DECISION
1.
Aspect Capital Limited (“the Company”) appeals against assessments and
closure notices totalling £3,153,915 raised in respect of years ending 31
December 2006, 2007, 2008 and 2009.
2.
There was an issue whether the appellant had lodged its appeal for the
later years in time but at the hearing HMRC said they raised no objection to
the appellant being given permission to appeal out of time. As it was clear
the appellants gave HMRC an early indication of their intention to appeal, in
so far as the appeals were lodged late, we allowed an extension of time and
proceeded to hear the appeals.
3.
The amount at issue in this appeal was not before us: we are asked to
determine the question of liability in principle, and if we find liability, to
leave it to the parties to agree the correct amount of liability. Our decision
is therefore one of principle only.
Findings of fact
4.
Evidence on behalf of the Company was given by Mr Greenwold. Mr
Greenwold was the Company Secretary for the Company and its Director of Legal
and Compliance. He was also a participator in the employee participation
scheme (“EPS”) at the root of this appeal. That EPS comprised a Share
Acquisition Agreement and a facility agreement.
5.
It was a Mr Rockall, Mr Greenwold’s predecessor at the Company, who set
up the EPS and some of what Mr Greenwold said was hearsay based on
conversations he had had with Mr Rockall and a half dozen or so of his
colleagues at the Company. Nothing turns on our decision on this: we accepted
Mr Greenwold’s evidence as reliable.
6.
In addition in evidence before us were the various documents comprising
the EPS and communications between the parties.
7.
Relying on this evidence we find the facts as set out below.
Outline of arrangements
8.
Aspect Capital Limited is an investment manger based in London. As at 10 February 2012, Aspect had 140 employees. The Company had approximately
17,000,000 issued shares; 77% of which were held by the Company’s directors or
associated trusts, 20% were held by the Company’s employees and the trustee of
the Aspect Capital Limited Employee Benefit Trust Number 2 (the “Trustee”) and
the remaining 3% by other persons. The Trustee had acquired its shares from
directors and departing employees. Shares awarded to employees under the EPS
amount to 13.6% of the shares in issue. Sixty-one of the sixty-two employees
eligible to participate in the EPS have done so.
9.
The Company had established approved and unapproved share option
schemes. For key employees who were ‘up to the limit’ (£30,000) on being
awarded options under the approved share option scheme, the Company decided to
introduce an alternative to the unapproved share option scheme. This
alternative was referred to as the Employee Participation Scheme or EPS and was
introduced in May 2006.
10.
The idea behind the EPS was to give key employees ownership of shares in
the company rather than merely options to acquire shares in the company. We
were told and accept that the purpose of the EPS was to incentivise and help
retain key employees.
11.
Employees might be given the right to acquire shares under the EPS in
the normal round of bonus awards at the start of the year, or when they joined
the company or on an ad hoc basis at any time.
12.
The right to acquire shares under the EPS was only offered to key
employees (“the Employees”). The Employees had the right to decide whether or
not to participate in the EPS. If they notified the Company that they wished
to participate, the Company would then resolve to make the EPS awards subject
to the Trustee agreeing to transfer the shares to the Employees.
13.
If and when the Trustee agreed to transfer the shares to the Employees,
the Company would enter into a Share Acquisition Agreement with each
individual participating Employee.
14.
At the same time, the Employee would have the right to enter into a
facility agreement with the Company. This meant that the Employee did not have
to immediately pay for the shares that he was acquiring. All of the 61
Employees who chose to take up the offer of shares under the EPS entered into a
facility agreement. None of the Employees paid for the shares out of their
own funds up front.
15.
There were two different types of facility agreement. There was the
facility agreement offered to UK employees which we refer to as the UK Facility
Agreement. And there was the facility agreement offered to employees with US
passports, which we will refer to as the US Loan Facility Agreement. The terms
of the two agreements were not the same and we discuss this below. Mr
Greenwold, as a US citizen, was a party to the US Loan Facility Agreement.
16.
At the same time as entering into the Share Acquisition Agreement and
one of the two facility agreements, the Employees also executed:
(a)
A deed of adherence to the Company’s shareholders’ agreement; and
(b)
A section 431(1) Income Tax (Earnings and Pension) Act 2003 election
with the Company.
We mention this for completeness but these documents had
no bearing on our decision.
17.
Once the documents were signed, the Company paid the Facility Amount,
less an amount equal to the stamp duty payable in respect of the transfer of
the shares, to the Trustee. No sums were received by the Employee.
18.
The Trustee signed the stock transfer form in favour of the Employee and
the Company submitted the stock transfer form for stamping and paid any stamp
duty to HMRC. On receipt of the stamped stock transfer form, the Company duly
amended and updated its register of members.
19.
Throughout these arrangements there was no communication between the Trustee
and the employee, and there were no written agreements which both the Trustee
and the employee signed.
20.
We go on to consider the agreements in more detail.
Share Acquisition Agreement
21.
There were various versions of the share acquisition agreement – a new
one for each year – but neither party suggested nor do we find that there were
any differences between them material to this appeal. We quote here from the
2007 version.
22.
Its introduction provided:
“INTRODUCTION
(A) In order to
incentivise and retain selected key employees who are not directors of the
Company, the board of directors of the Company has resolved to allow certain
employees, including the Employee, the opportunity to acquire a certain number
of ordinary shares in the capital of the Company under the Aspect Capital
Equity Participation Scheme.
(B) The arrangement
for the acquisition of the ordinary shares pursuant to this Agreement is an
employee share scheme (within the meaning given in Section 743 of the Companies
Act)
(C) The Employee
wishes to acquire ordinary shares in the Company and the Company wishes to
facilitate such acquisition by the Employee by issue or transfer of the Shares
upon and subject to the terms and conditions of this Agreement.
23.
The operative terms in so far as relevant provided:
2.1 The Employee:
(a) applies for the acquisition of Shares and at
the Subscription Price….
(b) undertakes to pay to the Company (the EBT or
such person as the Company directs where the shares are transferred to the
Employee) ….in cleared funds an amount equal to the Subscription Price for the
Shares in payment in full of such Shares, such payment to be received into the
Bank Account within three Business Days following the execution of this
Agreement;
……..
2.2 The Company
undertakes to the Employee that, within a reasonable time following the receipt
…..of the Subscription Price…..the Company shall:
(a) ….
(b) either allot and issue as fully paid up that
number of Shares as are due to the Employee pursuant to this Agreement, or
procure the transfer of such Shares from the trustees of the EBT or from any
other person …..
The “Bank Account” was a defined term and it was defined
as:
“the current account of the Company (in the case of
a subscription for Shares) or (in the case of a transfer of Shares) the current
account of the EBT or such other person as notified by the Company to the
Employee, in each case as set out more fully in Schedule 1”
Schedule 1 gave the name of the transferor and its bank
account details: in the examples show to the Tribunal the transferor was the
EBT.
24.
There were a number of issues surrounding the proper interpretation of
this agreement:
·
Was the Employee liable to pay for the shares under Clause 2.1(b)
if, simultaneously, he entered into a facility agreement? As this can only be
sensibly considered together with the UK Facility Agreement, we discuss this in
paragraphs 41-47 below;
·
Whether, if the shares were not issued, the Company was
procuring the shares for the Employee on its own behalf or as agent for the
Employee? Again the terms of the UK Facility Agreement bears on this and we
discuss it below in paragraphs 48-63.
Terms of the UK Facility Agreement
25.
The terms of the Facility Agreement are important as it is HMRC’s case
that this amounts to a loan to the Employees or at least creates a debt owed by
the Employees to the Company from the moment that it was entered into.
26.
As with the Share Acquisition Agreement, there was a new version of the
UK Facility Agreement each year but neither party suggested nor do we find that
there were any material differences for the purpose of this appeal. The
changes appeared largely if not wholly to be concerned with how the value of
the shares should be calculated on sale. We quote here from the 2007 version
but there was no difference in wording of the material sections between the
different year versions.
27.
The UK Facility Agreement expressly provided that the Company’s payment
did not give rise to a creditor-debtor relationship between the Company and the
Employee unless one of several specified “Contingent Events” occurred. On the
occurrence of a Contingent Event the facility was automatically converted into
a debt. Its preamble was as follows:
“INTRODUCTION
(A)
At the request of the Employee the Company has agreed to provide a facility to
the Employee for the acquisition of ordinary shares in the Company under the
Aspect Capital Equity Participation Scheme on and subject to the terms and
conditions of this Facility Agreement.
……
(D)
It is the intention of the Parties that a debtor-creditor relationship will be
established between the Parties in respect of the Facility only on the
occurrence of certain events specified in this Facility Agreement and not prior
thereto.
...”
28.
The “Facility” was defined as “the facility granted to the Employee by
the Company in clause 2 of this Facility Agreement”. Clause 2 provided:
“2.
The Facility
2.1
Upon and subject to the provisions of this Facility Agreement, the Company
agrees to provide the Facility up to the Facility Amount available to the
Employee.
2.2
The Company undertakes that within a reasonable time following the execution of
this Facility Agreement by the Parties, the Company shall provide the Facility
Amount to the Employee (or shall transfer the Facility Amount on the Employee’s
behalf directly to the transferor of the Shares) in cleared funds PROVIDED THAT:
(a)
the Employee applies the entire Facility Amount only for the acquisition of the
Shares (and Stamp Duty if applicable) or acknowledges the payment on his behalf
of the Facility Amount by the Company to the transferor of the Shares, in
either case pursuant to the Equity Participation Scheme and in accordance with
the terms of the relevant Share Acquisition Agreement…..; and
(b)
the Employee undertakes to repay the Facility Amount to the Company following
the Facility converting into a Debt on the occurrence of any of the Contingent
Events specified in clause 3.5.
...
2.4
The Company shall not have any right of enforcing the repayment of the Facility
from the Employee until and unless the Facility converts into a Debt on the
occurrence of any of the Contingent Events specified in clause 3.5.”
29.
The Facility Amount was a specified amount in sterling in each Facility
Agreement with each Employee and was the amount being the purchase price of the
shares plus the stamp duty payable on the transfer of the shares to the
Employee.
The Contingent Events
30.
The UK Facility Agreement provided that the Facility converted into a
debt on the occurrence of a contingency. We set out the provision in full in
so far as relevant:
“3
Repayment of the Facility Amount
3.1
The Employee may, at his own volition, at any time during the Facility Period,
declare that the Facility Amount is a Debt that he owes to the Company and
repay the Company the Debt in full provided that Employee may make such
repayment of the Debt so declared only once a year on the last Business Day in
the month of April or such other date or period that the Company may appoint
and notify to the Employee provided that the declaration of the Debt and the
repayment thereof are both made in the same Accounting Period.
...
3.3
The Employee may, at his own volition, at any time during the Facility Period,
declare that the Facility Amount is a Debt that he owes to the Company and
instruct the Company to set-off the entire Debt against any dividend or
distribution declared in respect of the Shares, net of tax at the relevant
rate, up to the outstanding balance of the Facility Amount, provided that the
declaration of the Debt and such set-off against the dividend are both made in
the same Accounting Period and on condition always that any such dividend or
distribution shall on a net basis be at least equal to the Facility Amount.
3.4
The Employee may, during the Facility Period, declare that the Facility Amount
is a Debt and may instruct the Company to setoff the entire Debt so declared
out of any bonus payments (net of income tax and employee’s national insurance
contributions) received by the Employee or that the Employee is entitled to
receive from the Company or any of the trustees of the EBTs, provided that the
declaration of the Debt and such set-off against the bonus payments are both
made in the same Accounting Period and on condition always that any such bonus
payment shall on a net basis be at least equal to the Facility Amount.
