“ ’in respect of’ tax avoidance”

The Upper Tribunal has upheld the First Tier Tribunal’s decision to strike out the taxpayers’ appeal on the basis it had no reasonable prospect of succeeding.   The case, The First De Sales Limited Partnership (2) Twofold First Services LLP (3) Trident First Services LLP (4) Trident Second Services LLP v HMRC, concerned a tax avoidance scheme.  The judgement notes “Each Appellant carried on a modest business for the purposes of which it employed one or more individuals. In implementation of the schemes, each Appellant entered into a Deed of Restrictive Undertakings with an employee and a third party. Under each Deed, the employee agreed to be bound by certain restrictive undertakings as part of entering into a contract of employment and the Appellant made payments to the third party pursuant to the Deed. The schemes were intended to generate losses that could be utilised by individual partners/members…” 

The employees were paid £60,000 and £80,000 in total – yet the partnerships each agreed to pay £970 million “solely in consideration of [the employee] giving the restrictive undertakings”, which were broadly a six-month non-compete provision. 

It is thus one of those cases where reality fails to coincide with the written agreements.  The judges held that:

“The payments were not in respect of, or for, the giving of, the restrictive undertakings. The memoranda supported the obvious conclusion that any relationship between the commercial value of the undertakings and the amount of the payments was irrelevant to these schemes, which were entered into solely for the purpose of tax avoidance.”

No escape

Mr Justice Henry Carr and Judge Greg Sinfield indulged in  a spot of judicial wit, by referring to Lord Reed’s judgment in UBS:

“In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax (to borrow a phrase from the judgment of Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs generally take the form described in Barclays Mercantile Business Finance Ltd v Mawson:

“…structuring transactions in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute. It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge.”

That paragraph is apt to describe the schemes which are the subject of this appeal, save in one respect. Houdini always allowed himself a reasonable prospect of escape from the handcuffs in which he was bound. These schemes do not have any reasonable prospect of enabling taxpayers who invested in them to escape from the manacles of tax.