All bets are off for HMRC in Supreme Court TOOA rulingby
The Supreme Court has ruled that the transfer of a UK telebetting business to Gibraltar could not be a transfer of assets abroad as it was not made by individual shareholders but by a company owned by them.
On 21 November 2023, Lady Rose conveying views unanimously shared with her colleagues Lords Reed, Hodge, Sales and Stephens delivered a Supreme Court judgement in a tax avoidance case relating to the transfer of assets abroad code (“TOOA”).
This considered legislation that has been on the statute books for 87 years, starting as the preamble to section 18 of the Finance Act 1936, embodied in section 739 ICTA 1988 by the time of the relevant transfer and subsequently in the Income Tax Act 2007.
Despite this longevity, interpretation is still open to doubt, as demonstrated by a dispute about events 20 years ago that has run through two levels of tribunal and the appeal court, with conflicting decisions along the way.
Section 739 is headed “Prevention of avoidance of income tax” and is essential reading for interpretation of the decision.
The case relates to the affairs of the Fisher family, who ran a UK betting business through Stan James (Abingdon) Limited (“SJA”) and, in 1998, managed to get ahead of the market by developing a telebetting strategy, which was soon followed by its rivals.
Having developed the initiative, they saw a significant advantage in moving their business from the UK where betting duty was charged 6.75% to Gibraltar, where it was just 1%.
As if this wasn’t harmful enough to be UK Exchequer, they first transferred the business to a Gibraltarian branch and subsequently a new company, Stan James Gibraltar Limited (“SJG”).
At the time of the transfer, the shareholdings were held either 12% or 38% by family members, one of whom was an overseas resident. On transfer, they received either 24% or 26%.
HMRC raised assessments to various family members in proportion to their shareholdings in the Gibraltarian transferee company for tax years between 2000/01 and 2007/08 for a total of almost £5.3m. It emphasised that the tax should be due regardless of whether any money was actually received from the company.
The first tier tribunal allowed some appeals but not others. The upper tier tribunal disagreed, holding that the transfer was made by the UK company, not the individuals and as such, “there is no basis for treating any of them as the ‘real’ transferor and SJA as merely an instrument by which they effected the transfer of assets”.
The Court of Appeal issued a split decision with the majority believing that two of the shareholders were liable to tax, while a third escaped because although she was a shareholder and director she was not a decision-maker in the business.
The Supreme Court believed that two issues need to be resolved.
i) Does the transfer of assets referred to in subsections (1) and (2) of section 739 have to be a transfer by the individual who has the power to enjoy the income that becomes payable to the overseas person, or can the transfer be by any person, provided that the individual assessed to tax has the power to enjoy that income by virtue or in consequence of the transfer?
On this point, the judges decided in favour of the Fishers. They can only be subject to the charge under section 739 if they are properly to be regarded as the transferors of the assets which were sold by SJA to SJG in February 2000.
(ii) If the individual has to be the transferor of the assets in order for section 739 to apply, in what circumstances (if any) can an individual be treated as a transferor of the assets where the transfer is in fact made by a company in which the individual is a shareholder?
The judges concluded there was no doubt the legal transferor of the assets was SJA and not the Fishers. HMRC argued that because the Fishers together owned the controlling interest in SJA, they should be treated as transferors of the assets and therefore within the charge imposed by section 739.
This raises two questions – is it ever possible for someone other than the owner and legal transferor of the assets to be treated as a transferor for the purposes of section 739? If so, in what circumstances (if any) do the shareholders of a company which transfers its assets count as transferors? The position was clear in that “Section 739 is expressly limited to “individuals” and the judges observed that HMRC’s contention therefore bristles with difficulties.”
The Fishers largely relied on the House of Lords decision in Vestey v Inland Revenue Comrs (Nos 1 and 2)  AC 1148.
Lacuna in the legislation
In summing up, Lady Rose observed that HMRC may protest that this leaves a lacuna in the legislation since all an individual needs to do is put the asset into a company and then get the company to transfer that asset abroad. She responded that as section 740 applies to non-transferors that individual will not escape the tax charge if he or she actually receives a benefit in the UK.
Additionally, a taxpayer could not avoid the operation of section 739 by simply transferring their income-producing assets to a UK company prior to the transfer of the same assets by the company to a foreign company or individual as this would still be a transfer by the individual to the foreign entity. Likewise, if a UK company was deliberately set up to circumvent a liability to income tax, that scenario might fall within one of the recognised exceptions to the distinct legal personality of the company. No such argument could be relied on by HMRC here because SJA was a bona fide company which had been trading for many years.
In allowing the Fishers’ appeal, she finally commented that if the legislation is not achieving the necessary goals, there may be a need for amendment.
Having rumbled through three layers of the legal system and arrived in the Supreme Court, where no fewer than three KCs and six other barristers representing their clients in front of five judges, the combined costs may have come close to wiping out the tax at stake, although there may be a number of other similar cases that rest on the outcome.
It is possible that HMRC’s motivation in taking the case to its ultimate conclusion had less to do with recovering tax from the Fisher family but instead definitively proving that even though the legislation in various forms has existed since 1936, a loophole remains that will need to be closed by a further amendment.