3.5
Notwithstanding anything contained in this Facility Agreement but subject to
clause 3.6, the Employee shall not be under any obligation to repay the Company
in respect of the outstanding balance of the Facility Amount until the Facility
Amount automatically converts into a Debt on the occurrence of any of the
following events (each a “Contingent Event”):
(a)
the cessation of the Employee’s employment with the Group for any reason
whatsoever (excluding death);
(b)
the conclusion of a Trade Sale;
(c)
on the directors in their discretion providing written notification to the
Employee that there is a reasonable likelihood of a successful IPO and
confirming that such notification constitutes a Contingent Event or failing
such prior notification, then automatically on the date the Company’s shares
are initially traded on any exchange unless otherwise provided in writing by
the directors of the Company;
(e)
a Change of Ownership;
(f)
the date on which the directors notify the Employee after having become aware
that the Employee is in breach of the terms of the Share Acquisition Agreement;
(g)
on the day on which the Employee completes a sale or disposal of any of the
Shares; and
(h)
on the directors in their discretion determining the Facility Amount to be a
Debt provided that the directors shall only exercise such discretion in the
event that the Net Profits of the Company for the preceding Accounting Period
of the Company are greater than the sum of £100.
3.6
On the occurrence of any of the Contingent Events specified in clause 3.5, or
any declaration of a Debt by the Employee in accordance with clauses 3.1, 3.3
and 3.4, a “creditor-debtor” relationship will be established between the
Company and the Employee, but not prior thereto.”
31.
In summary, the Facility would become repayable by the Employee on the
occurrence of the first of any of these events, which we will refer to as “the
Contingent Events” or a “Contingent Event” in the singular. The most
significant of the Contingent Events, in summary, were:
(a)
The choice of the Employee to repay;
(b)
Termination of the Employee’s employment for any reason other than
death;
(c)
The sale or floatation of the Company;
(d)
The sale of the shares by the Employee;
(e)
The discretion of the Directors (but only when the Company had made a
profit in the preceding accounting period).
In practice, the only Contingent Event which occurred
during the years of assessment was the departure from their employment with the
Company of some 22 Employees.
32.
Under the Share Acquisition Agreement an employee leaving the Company was
bound to sell his shares. He was deemed to have given a notice enabling the
Company to redeem and/or to act as the employee’s agent for the sale of the
shares. In practice, the Company has not had to rely on this clause as the 22 leavers
mentioned above have all cooperated in the sale of their shares. In all cases but
one the shares have been sold to the Trustee. In that one exception the shares
were transferred direct to another Employee under the EPS.
33.
The Employee also had the right to sell his shares after the first three
years: but in the event it appears that the only sales have been sales on
termination of employment.
34.
The Facility Agreement had a non-recourse provision so that an
Employee’s liability to repay was limited to the sale proceeds of his shares,
unpaid dividends on them, termination payments and bonus payments from the
Company.
35.
The Share Acquisition Agreement contained terms which provided for the
valuation of the shares in circumstances when they were sold by the Employee.
In reality as it was a private limited company and because the Employees had
to be signatories to the shareholders agreement, a sale of the shares was only
likely to occur on one of the Contingent Events under the Facility Agreement,
and in particular termination of employment.
Downside Protection
36.
Where the value of the shares determined on the occurrence of a
Contingent Event exceeded the costs of the shares to the Employee, the
Trustee (being the purchaser of the shares) would pay the amount of the
Facility to the Company to discharge it and would pay the balance to the
Employee.
37.
However, where the value of the shares determined as provided for in the
agreements was less than the Facility Amount, the terms of the Facility
Agreement provided that the Company would “pay” to the Employee a bonus
equivalent to the grossed up amount of the difference in share cost and current
value. No money would change hands as the Company would retain the net bonus
in part re-payment of the facility: the trustee as purchaser of the shares
would pay the valuation amount to the company. The net bonus and the payment
from the trustee would discharge the facility.
38.
The purpose of this clause was not in dispute: it was to protect
Employees from a fall in value of the shares. Without the right to this bonus,
they would be in a worse position than someone who was merely awarded share
options. Employees can simply fail to exercise underwater share options: with
the EPS the employees were the owners of the shares and were (for most
practical purposes) committed to repaying the purchase price of them. The
bonus protected them from falls in value of the shares. It was grossed up for
tax and NIC as the bonus itself would be subject to tax. The provision
(discussed below) which waived the loan in the event of insolvency also
protected the Employees (to some extent) as the bonus clearly could not be paid
in the event of insolvency.
Non Repayment Events
39.
The Facility would never be repayable in three circumstances:
“3.7
The outstanding balance of the Debt shall not be repayable by the Employee on
the occurrence of any of the following events:
(a)
death;
(b)
Insolvent Liquidation of the Company; or
(c)
the waiver of Debt by the Company at its sole discretion with discretion the
Company may exercise only in exceptional circumstances.”
40.
This provision is important to this case as part of the appellant’s case
rests on it as we explain below. When we refer to it again, we will call it,
very clumsily but neutrally, the “Not Repayable Events Clause” and the three
events on the occurrence of which the facility ceased to be repayable as the
“Not Repayable Events”.
Was there an obligation to pay under clause 2.1(b) of the Share Acquisition
Agreement?
41.
It was the appellant’s case that the obligation on the Employee under
clause 2.1(b) of the Share Acquisition Agreement to pay for the shares only
applied to those Employees who decided to pay for the shares out of their own
funds rather than enter in a facility agreement.
42.
We cannot agree.
43.
Firstly, there is no reason on the face of the Share Acquisition
Agreement to restrict the obligation to pay to only to those employees who did
not simultaneously enter into a facility agreement. On the face of the Share
Acquisition Agreement, the liability to pay applies to all Employees who
signed it.
44.
Secondly, if the Employees who were a party to the Share Acquisition
Agreement were not liable to pay for the shares, then the only possible
interpretation of the Share Acquisition Agreement would be that the Company gave
the shares to the Employees. Such an interpretation that was not put forward by
either party and we find is not consistent with the documents.
45.
Thirdly, what was the purpose of the facility agreement other than
modify the effect of the Share Sale Agreement? The facility agreement only
makes sense on the assumption that without the “facility” or financial
accommodation it gave to the Employees, they would otherwise be liable to
immediately pay for the shares transferred to them under the Share Sale Agreement.
46.
In conclusion Clause 2.1(a) gave an obligation to the Employees to pay
for the shares. If a facility agreement was not entered into at the same time,
payment would be due within 3 days as stated in Clause 2.1(a). However, where
both agreements were entered into at the same time, the two agreements must be
seen as a single contract. In such a case, the combined effect of both
documents was that the Employee had to pay for the shares but only on the
occurrence of a Contingent Event and not within the 3 days provided for by
Clause 2.1(a).
47.
The real issue in dispute was whether these two agreements in
combination created a loan or debt before one of the Contingent Events
occurred.
Was company agent or principal in the purchase of the shares?
48.
In all cases (save one where the Company paid an outgoing Employee) the
shares were transferred direct to the Employees by the Trustee. There are two
possible interpretations of the legal relationship between the Employee,
Company and Trustee. Either the Company provided the Employee with the funds
to buy the shares from the Trustee and acted on the Employee’s behalf in
agreeing the sale by the Trustee, or the Employee agreed to buy the
shares from the Company and the Company agreed to buy them from the Trustee and
merely directed the Trustee to transfer legal title direct to the Employee.
49.
It was the appellant’s case that the latter interpretation was the
correct one. The Share Acquisition Agreement was between the Employee and the
Company. The Trustee was not a party. The Trustee was not even bound to be
the source of the shares, as the Company could have allotted new shares or (and
in one case did) procure them from another source. There was no contract (nor
indeed contact) between the Employee and the Trustee, says the appellant.
50.
However, this does not tell us the answer to the question. While the
Company would have acted as principal on the allotment of new shares, this does
not tell us whether the Company acted as principal on the acquisition of the shares
from the Trustee (and outgoing Employee). The Company could have acted as the
Employees’ agent in arranging the acquisition of the shares from the Trustee
(or other vendor). The lack of contact between the Employees and
Trustees/other vendor is not inconsistent with such a position.
51.
We find the emails and other correspondence passing between the Company
and Trustee are consistent with either interpretation. For instance, one email
says:
“Aspect would like to ask the EBT to (i) transfer
shares to certain of these employees under the terms of the EPS…..”
52.
We consider the terms of the contract between the Company and the
Employee. The Share Acquisition Agreement and UK Facility Agreement were
entered into simultaneously and, clearly, although two separate documents, are
all part of the same contract.
53.
The terms of the Share Acquisition Agreement in clause 2.2 (see
paragraph 23 above) were that the Company shall:
“either allot and issue…. or procure the transfer of
such Shares from the trustees of the EBT or from any other person …..”
54.
This clause is neutral. The Company is to “procure” the shares: it
leaves open whether the Company will procure them as agent for the Employee.
However, clause 2.1(b) indicates that the Company is merely procuring the shares
as agent because it says (quoted more fully in paragraph 23) that the Employee:
“undertakes to pay the Company (the EBT or such
person as the Company directs where the shares are transferred to the
Employee)”
Our interpretation of this is that the Employee is
promising to pay the Company if the shares are issued to him; but is promising
to pay the Trustee (ie the EBT or Employee Benefit Trust) or other vendor if
the shares are transferred rather than allotted to him. That this is the
correct interpretation is bolstered by the reference to payment by the Employee
being into the Bank Account: the Bank Account was defined as the bank account
belonging to the EBT where the shares were to be transferred by the EBT.
55.
Overall this clause suggests that the Company is only acting as agent
and the liability to pay for the shares is between the transferor (the Trustee
or other vendor) and the Employee and not between the transferor and
Company.
56.
The UK Facility Agreement was even clearer on this question. It provided
(see clause 2.2 in paragraph 28 above) that the “facility” would be given to
the employee by the Company or transferred:
“on the Employee’s behalf directly to the
transferor of the Shares.”(our emphasis)
If the monies are paid to the Trustee or other vendor on
behalf of the employee then this clearly indicates that the Company has
merely acted as the Employee’s agent in procuring the transfer of the shares.
If the contract to purchase the shares was between the Company and the
Employee, the Company would not be transferring the funds to pay for them on
behalf of the Employee but on its own behalf, as it would be agreeing to
buy the shares in its own right in order to satisfy its liability to sell the
shares to the Employee.
57.
That same clause went on to limit the Employee’s ability to use the
“facility” for anything other than the acquisition of the shares and payment of
stamp duty on that acquisition, and provided that the Employee:
“acknowledges the payment on his behalf of the
Facility Amount by the Company to the transferor of the Shares”.
The UK Facility Agreement uses the language of agency.
Its implication is clear: the Company will make the Facility available to the
Employee but only if the Employee agrees to use it for the purchase of the shares,
and if the Company pays it to the transferor of the shares direct, then that
payment is on behalf of the Employee.
58.
So while there were no terms in either agreement under which the Company
was expressly appointed the agent of the Employee to contract on his behalf to
acquire the shares, the assumption underlying the both agreements is that the
Company does act as the Employee’s agent in so far as the shares are
transferred from a third party.
59.
We were shown the Participant Booklet which was an explanation of the
scheme produced for Employees. It expressly provided that the terms of the
Share Acquisition Agreement and facility agreements took precedence over the
booklet. Nevertheless, we note that it was consistent with our interpretation
of the two agreements in that it provided:
“The EPS enables you to purchase equity in the
company…Aspect will, in addition, offer a facility which will enable you to
borrow money on an interest free basis necessary to pay for the ordinary
shares.”
60.
The reason why it matters whether the Company contracted with the
Trustee for the shares in its own right or merely as agent for the Employee is
because the parties (putting aside the issue of timing which we address later)
do not agree whether the UK Facility Agreement gave rise (or would give rise on
a Contingent Event) to a loan or, in the alternative, a debt.
61.
If the Employee agreed to buy the shares from the Company and the
Company therefore acted as principal in agreeing to purchase them from the
Trustee, then we do not see how on any interpretation that the outstanding
Facility could be described as a loan. It would merely be the amount of
consideration outstanding between buyer and seller under a contract of
purchase. It would be a debt (whether arising immediately or on the occurrence
of a Contingent Event). It would not be a loan.
