In HMRC v Andreas Rialas [2020] UKUT 367 (TCC) the Upper Tribunal gives helpful guidance on the scope of the Transfer of Assets Abroad (‘ToAA’) legislation.
Mr Rialas wanted to buy out his co-shareholder’s interest in a UK company (‘Argo’) that they owned 50-50, apparently with a view to selling on the whole company to a third party (though that sale, if it ever happened, did not form any part of the proceedings before the Tribunal).
Rather than buy the shares himself, he established an offshore trust of which he was a potential beneficiary. The trustees formed a non-resident company (‘Farkland’) which bought the shares in Argo, borrowing (from someone not connected with Mr Rialas) 100% of the purchase price. Argo subsequently paid dividends to its shareholders including Farkland.
HMRC sought to assess Mr Rialas, under the ToAA legislation, on the dividends paid by Argo to Farkland. To do so they needed to show that he was the ‘transferor’ for the purposes of the legislation.
The Tribunal summarised the conditions required for the legislation to apply as follows:
- There must be a “transfer of assets”
- By virtue of or in consequence of that transfer of assets, either alone or in conjunction with “associated operations”, income must arise to a person resident or domiciled outside the UK.
- Also by virtue of or in consequence of the transfer of assets, either alone or together with associated operations, “such an individual” must have “power to enjoy” income of a non-UK resident or domiciled person which would have been subject to income tax if it had been received by that individual.
Unquestionably there had been a ‘transfer of assets’ resulting in income arising to a non-resident inasmuch as the shares in Argo had been transferred to Farkland (notwithstanding that the vendor had been paid full market price for the shares) and dividends had been paid. And Mr Rialas certainly had ‘power to enjoy’ that income. But was Mr Rialas to be treated as the ‘transferor’ despite the fact that the actual transfer had been made not by him but by the vendor?
HMRC pointed to the fact that Mr Rialas had been influential in procuring that Farkland was able to borrow the funds necessary to buy the shares: it appears that he ‘called in a favour’ and used his personal contacts to persuade an unconnected company to make the loan. HMRC asserted that his ‘close involvement with the structuring and financing of the transaction’ was sufficient to render him a ‘transferor’ for the purposes of the ToAA code.
The Tribunal agreed that earlier case law had shown that ‘a person who is not a transferor may nevertheless be liable as if he were a transferor’. But, as was held in Fisher [2020] UKUT 62 (TCC): ‘There must be some proper basis for ascribing the acts of the person transferring the assets to the individual concerned and treating him as being responsible for the transfer as if he had carried it out himself. If the individual has no influence over what the actual transferor does with the assets, there is no good reason why he should be treated as the “real” Transferor.’
In the Tribunal’s view, the crucial point was that, however closely Mr Rialas might have been involved with the structuring, the fact was that he did not have any influence over the vendor’s decision to sell the shares. He was, therefore, not a ‘transferor’ in respect of the transfer of the shares in Argo to Farkland.
But HMRC had a second string to their bow.
Mr Rialas had settled a few pounds on the trustees. That was unequivocally a ‘transfer of assets’ made by him. HMRC sought to argue that it was that that resulted in the offshore trust owning the shares in Farkland and Farkland receiving the dividend. That was thus a further basis on which Mr Rialas was caught by the ToAA code.
The Tribunal’s response was: ‘That argument can be dismissed briefly.’ (Tribunals are far too polite to use phrases like ‘You must be joking’, even when that’s what they are clearly thinking). Establishing the trust and acquiring the subscriber shares in Farkland were no more than preconditions to the acquisitions of the shares in Argo. That was a quite different thing to saying that the receipt of dividends was ‘by virtue or in consequence of’ the establishment of the trust.
It is more than possible that the decision (at least on HMRC’s first argument – less likely on the second, we think) will go further, perhaps in conjunction with an appeal against the decision in Fisher. ToAA-watchers will be following progress with interest.
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This article was republished in Tax Journal Issue 1517 and is also available on the Tax Journal website.
This article was also republished in the March 2021 issue of ICAEW TaxLine and is available here on the ICAEW website.