Introduction
In Arthurian legend, the Fisher King stands as both the guardian and embodiment of his lands – a full on gig. However, a profound wound renders him impotent, resulting in a kingdom left desolate and barren. Eek.
Drawing parallels, the recent Supreme Court decision in Fisher marks the conclusion of a long-standing tax saga, perhaps exposing a vulnerability within the Transfer of Assets Abroad (“TAA”) provisions—a fiscal guardian akin to the Fisher King.
These TAA provisions, safeguarding the UK tax base from offshore chicanery, have stood for decades, fiercely protecting against attempts to circumvent UK tax responsibilities.
However, the Fisher ruling has led to questions: Does this landmark decision cast light on the true limits of these rules, revealing a chink in their armour?
But what are the TAA rules?
What are the TAA rules?
As I often say, the Transfer of Assets Abroad is not simply a posh way to describing your Louis Vuitton luggage.
They are tax avoidance rules which bite in circumstances where a UK resident person seeks to shift income offshore and outside the scope of UK tax.
A classic case is where a UK resident individual transfers assets such as shares to a person overseas (such as a non-UK company or trust) so that instead of that individual receiving and paying tax on income arising from the assets (eg dividends) the overseas entity either retains the income or transfers it to the individual in the form of capital.
The rules counteract any benefits by deeming the income received by the overseas person to be the income of the individual who will be required to pay tax accordingly.
These are the rules that prevent the vast majority of UK businesses from ‘doin a Google’ and offshoring their businesses (see my article considering the case of a Halifax scrap dealer)
The rules are split, broadly, into two parts:
- Transferors: a tax charge will apply to transferors who have a power to enjoy the income; and
- Non-transferors: a tax charge may apply where an individual actually receives a benefit
The case considers the first of these, although the presence of the second assists the Supreme Court in reaching their decision.
The rules importantly don’t apply to non-UK resident individuals. There is also a motive test which, it is probably fair to say, is more limited than one might expect.
The rules were first introduced in 1936 and extended in 1981 and 2005. As you might expect, these important and longstanding rules have been subject to some epic battles that are already written in tax lore.
However, now that the Fisher case which has now reached its denouement in the Supreme Court with victory for the taxpayer, we have new clarity.
But does the provide much-needed clarity on the boundaries of these rules?
Or does it, akin to the Fisher King’s wound, reveal a vulnerability within this long-standing fiscal guardian?
The facts in Fisher
Anne and Stephen Fisher, parents to Peter and Dianne Fisher, spearheaded a betting business in 1988 under Stan James (Abingdon) Limited (“SJA”).
This UK-resident company, owned by the four Fishers, operated under their directorship.
The Fishers were perhaps at the forefront in recognising and exploiting the burgeoning market of “tele-betting,” allowing bets to be placed via telephone—contrasting the conventional method of betting solely in UK shops.
As the landscape evolved, enabling bets to be placed remotely, the fact that the UK levied a 6.75% betting duty, while Gibraltar imposed only a 1% duty offered an obvious opportunity for savings where bets could be placed overseas to bypass UK betting duty. However, regulations prohibited overseas bookmakers from UK advertising and resource-sharing with UK entities to facilitate bets.
This period is well documented in Chapter X of the book “Butler to the World”, by Oliver Bullough.
The Fishers reacted to this evolving landscape by establishing an SJA branch in Gibraltar, operational since 1 April 1998, to accept bets via telephone from non-UK customers. The transition marked a significant business upswing—escalating from six to over 20 staff, requiring infrastructure expansion.
Subsequently, on 22 July 1999, Stan James Gibraltar Limited (“SJG”), a Gibraltar-incorporated company, emerged. Between August 1999 and February 2000, SJA transferred its tele-betting operation and activities (excluding shops) to SJG.
Factually, it is important to note that, from a legal standpoint, the assets were being transferred by the Company, SJA. That transfer, endorsed by Stephen Fisher for SJA and Peter Fisher for SJG, included the UK-based tele-betting operations and the Gibraltarian branch.
