The Supreme Court has recently handed down its decision in the conjoined Deutsche Bank and UBS appeals. The case concerned the efficacy (or lack of it, as it turned out) of two very similar schemes to remunerate bankers without the inconvenience of Income Tax; but its import is much wider than that.
Each scheme involved the subscription by the bank of shares in an offshore company brought into existence for the purposes of the scheme, the award of the shares to employees and the redemption of those shares for cash at a later date.
HMRC’s first line of attack was that the “Ramsay” principle applied and that the whole thing failed. The argument ran thus: the bank had determined that a given employee had earned a bonus of £X: the bank paid £X in at one end of the scheme and the employee got cash at the other end. Everything that happened in between times was mere detail and should be ignored: the employee should be taxed on what was to all intents and purposes the cash bonus envisaged at the outset.
That argument failed. The shares were not redeemable immediately on acquisition by the employee and because of the way in which the offshore company was required to invest its cash there was no certainty that the amount of cash coming out to the employee would equate to the cash paid in by the bank. On the contrary, there was no getting away from the fact that the employee was being given shares and only shares, the redemption value of which “was neither fixed nor ascertainable when the shares were acquired, and was unlikely to be the same as the bonus which had initially been allocated to the employees.”
Yet Ramsay did apply and the schemes did fail. Why?
The key point on which the schemes hinged was that there should be no charge to tax on the acquisition of the shares. That in turn depended on their being “restricted securities”, which required there to be some “contract, agreement, arrangement or condition” under which the employee might be called upon to sell the shares for less than their full market value. The precise condition was different in the two cases: but what the conditions had in common was that they had no business or commercial purpose and were unlikely in practice to be fulfilled: they existed only in order to bestow upon the shares the status of “restricted securities” necessary for the working of the scheme.
The Court of Appeal had felt unable to look beyond the fact that the restrictions existed: the court “did not understand the argument that because the forfeiture provision had no commercial rationale, the shares could not be restricted securities.” The Supreme Court took a different view. A review of the history and context of the employment-related securities legislation in general and the provisions relating to “restricted securities” in particular did disclose an underlying purpose of the legislation which would be frustrated if account were to be taken of restrictions brought into existence for no purpose beyond that of tax avoidance: “the exemption conferred by section 425(2), in respect of the acquisition of securities which are “restricted securities” by virtue of section 423(2), was designed to address the practical problem which had arisen of valuing a benefit which was, for business or commercial reasons, subject to a restrictive condition involving a contingency. The context was one of real-world transactions having a business or commercial purpose. There is nothing in the background to suggest that Parliament intended that section 423(2) should also apply to transactions having no connection to the real world of business, where a restrictive condition was deliberately contrived with no business or commercial purpose but solely in order to take advantage of the exemption.”
The schemes failed, then, because, applying a purposive construction to the legislation, the shares were not “restricted securities” within the meaning of the legislation: there was therefore nothing to inhibit a tax charge in the normal way on the award of the shares by reference to their market value at the time they were awarded.
In some ways the decision is surprising. For one thing, the employment-related securities legislation is awash with specific anti-avoidance provisions, a factor which might have been expected to make the courts hesitant to overlay upon those express provisions a further purposive construction. For another, the wording of s423 in referring to “conditions” and “restrictions” is on the face of it clear (or as clear as tax law ever is) and apposite to cover the kind of conditions present in this case. Nonetheless, the case is a reminder that in this, as in other areas of tax law, one must have regard not only to what the law appears to say, but also to what it means by what it says, having due regard to the purposes it seeks to achieve.