 01 2004 FTSE 100 trigger level set: 4,749
29 01 2004 Date on which UBS contended award of bonuses to employees
Meeting of UBS ESIP committee
30 01 2004 UBS confirm to Juris that Juris holds shares for named employees plus 24 to UBS Employee Master Trust
(with 426 named employees holding 91,856 shares)
10 02 2004 UBS informs the 426 employees of allocation on 29 01 2004
18 02 2004 ESIP Ltd appoint UBS Wealth Management as broker
19 02 2004 End of restricted period . FTSE 100 level not exceed 4,749 at any time so no forced sale triggered
20 02 2004 ESIP Ltd funds released from time deposit
25 02 2004 Payday for bonuses paid in cash
27 02 2004 ESIP Ltd invests funds by purchasing UBS shares
1 – 12 03 2004 Notice period for first opportunity to request to divest/redeem
22 03 2004 First redemption approved: 47,387 shares redeemed coupled with call on Mourant and UBS to subscribe for additional VOS
June 2004 Corrective special resolution of ESIP Ltd because overissue of VOS
March 2006 Second opportunity to redeem/divest
June 2006 Third and final opportunity to redeem/divest
30 06 2006 Termination date of agreement on subscription by UBS in ESIP Ltd