62.
On the other hand, if the Employee did not agree to buy the shares from
the Company, but on the contrary the Company acted as the Employee’s agent in
buying the shares from the Trustee on behalf of the Employee, then the Facility
looks more like a loan between the Company and Employee.
63.
We find as a fact for the reasons given above that the relationship
between the appellant and each Employee was one of agency: the appellant agreed
with each Employee to purchase shares on the Employee’s behalf from the Trustee
using the appellant’s money, which money the Employee agreed to repay at a
later (uncertain) date. The question therefore arises whether the appellant
made a loan to each Employee. If A agrees with B that it will purchase
something on behalf of B with A’s own money which B will repay at some later
date, is that is a loan by A to B? We address this issue below in paragraphs
87-111, after dealing first with the second type of facility agreement.
The American Loan Facility Agreement
64.
Aspect had a number of employees who were US citizens and subject to the
US tax regime. We were told that because under the US tax regime, US citizens
would be at a financial disadvantage if the amount they received under the
facility was not received as a loan, the Company chose to offer its US
employees a different facility agreement. This agreement explicitly provided
that a loan was offered to the Employee and that a debtor-creditor
relationship arose upon the parties entering into the facility.
65.
Therefore, in contra-distinction to the UK Facility Agreement, the US
Loan Facility Agreement provided in its Introduction:
“(C) It is the intention of the Parties that a
debtor-creditor relationship will be established between the Parties in respect
of the Loan.”
66.
The contingent events which triggered the due date for repayment of the
loan were very similar to the Contingent Events which converted the Facility
into a debt in the UK Facility Agreement. These are summarised in paragraph
30-31 above.
67.
Apart from being expressed to be a loan, there were two other main
differences. There was no equivalent provision to clause 3.7 which in the UK
Facility Agreement provided that the Facility would not be repayable on the occurrence
of certain events (“Non Repayment Events” - see paragraph 39-40 above).
Secondly, there was no provision for payment of a bonus to cover a possible
shortfall of the price of the shares at purchase with their value on sale
(downside protection -see paragraphs 36-38 above in relation to the UK Facility
Agreement).
68.
Indeed, because of these differences it was not immediately apparent to
us why an US Employee would opt to participate in the EPS when he could
instead chose the unapproved share option scheme. Mr Grimwold, who is a US
citizen, indicated that he himself had nevertheless chosen the EPS over the
unapproved share option scheme because it was his understanding that, were his
employment to terminate, the Company was likely, although not contractually
obliged, to pay a bonus to cover any shortfall. Nothing turns on this for this
appeal.
Mortgage applications
69.
We had hearsay evidence from Mr Greenwold that he considered one of the
reasons the scheme was set up with the intention that no debt would be created
at the outset was to protect Employees from having to declare the UK Facility
Agreement when making mortgage applications. The perception was, he believed,
that having to declare something out of the ordinary in financial terms could
make it harder to obtain a mortgage offer. (We would expect them to be right
on this but we had no evidence on the point and it does not matter). The
Company’s concern was that employees would be less willing to participate in
the EPS if they perceived it might have a negative impact on a mortgage
application.
70.
Mr Greenwold’s evidence was that Employees in practice did not record
the facility agreement on any mortgage application. We asked if employees
declared their ownership of the shares acquired under the EPS and in respect of
which they had an outstanding Facility. Mr Greenwold was unable to answer
this: he had re-mortgaged his own home since the time he joined the EPS but
was unable to recall if he had put down his shares as an asset.
71.
We do not consider this has any relevance to the appeals, however much
of a concern it might be to a mortgage provider. Whether the Employees would
be materially misleading any mortgage provider if they failed to declare that
they were a party to one of the facility agreements would depend on what it was
they were asked to disclose for the purpose of their application and, perhaps,
whether they mentioned their ownership of the shares.
72.
If the Employees failed to disclose on a mortgage application what
should have been disclosed tells us nothing for the purpose of this appeal: we
are concerned with whether, as a matter of law, the UK Facility Agreement gave
rise to a loan or a debt and, if so, at what point in time. We are not
concerned with what the Company or its Employees or any mortgage provider
thought (or would have thought if they had known about the agreements) was the
answer to this question.
73.
The only potential relevance of the Company’s concerns about mortgage
applications is that it may be the explanation for why the UK Facility
Agreement contained the recital (D) outlined in paragraph 27 above declaring
that there was no debt until a Contingent Event occurred. However, as HMRC do
not allege that this recital was incorporated for tax avoidance motives, we do
not think it matters what the Company’s motivation was, other than to note that
it was not tax avoidance.
Employees’ view
74.
We also had hearsay evidence from Mr Greenwold that Employees did not
consider themselves indebted to the company after joining the EPS. We had no
evidence from UK Employees why this was so: it seems likely to us that they
might rely on what the contract and participant booklet said but we think they
would primarily take comfort from what was described as “downside” protection
and which we have discussed above in paragraphs 36-38.
75.
It is irrelevant. We are here to determine whether there was in law a
loan or debt and if so when it arose. The views of the members of the EPS are
not relevant.
The Accounts
76.
In the Company’s accounts for years ending in 2007 and 2008 the
outstanding Facilities were described as “interest free loans”. The accounts
for 2009 and 2010 described them as “interest free facilities.” We were told
and accept that this change occurred after the Company gave its auditors more
information about the terms of the facility agreements. The auditors’ later
view of the facilities as “facilities” rather than “loans” is immaterial: the
question is whether it was correct.
Treatment under Companies Act
77.
Loans to directors under the Companies Act must be approved by
shareholders. Mr Greenwold’s evidence is that “out of an abundance of caution”
shareholder consent was obtained before allowing directors to participate in
the EPS. Mr Greenwold said that the Company did not consider the facilities to
be loans for the purpose of s 419(1) but the definition of loan for the
Companies Act was not necessarily the same and it needed to protect its
position. We read nothing into this. We are interested in what the law
actually is, and our view of that cannot and is not influenced by the
possibility that the appellant may have taken a view on the meaning of “loan”
in the context of company law inconsistent with the view it now advances in a
tax context.
78.
Having established the facts, we now turn to consider the law.
The Law
79.
Section 419 of ICTA 1988 provides:
“(1)
Subject to the following provisions of this section and section 420, where a
close company, otherwise than in the ordinary course of a business carried on
by it which includes the lending of money, makes any loan or advances any money
to an individual who is a participator in the company or an associate of a
participator, there shall be due from the company, as if it were an amount of
corporation tax chargeable on the company for the accounting period in which
the loan or advance is made, an amount equal to 25 per cent of the amount of
the loan or advance.
(2)
For the purposes of this section the cases in which a close company is to be
regarded as making a loan to any person include a case where—
(a)
that person incurs a debt to the close company; or
(b)
a debt due from that person to a third party is assigned to the close company;
and then the close company shall be regarded as making a loan of an amount
equal to the debt.
(3)
Tax due by virtue of this section in relation to any loan or advance shall be
due and payable in accordance with section 59D of the Management Act on the day
following the expiry of nine months from the end of the accounting period in
which the loan or advance was made.
(4)
Where a close company has made a loan or advance which gave
rise
to a charge to tax on the company under subsection (1) above and
(a)
the loan or advance or any part of it is repaid to the company, or
(b)
the whole or part of the debt in respect of the loan or advance is released or
written off, relief shall be given from that tax, or a proportionate part of
it.
Relief
under this subsection shall be given on a claim, which must be made within six
years from the end of the financial year in which the repayment is made or the
release or writing off occurs.
(4A)
Where
(a)
the repayment of the whole or any part of a loan or advance occurs on or after
the day on which tax by virtue of this section becomes due in relation to that
loan or advance, or
(b)
the release or writing off of the whole or any part of the debt in respect of a
loan or advance occurs on or after the day on which tax by virtue of this
section becomes due in relation to that loan or advance, relief in respect of
the repayment, release or writing off shall not be given under subsection (4)
above at any time before the expiry of nine months from the end of the
accounting period
(4B)
Schedule 1A to the Taxes Management Act 1970 (claims and elections not included
in return) applies to a claim for relief under subsection (4) above unless—
(a)
the claim is included (by amendment or otherwise) in the return for the period
in which the loan or advance was made, and
(b)
the relief may be given at the time the claim is made.
(5)
Where, under arrangements made by any person otherwise than in
the
ordinary course of a business carried on by him—
(a)
a close company makes a loan or advance which, apart from this subsection, does
not give rise to any charge on the company under subsection (1) above, and
(b)
some person other than the close company makes a payment or transfers property
to, or releases or satisfies (in whole or in part) a liability of, an
individual who is a participator in the company or an associate of a
participator, then, unless in respect of the matter referred to in paragraph
(b) above there falls to be included in the total income of the participator or
associate an amount not less than the loan or advance, this section shall apply
as if the loan or advance had been made to him.
(6)
In subsections (1) and (5)(b) above the references to an individual
shall
apply also to a company receiving the loan or advance in a fiduciary or
representative capacity.
(7)
For the purposes of this section any participator in a company which controls
another company shall be treated as being also a participator in that other
company.”
What is not in dispute
80.
The Company accepts that:
(1)
it is a close company;
(2)
its ordinary course of business does not include the making of loans;
(3)
s420 ICTA does not apply; and
(4)
the Employees who participated in the EPS were participators in the
Company.
81.
We consider that these concessions were well made, although revert to
the issue in paragraphs 215-223 at the end of this decision. Each Employee, by
virtue of his earlier participation in the approved share option scheme, was
already a shareholder in the Company or was entitled to acquire shares in the
Company. So even before a facility agreement was signed by the Employee, he
was already a participator in the Company.
82.
With regards the concession that the Company does not make loans in the
ordinary course of its business, the appellant made this concession relying on
the Court of Appeal’s decision in Brennan v Deanby Investments [2001]
STC 536. We agree with the appellant that the mere fact that the Company
entered into a large number of facility agreements with its Employees did not
make granting Facilities part of its ordinary course of its business. Carswell
LCJ in the Deanby case said:
(548 d) “….We do not consider that the making of
loans on some eight occasions over a period of 14 years to one associate of a
participator is capable of amounting to a business…If it did so amount, a
company could make a series of loans to its participators and their associates,
the very acts at which the provision is aimed, and then say that the lending of
money was included in a business carried on by it. We cannot suppose that that
accords with the intention of the legislature.”
We consider that the appellant was right to make this
concession.
83.
In summary, therefore, what is in issue is whether the UK Facility
Agreement involved the making of “any loan” or any “advances” by the Company
to the Employees or in the alternative whether the Employee incurred “a debt”
to the Company and if so at what point in time.
The Appellant’s case in outline
84.
The appellant’s case is that:
(a)
The EPS functions as an employee share incentive scheme enabling
employees to acquire shares in the Company on particular terms. The Scheme does
not have as its purpose nor does it involve the making of any loan by Aspect to
individuals who are its participators as contemplated by section 419. (We deal
with this in paragraphs 86-118.)
(b)
At no stage is any money ever transferred to employees under the EPS and
employees do not contract with the Trustee to acquire and pay for the shares
that are transferred to them by the Trustee. The Company acts throughout in
its capacity as employer to procure the transfer by the Trustee of shares that
the Company has awarded to employees under the Scheme. (We dealt with this as a
question of fact at paragraphs 48-63 and the implications of our findings as a
matter of law are recorded at 114-118.)
(c)
As between the Company and its employees (other than those few employees
who are US citizens), the shares are acquired on terms that expressly do not
involve the incurring of any debt or give rise to the relationship of debtor
and creditor as between the Company and its employees at the time at which the
shares are acquired. (We deal with this at paragraphs 193-203)
(d)
Even if (notwithstanding the express terms of the Facility Agreement) it
can be said that a debt is incurred at the time at which the shares are
acquired in the sense that the Facility Agreement may give rise to a debt in
the future if a relevant contingency occurs, the amount of the debt until such
time as a contingency does occur is nil. (We deal with this at paragraphs
125-214).
The questions for the Tribunal
85.
To decide whether the Facilities were caught by s 419(1) we divide the
question up into the following:
·
Whether a loan was made by the Company to an Employee;
·
Whether an advance was made by the Company to the Employee;
·
Whether the Employee incurred a debt to the Company;
·
The time at which any loan, advance or debt arose.
“Makes any loan”
86.
Putting aside the extended meaning of s 419(1) given to it by s 419(2)
and 419(5), s 419(1) only bites if the company “makes any loan or advances any
money” to the Employees, as the Company has conceded that its Employees were
participators. So we need to determine what is a loan.
Dictionary definition
87.
Mr Connell referred us to various dictionary definitions of “loan”. In
brief, all dictionaries had the common theme that a loan was the temporary
grant of the right to use something, and in the context of money was money lent
for a temporary or fixed period with or without interest.
88.
Mr Connell accepted, as we find, that a loan is not the same thing as a
payment (even deferred) in consideration for a supply.
89.
HMRC’s case was that the Company made a loan to the Employee when the
Company transferred the money in payment for the shares to the Trustee. The
question, as we have already stated in paragraph 63, therefore arises whether
there was a loan if A paid C at B’s request where B was liable to (re)pay to A
the sum “loaned” .
The Potts case
90.
The appellant considered that Potts Executors v Inland Revenue
Commissioners [1950] AC 443 was the leading authority on whether a payment
by A to C at B’s request could be a loan from A to B. In that case, the owner
and director of a company, Mr Potts, had an account with his company: he would
be credited with fees and expenses to which he was entitled as director and
debited with cash drawings and amounts paid out by the company on his behalf,
in particular charitable subscriptions and income tax payments. The account
was often overdrawn in the company’s favour. In 1939, Mr Potts sold his shares
to a trust of which he was the settlor. Shortly afterwards the company paid a
substantial sum of money to HMIT to discharge Mr Pott’s surtax liability,
leaving his director’s account substantially overdrawn. After his death, HMIT
assessed his estate for tax on the basis that the large payment of surtax to
HMIT should be treated as paid to Mr Potts (the settlor) by the trustees of the
settlement.
91.
The case turned on the taxing provision contained in s 40 Finance Act
1938 and in particular whether a “capital sum” was “paid directly or
indirectly” by the trustees to the settlor of the trust. The Act expressly
provided that a capital sum included “any sum paid by way of loan”. The court
had to decide whether the sums paid on behalf of Mr Potts to HMIT by the
Company were paid by way of loan by the Company and, if so, whether they were
paid directly or indirectly to Mr Potts.
92.
The Special Commissioners decided against the executors; the High Court
reversed them. The Court of Appeal unanimously reversed the High Court, but
the House of Lords, like the High Court, found in favour of the executors.
93.
What is important for the Company’s case are the reasons the five law
Lords gave for allowing the appeal. (The reader should be aware that the Law
Lords were inconsistent as between each other in designating the various
parties by the letters of the alphabet A, B and C).
94.
Lord Simonds did not find the transaction was one of loan. He said:
“(page 454) …were the sums paid to the settlor by
way of loan? I do not doubt that in certain contexts money paid at A’s request
to B may properly described as “paid to A”: see eg Parsons v Equitable
Investment Co Ld per Cozens-Hardy MR. The explanation of this is to be
found in the judgment of Shearman J in Stott v Shaw & Lee Ld: ‘..if
the legal or business or commercial effect of the transaction can be taken to
be the same as that described in the bill of sale, then the courts will hold
the consideration to be truly stated.’
But this is not the way in which a taxing statute is
to be read. I am not, in the construction of such a statute, entitled to say
that, because the legal or business result is the same whether on the one hand
I borrow money from the company and with it make certain payments, or on the
other hand the company at my request makes certain payments on my implied
promise to repay, therefore, it is immaterial what words are in the statute if
that result is attained.”
95.
Lord Normand appeared to be of much the same view :
(page 457) “…. In my view [the words of the
statute] are apt to cover payments made as loans to third parties through whom
the payment reaches the settlor himself, but they are not apt to cover payments
made to third parties who are not accountable to the settlor and are entitled
to retain the sums as their own moneys. This is a taxing Act and its terms are
not to be enlarged by reasoning that the same final result is achieved as by a
loan made to the settlor followed by a payment made by him to the third party.”
Nevertheless, technically, Lord Normand’s view was only
obiter as he said on page 458:
“I therefore hold that the payments made by the
settlor’s request to third parties were not payments made directly or
indirectly to the settlor. It is not necessary to consider whether they were
payments made by way of loans. But since the question was argued I will state
my opinion. There is a real distinction between a loan to A to enable him to
pay his creditors and a payment to A’s creditors made for the purpose of
discharging his debts….”
96.
Lord Oaksey gave a short judgment from which it is clear his prime
concern was that he thought that the tax charge imposed in this case was beyond
that intended by the legislature:
(page 460) “The object of the Act, in my opinion,
was to tax a settlor who obtained payment of capital sums from the trustees of
his settlement or from companies connected with the settlement for which he had
not given full consideration in money or money’s worth; it cannot have been the
object of the Act to tax him in respect of payments for which he had given full
consideration. In these circumstances it appears to me that if the words of
the Act are fairly susceptible of a meaning which attains this object they
should be given that meaning rather than a meaning which goes beyond the object
of the Act and leads to admitted injustice.
…In my opinion in the particular circumstances of
this case the payments were not made by way of loan.
The second question is whether even if the payments
were made by way of loan they were paid directly or indirectly to the settlor.
None of them was in fact paid to the settlor ….Having regard to the object of
the statute I think the words ‘paid directly or indirectly to the settlor’
should be held to mean paid into the settlor’s hands or into the hands of
someone accountable to him.
For my own part, I should also be prepared to decide
the case upon the ground that the true construction …is that it refers only to
sums paid by way of loan which are not paid for full consideration in money or
money’s worth and that in the present case the accommodation offered to the
appellant was given for full consideration in money or money’s worth.”
97.
Lord Morton dissented. He considered the sums paid were loans to the
settlor and paid directly or indirectly to him
(page 462) “….My lords, I think that the sums so
paid out cannot accurately be described as anything other than loans to the settlor….
(page 463)….That transaction can, I think, be
accurately stated as follows: - The settlor said: ‘Please pay my surtax; if
you do pay it I promise to repay the sum on demand.’ When the money was paid
to the Inland Revenue, it seems to me that it was lent to the settlor just as
much as if the company had been a bank and had granted him an overdraft of that
amount.”
98.
Lord MacDermott was the last to give his judgment and gave no decided
view on the issue:
(page 465) “…Now I entertain little doubt that in
certain circumstances it may properly be said that, if A out of his own moneys
pays a sum to B for and at the request of C, A has paid the sum by way of loan,
and by way of loan to C in the sense, and only in the sense, that he has
thereby created the relation of lender and borrower between himself and C. But
this is not to say that all transactions of that kind are loans….On the other
hand, the kind of wider relationship to which I am referring my provide
opportunity for transactions within it which are exceptional and beyond the
normal scope of the relationship and which may properly be describable as loans
and as nothing else….
….because, on the view I take of the rest of the
case, it becomes unnecessary to do so, I do not propose to express any concluded
opinion on this branch of the matter. I therefore proceed to the second
question assuming, for the purpose, an affirmative answer to the first.”
99.
Reading of the decision of all five law lords therefore shows that one
law lord considered that the relationship did create a loan (Lord Morton) while
two reached the opposite conclusion (Lord Simonds and Lord Oaksey). Lord
Normand expressed views very similar to Lord Simonds’, but his decisions on the
meaning of loan was obiter. Lord MacDermott did not express a concluded view
on the point.
100. Lord Oaksey’s
view that there was no loan was “in the particular circumstances of this case”
and those particular circumstances were that the anti-avoidance provision with
which he was dealing was intended to catch gifts by trustees to settlors and
not transactions at full value. In the Potts case the transaction was
at full value as Mr Potts or his estate was liable to repay the amount paid out
by the Company on his behalf. So Lord Oaksey’s decision did not rest on a similar
view to Lord Simond’s that a payment to C by A on B’s behalf could not be a
loan by A to B.
101. Lord MacDermott
considered that a payment to C by A on B’s behalf could in some but perhaps not
all circumstances be a loan by A to B but did not express a concluded view on
the matter.
102. It is apparent
that all the Lords were concerned that the anti-avoidance provision should be
narrowly construed in order to prevent taxation in circumstances which were not
intended by the legislature. Further, Lord Simonds (see the second paragraph
quoted above) and Lord Normand (see paragraph quoted above) both considered tax
legislation should be given a strict interpretation. However, more recent
decisions of the House of Lords apply a purposive interpretation to tax legislation
(such as Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51). It is notable that Lord Oaksey who wished to decide the case on a
purposive interpretation of the legislation (see the third quoted paragraph
above of his decision) arrived at a decision in favour of the executors but not
on the grounds that A discharging B’s liabilities could not be a loan by A to
B.
103. Therefore, it
cannot be said that this case is binding authority that in some circumstances
outside banking a payment of B’s debt by A does not amount to a loan. Views of
the Law Lords are highly persuasive but binding only where we can determine
consistency amongst a majority.
104. Putting the view
of the various Law Lords asides for the moment, it seems to us that where A
agrees to pay money to C on behalf of B on terms that it is repayable by B to
A, that is a loan by A to B. Any other conclusion leads to the result that a
loan is not a loan simply by directing the creditor to pay the money to a third
party. And if it is not a loan how else it is to be described?
105. In Potts only
2 out of 5 law Lords expressed a concluded view (and in one case it was obiter)
that A (outside banking) discharging B’s liabilities could not be a loan by A
to B. It does not bind us and for the reasons given above we prefer the view
of Lord Morton as expressed in the paragraphs from his decision cited above.
106. The appellant
pointed out that s 419(2) was enacted in 1969 after and in response to the
House of Lords’ decision in Potts. In other words it was recognised by
Parliament that what is now s 419(1) did not capture all the scenarios that
they intended. However, that the law was changed in response to a perceived
interpretation of “loan” does not mean that Parliament’s apparent perception of
the ratio of Potts was necessarily right. In any event, it is clear
that ‘loan’ does not encompass every debt situation and this reason by itself
provides good cause for the addition of s 419(2) as explained below.
107. We are also
aware that our view of Potts does not accord with that recently
expressed by the First-tier Tribunal in MJP Media Services Ltd v HMRC [2010] UKFTT 298 (TC) (not a case cited to us) at paragraph 90, a case in which we
note that HMRC took the completely opposite view to the view advanced in this case
on whether a payment by A to C at B’s request is a loan by A to B. The Upper
Tribunal in its decision expressed no view on this part of the case on appeal
(see paragraph 41 of [2011] UKUT 100 (TC)).
108. We are indebted
to Jonathan Peacock QC’s article in the Tax Journal for 27 September
2010 (not mentioned to us in the hearing) on the First tier decision in MJP
Media for bringing to our attention two decisions on the matter which were
not brought to the attention of the Tribunal in MJP. Those cases are: Parsons
v Equitable Investment Co Ltd [1916] 2 Ch 527 and Re HPC Productions Ltd
[1962] Ch 466. Lord Cozens-Hardy MR in Parsons stated:
“…a sum of money paid by the bill of sale holder at
the grantor’s request to a creditor or another person is properly described as
a payment to her [the grantor].”
In HPC Productions, Plowman J decided in a case on
the interpretation of the Exchange Control Act 1947 that the person at whose
request the payment had been made to a third party had not borrowed the money
as he did not receive it: nevertheless, Plowman J appeared to indicate that
nevertheless it might still be a loan:
“[the transactions in issue] would give rise to a
claim for money paid at the request of [B], and that such a claim is
generically and commercially different from a claim for money lent, though this
of itself is not conclusive of the point I have to decide as the words ‘borrow’
and ‘lend’ might conceivably include both.”
Conclusion on what a loan is as a matter of law
109. There is
inconsistency in the authorities over whether in all, or at least some, cases
where A (not being a bank) pays a sum of money to C at B’s request there is a
loan by A to B. Because of the lack of a majority view on this issue in the
House of Lords’s decision in Potts, we consider that we are not bound by
authority but must consider the question for ourselves.
110. In so far as the
interpretation of s 419 is concerned, we consider that Parliament would have
and did intend such a situation to be within the meaning of “loan” because s
419 is an anti-avoidance measure and it would itself all too easily be avoided
if a direct loan to B was caught but not the payment of a sum of money to a
third party at B’s request. The amendment to s 419 after the decision in Potts
is consistent with this view in that the amendments were made because the
legislature had concerns that the meaning the courts would give to “loan” was
not as wide as intended.
111. In conclusion,
we find as a matter of law that “loan” in s 419 includes a payment by A to C at
B’s request where there is a legal obligation on B to reimburse A the amount
paid.
Application of law to facts of this case
112. If, by paying
the Trustee, the Company discharged a liability of each Employee entering into
the Share Acquisition Agreement, we would find that the Facility Agreement was
a loan (subject to what we say below about timing and when a
debtor-creditor relationship arose).
113. Payment for
the shares:
114. We considered
this question of fact in paragraphs 48-63 above and our conclusion was that the
Company acted as agent for the Employee in arranging the transfer of the shares
by the Trustee (or other vendor) to the Employee. Therefore, there was a loan
by the Company to the Employee of the price of the shares, as by paying the
Trustee (“C”), the Company (“A”) was making a payment on behalf of and at the
request of the Employee (“B”).
115. Payment of
the stamp duty: The Facility Amount comprised not just the price of the
shares but included the stamp duty payable on any transfer. The Employee
covenanted to use the Facility Amount only to acquire the shares and pay the
stamp duty if applicable (newly issued shares would not be subject to stamp
duty). In practice, the Employee would have had no choice as the Company never
made the funds available to the Employee, but paid the Trustee to transfer the
shares to the Employee. It was also an assumption if not an express term that
the Company would discharge the Employee’s liability to stamp duty.
116. So similarly, in
so far as the Company paid a small part of the Facility to HMRC, it was making
a loan to the Employee.
117. We find the
whole of the Facility was a loan within the meaning of s 419(1). Whether that
finding disposes of the appeal, depends, though on when the loan arose.
The terms of the UK Facility Agreement were that no debtor-creditor
relationship arose until a Contingent Event occurred. If this provision is
effective, that would mean the loan did not take place or the debt arise until
the moment that it was due to be repaid which would in effect mean that there
would be no tax charge under s 419(1) as the tax charge only exists between the
date the loan is created to the date it is repaid: s 419(4) (subject to s
419(4A)).
118. Although the
appellant argued its case before us on the basis this provision in the UK
Facility Agreement was relevant to the question of when a debt
was created, it seems to us equally applicable to the question (if the facility
was a loan) of when the loan was created. However, as it was argued in
respect of “debt” we deal with it below.
“advances any money”
119. For the sake of
completeness, we mention that the second part of s 419(1) (ignoring the
extension of it contained in s 419(2) and 419(5)) catches an ‘advance’ of any
money by the close company to a participator. Was the facility amount also an
advance?
120. We were referred
to the case of Bronestar Ltd v Priddle [1961] 3 All E R 471. D
was employed by P as a salesman on a salary and commission. P paid advances on
the commission. On termination of the employment, P sued D to return the
advances less the salary and commission actually earned up to his termination.
It was held that D was liable to repay the excess of the advances over his
entitlement to salary and commission.
121. In the course of
his decision, Holroyd Pearce LJ approved the definition of an advance given in
the County Court:
(page 1301) “ ‘It seems to me that ‘advance’ means:
‘I will pay now what I may have to pay in the future. I am paying before due
time. If, after the advance, some event in the future upon which payment
becomes due does not occur, you can recover it back.’”
122. We also think
that the natural meaning of “advance” is that it is the bringing forward of
something: in the context of money it is the bringing forward of a payment
that would be made at some point in the future.
123. Is it possible,
that while carrying this meaning as set out in Bronestar v Priddle, “advance”
could nevertheless also encompass other situations? If we are wrong in saying
that there is a loan where A pays C on B’s behalf such that B owes A the amount
paid to C, would it be correct to say that that situation is one of an
advance? We think not. The natural meaning of “advance”, and the one it was
no doubt intended to carry in the context of s 419(1) where a company would
ordinary be liable at some point to make payments of dividends and/or salary to
its directors-cum-owners, is that it is the bringing forward of a payment that
would otherwise have been paid later, as explained in Bronestar.
124. Therefore, we
can see no way in which the sale of the shares to the Employee on terms that
they can pay for them later could be described as an advance. Mr Connell for
HMRC did not really suggest otherwise. The shares were not transferred to the
Employees on the basis that they were advances of salary that they would earn.
They were transferred to the Employees on terms that they would be paid for
(albeit at a later date). The facility amount was not an advance.
Incurring a debt
125. Section 419(2)
extends the meaning of “makes a loan” as it provides (as quoted more fully
above) that:
“….
the cases in which a close company is to be regarded as making a loan to any
person include a case where—
(a)
that person incurs a debt to the close company; …..”
126. In HMRC’s
skeleton, although not in the earlier correspondence, their position was that
s 419(2) and (5) were irrelevant. Just before the hearing they changed their
minds again and reverted to the position that both these sub-sections applied.
It was not suggested by Mr Gammie that these changes in position by HMRC had
put the appellant at a disadvantage, and we proceed to consider these
additional sub-paragraphs.
127. We have
determined that the entire facility amount was a loan. The question of whether
it was also a debt might therefore be thought irrelevant. However, we do go on
to consider the matter, for a number of reasons:
(a)
We were addressed at length on it;
(b)
the meaning of “loan” in a third party context is not clear in the
authorities so the HMRC’s secondary case on the meaning of “debt” ought to be
considered;
(c)
it seems to us that the appellant’s point on timing and in particular when
the debt arose applies equally to a loan and therefore is directly
relevant, as explained in paragraph 118, to the appellant’s liability under s
419 in any event.
Meaning of debt
128. Both sides
agreed, and we agreed with them that incurring a debt was wider in meaning than
being the recipient of a loan. An obvious example was where the matter was
non-consensual: if B stole money from A, B (apart from being guilty of theft)
would owe A the debt of the money stolen. In no way could it be said that A
had loaned the money to B.
129. In the case Stephens
v Pittas, the major shareholder and director of a company was found to have
misappropriated receipts belonging to the company. It was held that in the
absence of consensus between the company and the owner, the misappropriation of
funds by the owner was not a loan by the company to the owner. It was accepted
by the parties to that case that the 1969 amendments which introduced s 419(2)
and (5) meant that the company had a liability under s 419(1) as extended by s
419(2) for the misappropriations after that date as these were a debt the
participator owed the company: the court held that there was no liability under
s419(1) for misappropriations before that date. The misappropriations created
a debt but not a loan.
130. Theft or
misappropriation of funds is not the only situation in which a debt but no loan
will arise. A common such situation is where goods or services are provided on
credit. There is no loan as no money or other property passes in return for
the goods or services supplied. But there is a debt as the customer owes the
supplier the consideration for the goods or services supplied.
131. We did not
understand either party to disagree with this analysis. In other words, even
if a payment to C by A on B’s behalf with the understanding B will repay A does
not create a loan, both parties agreed, as we do, that it created a debt from B
to A. The disagreement was when this debt relationship arose. The
appellant’s position was that nevertheless it was clear from case law that
parties to a contract can agree something other than what would otherwise arise
under law. And in so far as the UK Facility Agreement was concerned, the parties
had agreed that there was no debt until a Contingent Event occurred.
Timing –when does the debt (or loan) arise?
132. So both parties
were agreed that the Facility Agreement gave rise to a debt. Their difference
was on timing. So far as we can see, the appellant’s point on timing applies
equally whether the UK Facility Agreement was one of loan or of deferred
consideration for the supply of the shares (in other words, a debt). Where
below we refer to debt, unless clear from the context our meaning is otherwise,
we are referring to a liability under the UK Facility Agreement whether
properly defined as a debt or as a loan.
133. HMRC was of the
opinion that the debt arose at the moment that the agreements were entered into
(or at least no later than when the Company paid the Trustee to transfer the
shares to the Employee). Such an interpretation would give rise to an
immediate liability to tax on the Company under s 419(1) as extended by s
419(2).
134. The appellant’s
view was that the debt arose at the earliest when one of the Contingent Events
first occurred, and if one of the Not Repayable Events in clause 39 occurred
before a Contingent Event, then no debt ever arose.
Case law on the meaning of “debt”
135. We were referred
to case law on the meaning of “debt”. The Court of Appeal considered the issue
in the case of O’Driscoll v Manchester Insurance Committee [1915] 2 KB
499. In this case a doctor was owed money for work performed but under the
particular terms of the agreement he might receive more or less than his bill
for fees. The Court of Appeal held that despite the uncertainty in the amount
that was owing to him, nevertheless a creditor of the doctor’s could attach the
‘debt’ owed by the insurance company to the doctor: the doctor was absolutely
entitled to an unascertained sum. There was a debt.
136. Swinfen Eady LJ
said:
(page 512) “It is contended, however, that there
cannot be a “debt” until the amount has been ascertained, and in support of
this contention cases have been cited to us where it was attempted to attach
unliquidated damages. But in such cases there is no debt at all until the
verdict of the jury is pronounced assessing the damages and judgment is given.
Here there is a debt, uncertain in amount, which will become certain when the
accounts are finally dealt with by the Insurance Committee. Therefore there
was a “debt” at the material date, though it was not presently payable and the
amount was not ascertained. It is not like a case where there is a mere
probability of a debt, as, for instance, where a person has to serve for a
fixed period before being entitled to any salary, and he has served part of
that period at the time the garnishee order nisi is served. In such a case
there is no “debt” until he has served the whole period….”
137. In the same case,
Bankes LJ put it as follows:
(page 516) “The matter is well put in the Annual
Practice 1915 page 808: ‘but the distinction must be borne in mind between the
case where there is an existing debt, payment whereof is deferred, and the case
where both the debt and its payment rest in the future. In the former case
there is an attachable debt, in the latter case there is not.’ If, for
instance, a sum of money is payable on the happening of a contingency, there is
no debt owing or accruing. But the mere fact that the amount is not
ascertained does not show that there is no debt.”
138. It is the
appellant’s case that the Facility in their case was not a debt unless and
until a contingent event happened: it was the case in their view that the
“debt and its payment rest in the future” rather than an existing debt with
deferred payment: there was a “sum of money” only “ payable on the happening
of a contingency”.
Definition of credit
139. We were also
referred to the case of Grant v Watton [1999] STC 330 by the appellant
on the basis it considers it is authority for the proposition that there is no
debt until a contingent event occurs. The facts of that case were that G was
the director and owner of a service company which provided on-going services to
a partnership of which G was a member. The fee was calculated annually but
paid by the partnership from time to time.
140. Under s 160 ICTA
G was to be taxed on “any form of credit” which he obtained by reason of his
employment by a company. The High Court decided that the partnership (and
therefore G) had been granted credit by the company because on the facts the
services rendered by the company were payable from day to day but not paid
until some time later.
141. Under s 419 ICTA
it was also held that G had incurred a debt to the company.
142. In the course of
his judgment, Pumphrey J gave a definition of “credit”:
(page 345 h) “…In my judgment, on the face of it,
credit is granted where payment is not demanded until a time later than the
supply of services or goods to which the payment relates. Credit is the
deferral of payment of a sum which, absent agreement, would be immediately
payable.”
Looking at s 419(2) and in particular the words “incurs a
debt” Pumphrey J said:
(page 348 e) “in my judgment the word “incurred” is
apt to describe the point in time at which the debtor became legally committed
to some future expenditure albeit unascertained. If the debtor knows in
respect of a service which he has received that he will have to pay for that
service on some date in the future, if he has not already done so, I believe
that in the ordinary sense of the words he has incurred a debt, albeit that the
debt will not be due until that future date and although its quantum may not be
capable of ascertainment because of the possibility of discharge or partial
discharge between the date on which it is incurred and the date on which it
becomes due and payable.”
143. The Court of
Appeal, in a very different factual situation, expressed very similar if not
identical views in Dimond v Lovell [1999] 3 All ER 1. P hired a car
from a hire company on terms that no hire charges were due to be paid until the
hire company (on behalf of P) had successfully pursued the Defendant D for
damages for causing an accident in which P’s car had been damaged. P succeeded
in proving negligence against D but D successfully disputed his liability to
pay the hire charges on the grounds that the agreement between P and the hire
company was unenforceable as an unauthorised credit agreement under the
Consumer Credit Act.
144. So in the course
of its decision the Court of Appeal had to determine the meaning of “credit”.
Sir Richard Scott VC said (with the concurrence of the other two Lord Justices)
as follows:
(page 11 c) “….If payment for goods or services or
land is deferred after the time when, if nothing about the time of payment had
been agreed, the payment would be due, the payer is being given credit. Such
authority as there is supports this view.”
145. The Judge
referred to Pumphrey J’s statement in Grant v Watton at page 345 h and
quoted above in paragraph 142 and said he entirely agreed with it.
146. He went on to
refer to the Recorder’s view at first instance that no debt arose until the
contractual due date of payment, which in the case only arose at the conclusion
of the negligence action. He disagreed with this view and said:
(page 12 e)”… the question whether there is a
contractual deferment of debt cannot be answered simply by looking at the
contractual date of payment. It is necessary also to ask when, but for that
stipulation, payment would have had to be made. It is the difference between
the two dates that constitutes the credit.”
147. The case went to
the House of Lords who determined the issue on the same grounds as the Court of
Appeal. Lord Hoffman, giving a judgment with which 3 of the other Law Lords
concurred, said:
“….In the absence of credit [the hire company] would
have been entitled to payment during or at the end of the hire. All the
provisions about the pursuit of the claim were express or implied conditions that
deferred the right to recover the hire and therefore constituted a granting of
credit…..”
148. The remaining
Law Lord, Lord Hobhouse, agreed with the decision but commented that some
contracts might defer the time of payment for reasons other than the grant of
credit.
149. The Court of
Appeal considered the meaning of “credit” again in the case of Nejad v City
Index Ltd [2000] CCLR 7. In that case, the defendant offered the facility
of betting on trends in indexes such as the FTSE 100 index. Clients could have
credit or debit accounts. The appellant, N, was given a credit account which
meant that he could place bets up to a certain amount of exposure without
paying a deposit to cover his potential liability. Realised losses had to be
paid within 5 days.
150. N made bets
which led to a substantial liability to the defendant who sought to make him
bankrupt. One of N’s defences was that the contract was unenforceable under
the Consumer Credit Act 1974 because the defendant was not licensed to grant
credit. The question was whether the defendant had granted N “with credit of
any amount”. The Act defined credit as:
“a cash loan, and any other form of financial
accommodation…”
151. The conclusion
of Rattee J in the Court of Appeal giving a judgement with which the other two
Lord Justices concurred, was that the “credit account” merely allowed N to bet
without giving the security of a deposit for any yet-to-be realised losses. No
debt arose until the end date of the bet and then only if the index had moved
in the opposite direction to the bet:
“In my judgment that represents a fundamental
difference between this case and the situation in Dimond v Lovell. In Dimond
v Lovell there is no doubt, …., that 1st Automotive earned hire
charges under the contract between it and the claimant by providing a hire car
for the claimant’s use. In the present case, on the other hand, the contract
between the customer and City Index for which City Index earns some entitlement
to payment by provision of the service. It is simply a contract that, if the
relevant Stock Exchange Index is above or below a specified figure on a
specified date, or on early closing of the contract in accordance with City
Index’s terms and conditions, the customer will pay or receive the appropriate
amount of money. There may never be any indebtedness by the customer to City
Index; all will depend on the movement of the relevant index.”
152. Both Swinfen
Eady LJ’s views in O’Driscoll and Pumphrey J’s views in Watton v
Grant were approved by the Court of Appeal but distinguished on the facts.
153. The last case on
the meaning of “credit” to which we were referred was MacMillan Williams v
Range [2004] 1 WLR 1858. R, a solicitor, entered into a contract with a
firm of solicitors under which she would be paid at the rate of one third of
her paid bills. It was also agreed that she would be paid a monthly advance at
a rate of £22,000 per annum. After a year R resigned and the appellant firm
sued her for repayment of the advance to the extent it exceeded three times the
value of her paid bills.
154. As with Nejad
it was claimed that the contract was unenforceable under the Consumer
Credit Act as involving the grant of credit by an unlicensed body. The Court
of Appeal found otherwise: at the time the contract was entered into it was not
known what R’s billings would be and therefore it was not known whether the
advances would be greater or lower than the amount to which R would be
entitled. So it was not known at the time the contract was entered into whether
it would involve the grant of credit. Ward LJ said, giving a judgment in which
the other two judges concurred:
[16] “ ….the time at which to judge whether or not
credit is being provided is the moment when the agreement is made. That must
be so because the parties must know at the time of the agreement whether it
falls within or outside the Act if they are to be able to comply with the form
and formalities required by the Act. At the time this agreement was made it
was not known whether there would be a surplus or a shortfall when the
calculation came to be made at the end of two years or on the earlier
termination the agreement. Thus, as it seems to me, one was unable to tell at
the material time whether the supply of the benefit, assuming the monthly
advances to be such a benefit, attracted a contractual duty of repayment in
money which was being significantly deferred. Unless there was a debt, there
was no credit.
[17] In my judgment the correct principle is stated
in the headnote of Nejad v City Index Ltd…:
‘where it is completely
uncertain whether the arrangements between the parties will give rise to a debt
at all, there is no ‘credit’ merely because those arrangements postpone any
obligation to pay until such time as the future possible indebtedness has
crystallised.’…..
[23] In summary, I see
the essential nature of this contract to be one where payment is made in
advance of services to be rendered and that does not involve the notion of
giving credit. In any event it is impossible to say that the time when the
contract is made whether [R] would be the debtor or creditor at the time when
the calculations came to be made and thus one simply does not know whether at
the moment the parties’ obligations were crystallised she would in fact have
been provided with credit. …”
155. The appeal
before us turns on what is a “debt”. Nevertheless the cases on the meaning of
credit are relevant because there can be no credit without a debt. We find the
cases on the meaning of “debt” and “credit” all express a consistent and clear
definition. Ascertaining whether there is credit is a two stage process.
Firstly, the Tribunal or court must ascertain whether there is a debt.
Secondly the Tribunal or court must ascertain whether the contractual date for
payment of that debt is later than it would be if the contract were silent on
the matter. If there is a debt and if the contract provides for a later
date of payment than would arise under law then credit is granted.
Application of law to the facts of this case
156. The appellant’s
view of Nejad and McMillan and all the other cases cited above
is that no debt arises until the contingent event occurs so that even if at
outset it is probable that a contingent event will occur there is no debt. In
particular it says:
(1)
a debt only arises when there is a current obligation to repay. It is
not enough that an amount will be probably repayable. In this case, a
Not Repayable Event could occur at any time and therefore at no point (until
the occurrence of a Contingent Event before a Not Repayable Event) could
it be said for certain that the money must be repaid to the Company;
(2)
the Facility only had to be repaid by the Employee on the happening of
a Contingent Event and therefore until that time and applying Banks LJ’s dictum
in O’Driscoll (“If, for instance, a sum of money is payable on the
happening of a contingency, there is no debt owing or accruing.”), there was
no debt. This analysis, says the appellant, is not altered just because it was
very likely that a Contingent Event would occur.
(3)
The UK Facility Agreement specifically provided that no debt would arise
until a Contingent Event occurred and the Tribunal should give effect to the
unambiguous terms of a contract.
We deal with each of these points in turn.
(1) Uncertainty whether debt
157. The appellant
points out that the Facility might never be repayable: the Not Repayable
Events Clause (see paragraphs 39-40 above) provides three circumstances in
which the Facility would not be repayable. In the appellant’s view, unless and
until a Contingent Event occurred before one of these three Not
Repayable Events, there was no debt because it was not certain until that point
that the Facility would be repayable.
158. Case law shows
that if at the point that the agreement is entered into it is uncertain whether
an amount will be payable, there is no debt. Take the example used in O’Driscoll
of a chose in action (paragraph 136 above). A chose in action does not convert
into a debt owed by D to P unless and until P successfully sues D and gets
judgment in his favour. Take the facts of Nejad. It was not certain
when the agreement for the credit account was entered into whether N would ever
owe money to City Index: on the contrary if the bets had accurately predicted
future movements of the index, City Index would have owed N money. Take the
facts of MacMillan. At the date the employment contract was entered
into, it was not known how much R would bill her clients and therefore it was
not known if the firm’s liability to R would be less than or exceed the amount
it advanced to her each month.
159. However, we are
unable to agree that, on a true analysis of these cases, there is any
assistance in them for the appellant. Banks LJ’s reference to a contingency in
O’Driscoll was a contingency of the kind where the debt could only arise
after the contingency had occurred (such as a judgment in favour of P, or N
closing his bet in a loss making position). He said
“If, for instance, a sum of money is payable on the
happening of a contingency, there is no debt owing or accruing”
160. What we have in
this case is the direct opposite: in this case a sum of money is payable unless
a contingency occurs. We consider that there is a world of difference in law
between a debt which has already arisen, which on the occurrence of a
contingency will be waived, and a situation such as that contemplated by the
Court of Appeal in O’Driscoll and found in Nejad and MacMillan
where no debt had yet arisen at all and would only arise on the occurrence
of a future uncertain contingency.
‘Debt unless contingency’ contrasting with ‘no debt unless contingency’
161. It is not a
question of semantics. There is a very real difference between a situation
where a debt arises now but will be waived if a contingency occurs, and
a situation where a debt does not arise until the contingency occurs.
It is true that in both situations it is not predictable whether or not the
“debtor” will ever be obliged to pay the “debt’ because it is not known whether
or not the contingent event will occur. But that is not the point. The point
is whether at the point in time the question arises there is a current
liability to pay a debt, even if the date of payment of it is deferred.
162. From the moment
the Company completed its obligations under the UK Facility Agreement (when it
loaned the money to the Employee by paying the Trustee for the shares
transferred to the Employee), the Employee clearly owed the Facility Amount to
the Company albeit it was not yet due for payment. None of the Not Repayable
Events had occurred. The Directors had not waived the liability, the Company
had not gone into insolvent liquidation nor had the Employee died.
163. This was not the
case with the hypothetical damages claim in O’Driscoll, or in Nejad or
in MacMillan. In none of those cases was there a liability to pay a sum
of money (albeit deferred) at the time the question was asked. Before judgment
was given in the hypothetical claim in O’Driscoll it could not be said
that D owed P (whatever the probability of success in the action); before the
bet closed in Nejad it could not even be ascertained whether N would owe
City Index or the reverse, and in MacMillan, on the day the contract
was signed, it could not be ascertained that the advances would exceed three
times R’s billings for work which had not then even been undertaken. Certainly
at that point it could not be said that R would owe the firm or the firm would
owe R.
164. On the contrary,
in this case although it is true that at any point one or other of one of these
three Not Repayable Events might occur and at that moment the debt would be
waived, but unless and until they did occur (and so far none have) the money
was owed by the Employee to the Company.
165. Put simply, the
Company had paid out the money under the Facility Agreement. This was not a gift
so unless and until liability to repay it was waived and it became a gift, the
Employee owed it to the Company.
Relevance of uncertainty?
166. The appellant’s
case in a nutshell is that a debt only arises at the point that it is certain
that at any time in the future the debt will be payable and there are no
contingencies which might occur following which it would cease to be payable.
There is no authority for this proposition in the case law and a moment’s
thought will show that it cannot be right. The creditor always has the ability
to waive the debt: right up to the moment it is paid the creditor might chose
to waive the debt. It doesn’t matter whether this possibility is provided for
in the agreement. It is a contingent event that could occur at any moment
(however improbable it is no doubt in most contracts of debt!). On the
appellant’s analysis, therefore, no debt could ever arise until the moment it
was paid because there is always the chance the creditor could waive it.
167. The true
analysis of the cases must be that whether there is a debt at any point in time
must be addressed by considering the position at that particular time. If a
debt has arisen at that point it is irrelevant that circumstances could later
change and the debt might cease to be payable on the occurrence of an uncertain
contingency at some point in the future.
(2) Not payable until Contingent Event
168. There is
potential for confusion in the terminology used. The “contingency” referred to
in the above passage was the possibility that a debt would be waived on the
occurrence of a Not Repayable Event. The Contingent Events, as defined in
paragraphs 30-31, however, were the events which would trigger the Employees’
liability to repay the Facility. At the hearing they were referred to as the
Contingent Events, as none of them were certain to occur, and we stick with
this slightly confusing terminology.
169. It was, as we
have already mentioned, the appellant’s case there was no debt until a
Contingent Event occurred.
170. We have already
determined that the possibility of a Not Repayable Event occurring one day in
the future does not affect the question of whether a debt has arisen at a
current point in time. Does the fact that repayment of the Facility was
deferred until the occurrence of a Contingent Event alter our view?
171. The answer to
this is straightforward: as we have already the stated, the test is whether a
debt has arisen. If payment is contractually deferred beyond the time the debt
would otherwise be repayable that is a grant of credit: it does not mean that
the debt ceases to exist in the interim.
172. In view of the
decisions in O’Driscoll and Dimond v Lovell this is the only
possible interpretation of the situation in this case. If the appellants were
right about this it would mean that the decisions in these cases were wrong.
There was a current debt in O’Driscoll even though the parties had
agreed a deferred date of payment. Similarly there was a grant of credit in Dimond
v Lovell because a debt had arisen despite the agreed deferral of the date
of payment.
173. Not only are we
bound by these decisions but they are clearly right. The parties may agree
that payment of a debt is deferred, but unless they agree that payment of the
debt is entirely and permanently waived, it is still a debt.
174. The Contingent
Events merely determined when the Facility would be repaid. They do not
affect the legal position that a debt arose when the Company completed its
obligations to each Employee under the UK Facility Agreement (which would have
been when the Company paid the money to the Trustee).
175. We do not
consider that this analysis is in any way affected by the very remote
possibility that a Contingent Event might never occur, or (slightly more
likely) that it would not occur before a Non Repayable Event occurred. In our
opinion, unless it was certain that none of the Contingent Events could ever
occur, such that the deferral of the debt until the occurrence of a Contingent
Event was the same as the debt being written off, the position is that the debt
arose on completion of the UK Facility Agreement the due date of payment of
which was deferred.
What was the basis of the decision in Watton
v Grant?
176. In Watton v
Grant it was a finding of fact that in the absence of written contractual
terms the arrangements between the parties were to be interpreted such that the
debt was payable day to day and not simply when the accountants had done
the year-end calculations and worked out the exact amount of the debt.
177. As we have said,
the appellant says that this implies (at the least) that the parties could have
agreed that the debt was payable annually and no debt would have been created
until that day arrived. This is one of the main authorities the appellant
gives for its proposition that a debt is not incurred until a contingent event
arises.
178. We are unable to
agree that the case is authority for this. As is clear from the both extracts
above from Pumphrey J’s decision (see paragraph 139-142), a debt arises at the
date the supplier completes his obligations under a contract for the supply of
goods or services. The relevance of the contractual terms in Watton v Grant
was that the judge was seeking to determine when the supply of services
took place. The supply was a continuing supply of services so the answer to this
was not immediately obvious. A contractual term requiring the supplier to
provide services for a set period might mean that the contractor had only
completed its contractual obligation at the end of that period as that is when
the supplier has done what he agreed to do. But on the facts in that case,
the Judge found that the supply was made from day to day. In other words, each
day was a separate supply. Therefore the debt arose from day to day ((page 346
g-h and 347 a-b and “prima facie it is my conclusion that the services are
rendered from day to day”):
“The question, it seems to me, that has to be asked
is therefore basically a question of fact. When would payment fall due in
relation to the services provided by the service company? Here [counsel]
argues…that the services were annual in nature. He suggests that there was
..one continuous supply which was not complete until the year-end. No
liability to pay therefore arose until that date. On the facts found I
do not believe this to be a possible conclusion. …the service company provided
the services from time to time and was reimbursed in relation to them. I can
see no basis for suggesting that it was agreed in advance that the company
should provide prescribed services for a year….
….It seems to me to be a question of fact in each
case as to the period over which a particular service was provided but prima
facie it is my conclusion that the services are rendered from day to day……”
(my emphasis)
179. To reinterate
this point, as this case formed part of the backbone of the appellant’s case
before us, Pumphrey J did not rule that there was an immediate debt
because the contract required the services to be paid for day to day:
he ruled that there was an immediate debt because under the contract (as
interpreted) the services were supplied day to day. The relevance
of the contractual terms, implied or otherwise, was because the Judge was
determining the date(s) the services were supplied: he was not determining the
due date of payment (other than to say that the due date of payment was the
same as the date performance was completed).
180. If the contract
had been for a single supply of services over a period of time the implication
of his decision is that the services would not have been provided and the debt
would not have arisen until the supply was complete at the end of the year.
181. In Aspect
Capital’s case, however, there is no continuous supply of services and
determining when the supply was made is straightforward. There was a
one-off supply of a payment by the Company to the Trustee on behalf of the
Employee. The Company had done what it had contracted to do no later than the
date the Company paid the Trustee. On the authority of Grant v Watton,
the debt arose no later than that time. The liability to repay the Company arose
at the time that the Company had fulfilled its side of the bargain. It makes no
difference that the due date for payment of that liability was deferred.
182. Contrary to the
appellant’s submissions, Pumphrey J was quite clear that deferring the date of
payment did not defer the date on which a debt arose. As he said:
“If the debtor knows in respect of a service which
he has received that he will have to pay for that service on some date in the
future, if he has not already done so, I believe that in the ordinary sense of
the words he has incurred a debt, albeit that the debt will not be due until
that future date…”
Partly paid shares
183. The appellant
also referred us to cases on partly paid shares: Whittaker v Kershaw [1890]
45 Ch D 320 and Re Russian Sprats [1898] 2 Ch 149. These cases are
authority that no debt arises in respect of partly paid shares unless and until
a call is made on them by the company. The appellant sees these cases as
supporting their proposition that a debt does not exist until the occurrence of
a contingency without which it would not be payable.
184. The appellant’s
position is that if HMRC is right and a debt arises upfront and before the
occurrence of one of the Contingent Events without which the debt is not
repayable, then how do they distinguish partly paid shares? The share is
partly paid from the moment it is issued, but only becomes a debt if and when
the company makes a call on it.
185. It is clear to
us the determination in those two cases of the position of partly paid shares
was made by an analysis of the Companies Act 1862 (see page 326 of Cotton LJ’s
decision in Whittaker v Kershaw). The position for partly paid shares
appears to be analogous with that of a chose in action: a chose in action is
not a debt unless and until judgment is given in favour of the claimant. A
partly paid share does not give rise to a debt unless and until a call is made.
186. But that has no
impact on the position for contracts for goods and services, which is what is
dealt with in all the cases outlined above in paragraphs 135-155. The ratio
from those cases is clear: a debt for the consideration payable under a
contract for goods or services arises on the date on which it would arise under
application of the law in the absence of any contractual provision delaying the
date of payment. In other words, a debt arises at the moment the contract for goods
or services is completed.
187. In this case,
the Company provided a loan (or at least a financial facility). This was a
contract for services (a loan or facility). Completion occurred no later than
the moment the Company paid the money to the Trustee on behalf of the
Employee. At that point a debt arose, albeit the due date of payment was
indefinitely deferred.
Example of the neighbours’ car
188. We mention, as
something was made of it at the hearing, that Mr Gammie postulated an example
which he considered to be analogous to the facts of this case. In his example,
a person (B) agreed that he would give title to a car to his neighbour (A). He
agreed he would make the car or buy the car from a third party. The
consideration would be A’s obligation to drive B once a week to the supermarket
and wherever else he chose to go. But if A moved away, A would have to pay for
the car.
189. Mr Gammie’s
point was that in his view no debt would arise unless and until A decided to
move away.
190. We are unable to
agree. The facts suggested by Mr Gammie are rather unlikely, we think, to
arise in the real world. But assuming they did, clearly A owed B an obligation
(to drive him when and where B wanted) from the moment he was given the car.
It would not be true to say that A owned the car free of an obligation (even if
“debt” would be an odd description). If A moved away this merely altered the
consideration for the car from being an obligation to act as unpaid chauffeur
to a financial obligation. A “debt” arose from day one: it just changed its
nature on the occurrence of a contingency.
Summary
191. There are
situations where no debt has yet arisen but may arise on occurrence of
uncertain event (such as litigation which might lead to a judgment debt or a
partly paid share where there might be a call to pay the balance.) But these
situations are in contrast to a case, such as the one in this appeal, where the
supplier under a contract has completed his obligations. In such cases a debt
arises immediately even thought it may only be due for payment on a deferred
date and even though it might be waived on the occurrence of a future uncertain
event. In such a case a debt arises from the moment the contract for the goods
or services is completed.
192. In reality what
the appellant seeks to do is to combine the two concepts of deferred payment
and the possibility of future waiver of debt and argue that this creates a situation
where there is (as yet) no debt. But this cannot be done. Any debt can be
waived at any time but that does not mean a debt is any less a debt: and the
case law is clear that once a contract for goods or services is completed, a
deferred date for payment creates credit, but does not mean the debt does not
exist.
(3) Giving effect to the terms of the contract
193. The appellant
cites Seldon v Davidson [1968] 1 WLR 1083 as showing that there is only
a rebuttable presumption that a payment of money gives rise to obligation to
repay. The appellant’s argument is that the presumption is rebuttable and an
express term, such as in this case, rebuts it.
194. We find the
appellant is taking this case out of context. What the judge meant in Seldon
was that it is presumed unless the contrary is proved that a transfer of
money is not intended as a gift. As it is not the appellant’s case that the
Facility Amount was gifted to the Employee, this case is not on point.
195. Nevertheless, of
course courts and tribunals must normally give effect to the terms which the
parties have agreed (assuming that the agreement is not a sham or entered into
through a misrepresentation).
Agreeing the legal effect of a contract
196. But it only
applies to the obligations that the parties agree between themselves. The
parties cannot determine how the law will apply to their agreement. A trite
example shows this is right. A might agree to lend money to B. They might
agree when the money must be repaid and what interest is payable in the
meantime. They might agree a term that says “this is not a credit agreement”.
But if the legal effect of what they have agreed is that it is a credit
agreement, an express term that it is not cannot affect the legal nature of
what they have agreed.
197. This was put more
succinctly by the Upper Tribunal in the recent case of MJPMedia Services Ltd
(not cited to us) [2011] UKUT 100 (TCC). At paragraph 39 Mr Justice Arnold
said:
“…parties cannot make a transaction answer a
description which it does not otherwise answer by saying that it does….”
198. And this is what
we find has happened here. Ignoring the preamble to the UK Facility Agreement,
the effect of the obligations that the parties agreed to in the Share
Acquisition Agreement and UK Facility Agreement was that the Company would
arrange for a transfer of shares to the Employee and loan the Employee the
money to pay for them. As a matter of law, a debt once the Company had
completed its obligations by paying the Trustee for the shares. At that point,
therefore, a debt arose, albeit the contract provided that in the event of
certain contingencies the debt would be waived and in any event it would not be
repayable until the first of the Contingent Events arose.
199. The parties
cannot agree that the legal effect of their agreement is something other than
what in law it is. They cannot effectively agree that black is white. This was
a contract which gave rise to a debt from the moment it was completed which was
when the Trustee was paid. The Preamble in so far as it states otherwise is of
no effect. While the parties’ view of the legal nature of their agreement
might be relevant if there was ambiguity over what they had actually agreed
their obligations were, here there is no such ambiguity.
Rules of contractual construction
200. HMRC referred us
to the case of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and the rules of contractual construction
expressed by Lord Hoffman in that case. These rules are of no assistance
here: what the parties agreed in the contracts in this case was quite clear.
They agreed terms and obligations which as a matter of law amounted to the
creation of a debt with deferred terms of payment and certain contingencies on
the occurrence of which the debt would be entirely waived. They also agreed
that as a matter of law this did not create a debt.
201. The operative
terms of their agreement were therefore entirely at odds with the
“introduction” or recital: the operative terms created a debt while the recital
said that there was no debt. The law of contractual construction on this is
quite clear: recitals cannot affect the application of clear operative terms.
For this see the Court of Appeal’s decision in Leggott v Barrett (not
cited to us) (1880) LR 15 Ch D 306 at 311 per Brett LJ
“…the recital may be looked at in order to determine
what is the true construction; but if there is no doubt about the construction,
the rights of the parties are governed entirely by the operative part of the
writing or the deed.”
202. The same point was
made by a differently constituted Court of Appeal in In Re Moon (not
cited to us) (1886) LR 17 QBD 275 at 286 per Lord Esher MR:
“Now there are three rules applicable to the
construction of such an instrument. If the recitals are clear and the operative
part is ambiguous, the recitals govern the construction. If the recitals are
ambiguous, and the operative part is clear, the operative part must prevail.
If both the recitals and the operative part are clear but they are inconsistent
with each other, the operative part is to be preferred.”
203. In this case the
Facility Agreement falls in the third of Lord Esher’s above possibilities, so
the operative part, creating a debt, takes precedence over the introduction or
recital, which states that there is no debt. There are many other more recent
cases applying this rule.
Legal vacuum?
204. Lastly, even
assuming that the rules of statutory construction were not what they are, how
could we give effect to the recital in preference to the operative parts? What
the parties did in law was enter into an arrangement under which the Company
procured shares for the Employee and loaned them the money to pay for them. Yet,
says the introduction to the Facility Agreement, this did not create a debt.
If not a debt, then what was the legal relationship created? As there can’t be
a vacuum, if the Employee did not “owe” for the money the Company paid to the
Trustee, then this must mean that that payment was a gift to the Employee.
205. The appellant
does not agree: it says it can’t be a gift as ultimately a Continent Event is
likely to occur and a debt arise. Until that time, they say, there was no gift
but the contract created no debt. We consider what the appellant seeks to do
is create some sort of legal relationship unknown in law. Their case, no
doubt, is that the legal relationship is whatever would have been created in
the Grant v Watton case had the parties agreed that the services were
rendered only annually. But as we have already said there is an unbridgeable
gulf between these hypothetical facts of Grant and the appellant’s
case: in the hypothetical case in Grant the supply would have been
incomplete until the annual accounts were rendered; in this case, the Company
had completed its obligations under the contract for the procurement of shares and
loan facility no later than the moment the Company paid the Trustee.
206. The company had
completed its half of the bargain no later than the moment it paid the Trustee
on behalf of the Employee. Under law a debt arose at that point. If the
parties could displace that by contractual agreement, then, as there was no
debt, then there must have been a gift. And tax would have to be paid on that
basis. But they cannot and there was a debt from the moment the agreements were
completed.
Summary
207. For the reasons
given above we reject the appellant’s case that the loan or debt did not arise
until the occurrence of a Contingent Event. We find a debt arose no later than
completion of the obligations of the appellant under the contract with each
Employee, which was on payment by the Company to the Trustee.
US Loan Facility Agreement
208. The fallacy in
the appellant’s position is put into sharp relief by consideration of the US
Loan Facility Agreement. The agreement had virtually the same Contingent
Events which deferred the due date of payment of the debt. Yet its
Introduction recorded that it did create a debtor-creditor relationship.
209. So if we were
persuaded by the appellant’s case that deferring the due date of payment meant
there was no debt until a Contingent Event occurred, then either the US Loan
Facility Agreement would similarly create no debt despite its recital or
whether a debt was created as a matter of law would be an option for the
parties to the contract to agree on. It would allow them to switch the legal
effect of their agreement as a debt on or off at will depending on the recitals
to their agreement.
210. As a matter of
law they cannot do this for the reasons given above.
211. We find that the
UK Facility Agreement was as much a debt as the US Loan Facility Agreement.
Either way a loan under the US Loan Facility Agreement was within s 419(1), by
its plain meaning or extended meaning within s 419(2).
Legal position quite different to accountancy position
212. Whether
something is a receivable for accountancy purposes is a very different question
to whether it is a debt for legal purposes. We understand that whether
something is shown as a receivable in accounts will depend on whether it is
more likely to be paid than not. Whereas, on the rules as discussed above, we
could envisage a receivable that is very likely to be paid but is not a debt
(eg a chose in action that is virtually certain to be upheld in court) and a
debt that is very unlikely to be paid (eg a debt where a waiver event is very
likely to occur). The receivable would not be a debt and the debt would not
be a receivable.
213. Therefore, it is
irrelevant that the Facilities under the UK Facility Agreements were treated as
receivables (more likely to be paid than not) by the auditors. We also are
uninfluenced by whether or not the auditors described the facilities as loans
or facilities. Even if, which must be unlikely, the auditors were seeking to
describe the legal effect of the UK Facility Agreement, their view of the law
is irrelevant to the Tribunal.
Conclusion
214. Agreeing a
deferred time of payment does not mean there is no debt: it means that there
is both a debt and credit: agreeing that a debt will be waived on a future
contingent event and thus creating an uncertainty whether the debt will remain
due does not alter its status as a current debt. Agreeing both deferred
time of payment and waiver on future contingent events makes no difference:
there is a current debt.
The purpose of s 419 ICTA
215. The appellant
states that the object of s 419 is to prevent avoidance of tax by the device of
companies making loans to participators which if left outstanding indefinitely
would in effect amount to a distribution. Carswell LCJ said in Brennan v
Deanby Investment Co Ltd said: at 548a-b:
(548a-b) “The legislation includes provisions to
counter avoidance of tax by the making of loans or advances of money to
participators of close companies. Were it not for these provisions,
participators could enjoy the use of the income of a close company free of tax
if the company were to make loans to them instead of paying dividends or
remuneration. The loans could then be allowed to remain outstanding
indefinitely or could be waived or written off.”
216. It is the
appellant’s case that this was neither the purpose nor the effect of the EPS.
The purpose of the EPS was to incentivise the employees and reward long-term
loyalty. HMRC did not dispute this: they accepted the EPS was a commercially
motivated share incentive scheme. There was no suggestion that this method of
incentivisation was adopted as a more tax efficient method of doing this than
using unapproved share option schemes.
217. Indeed Mr
Grimwold says that the company sees the scheme as very tax inefficient and,
more importantly, as capital inefficient. This seemed to be because of the
need to buy back the shares at a loss if the value fell.
218. The appellant’s
position is that under the tax law as it stood they paid the intended amount of
tax in respect of these arrangements and that s 419 was a penal provision that
was not intended to catch these sorts of arrangements. Its meaning should not
be stretched to bring this sort of arrangement into charge.
219. On the face of
it, motive is not relevant to the application of s419(1). However, it is
well-established that a purposive interpretation should be given to tax
legislation. This is from the report of the Appellate Committee in Mawson:
[32]“The
essence of the new approach was to give the statutory provision a purposive
construction in order to determine the nature of the transaction to which it
was intended to apply and then to decide whether the actual transaction (which
might involve considering the overall effect of a number of elements intended
to operate together) answered to the statutory description. Of course this does
not mean that the courts have to put their reasoning into the straitjacket of
first construing the statute in the abstract and then looking at the facts. It
might be more convenient to analyse the facts and then ask whether they satisfy
the requirements of the statute. But however one approaches the matter, the
question is always whether the relevant provision of statute, upon its true
construction, applies to the facts as found.”
220. Where there is
ambiguity the courts would normally construe tax legislation so that it is not
easily avoided on the basis that such an interpretation is in accordance with
the intention of Parliament. It must follow that where there is ambiguity in
tax avoidance legislation, we should if possible construe any ambiguity so that
the law does not have a reach beyond tax avoidance situations.
221. But this does
not help the appellant. Firstly, here there is no ambiguity. We are not
straining the meaning of s 419 but merely applying the normal meaning to “debt”.
222. Secondly, were
we to agree with the appellant’s analysis of the law, it would be to render s
419(1) very easy indeed to avoid: a would-be tax avoiding close company would
need only to loan or advance money or supply goods to its director-cum-shareholder
on terms that (re)payment would be deferred until a contingent event and put in
a recital that no debtor-creditor relationship was incurred until the
contingent event in order to avoid liability under that section. We are
certain that such a situation was intended to be caught by s 419. So
ours is a purposive interpretation.
223. We note that the
real reason why the appellant is likely to consider that its EPS was not the
sort of thing Parliament intended s 419 to apply to is because the
“participators” are merely employees without control of the company and
therefore they are not and could not be intending to pay themselves the
equivalent of a dividend but avoid ACT on it, which was the mischief at which s
419 was aimed. But the appellant has already conceded that the Employees were
participators. We were not asked to consider the meaning of “participator”.
And we are not going to give a strained and unnatural reading of “debt” to
compensate for a wide definition of “participator” resulting in situations being
caught by the anti-avoidance provision which may not have been the object of
the anti-avoidance legislation.
224. In conclusion,
completion of the UK Facility Agreement resulted in both a loan by the Company
to the Employee and a debt owed by the Employee to the Company. That debt
arose on completion of the UK Facility Agreement. Therefore, in principle the
assessments are upheld.
Liability under s419(5)?
225. Section 419(5)
gives rise to liability under s 419(1) where there is both a loan or advance not
within s 419(1) and a transfer of property (or giving of other value) to a
participator. A loan or advance will not be within s 419(1) if it is not made
to the participator. So s 419(5) is apt to capture a situation where the close
company makes a loan or advance to a third party who then makes a loan or
advance or transfers property to the participator in the close company.
226. We find it does
not apply in this situation as no loan or advance was made by the Company to
the Trustee (or anyone else) in connection with the transfer by the Trustee of
the shares to the Employees. The Company paid (on behalf of the Employee) the
Trustee for the shares that were transferred: but it did not loan nor advance
any money to the Trustee.
Conclusion
227. It was accepted
by the appellant that the US Loan Facility Agreement created a loan (or at
least a debt) from the outset and s 419(1) with its original or extended
meaning applied to impose a tax charge. In any event, we find that this was so
for the reasons given above.
228. For the reasons
explained above, we also find that the UK Facility Agreement created a loan (or
at least a debt) from no later than the moment that agreement was completed
which would have been no later than the date the Company paid the Trustee the
money in consideration for the shares transferred to the Employee. This was
caught by s 419(1) with either its original or extended meaning and a tax
charge arose at that time.
229. We dismiss the
appeal in principle. If the parties are unable to agree quantum, either party
is at liberty to revert to the Tribunal for a ruling.
230. 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.
BARBARA
MOSEDALE
TRIBUNAL JUDGE
RELEASE DATE: 29 June 2012