At the time of the transfer, the company shareholdings were as follows:
- SJG: comprised 24% each for Peter and Dianne and 26% each for Stephen and Anne.
- SJA: Dianne and Peter held 12%, while Anne and Stephen possessed 38% each
SJG flourished post-transfer, attracting 25 to 30 employees and their families from SJA’s UK operations to Gibraltar.
From September 2003, SJG expanded into internet betting and gaming platforms.
HMRC issued tax assessments to Stephen and Anne for assessment years 2000/2001 to 2007/2008, and to Peter for 2000/2001, 2001/2002, 2003/2004, and 2004/2005.
As part of those assessments, HMRC treated SJG’s income as deemed income for Stephen, Anne, and Peter, in proportion to their SJG shareholdings at the transfer date. Despite slight variations due to other income sources, HMRC didn’t tax the remaining 24% held by Dianne, who wasn’t UK resident, escaping the provisions.
The First Tier Tribunal (“FTT”)
The FTT decision, way back in 2014, concluded that the Transfer of Assets Abroad (TOAA) code was applicable based on the facts.
The key findings can be summarised as follows:
- Quasi Transferor Issue: The FTT deemed the three family members as ‘quasi-transferors’ responsible for jointly orchestrating the transfer. The profits of the Gibraltar company were taxable under the TOAA rules as an ‘associated operation’ funded by the asset transfer abroad. It inferred that the income flowing to the Gibraltar entity resulted from the asset shift from the UK company.
- Motive Defence Issue: The taxpayers argued for a ‘motive defence,’ contending that the transfer aimed not to evade tax but to sustain their business amid competitors relocating to Gibraltar. The FTT disagreed, finding tax avoidance as the primary motive behind the transfer, dismissing their defence.
- EU Law Issue: While EU laws on freedom of establishment didn’t apply to Stephen and Peter Fisher due to Gibraltar’s relationship with the UK, Anne Fisher, being an Irish national, fell under EU establishment laws. Consequently, the TOAA code’s interpretation should narrow to apply solely to wholly artificial transactions for tax avoidance. The FTT deemed the Gibraltar transfer as a genuine trading entity, not a contrived arrangement, thereby restricting Anne Fisher’s freedom of establishment unjustifiably. The application was disproportionate, resulting in higher income tax rates and double taxation, contrary to legitimate TAA objectives. Thus, the denial of the motive defence for Anne Fisher was deemed disproportionate, allowing her to succeed under the motive defence clause.
The Upper Tribunal (“UTT”)
After a long abeyance (can’t even blame Covid), the UTT issued its judgment on 4 March 2020 in response to the Fisher family’s appeal against the FTT decision.
The UTT’s decided that the TAA code had been interpreted too widely by the FTT.
The UTT made the following decisions:
- The TAA Rules did not apply: The UTT held that the TAA code shouldn’t generally apply to transactions by companies. The tribunal clarified that attributing a transfer to an individual might occur in exceptional scenarios, especially when an individual plays a pivotal role in effecting the transfer. In the Fishers’ case, the UTT viewed the transfer as orchestrated by the directors on behalf of the company, indicating no direct application of the TAA code.
- Motive Defence: While the TAA code was deemed inapplicable, the UTT addressed the motive defence. The tribunal asserted that had the TAA code applied, the motive defence would have been accessible to all three appellants. This defence is applicable if the transfer and associated operations are legitimate commercial transactions not primarily designed to avoid tax liability.
- EU Law: The UTT assessed the EU rights under freedom of establishment. It affirmed Anne Fisher’s EU rights breach but diverged concerning her husband, Stephen Fisher. The tribunal reasoned that Stephen Fisher, if unable to rely on EU establishment rights and the motive defence, would face increased UK income tax. The tribunal concluded that Stephen Fisher could also invoke EU law, considering the impact on his and Anne Fisher’s financial and emotional well-being as a married couple. However, these rights didn’t extend to Peter Fisher, an independent adult whose tax position didn’t directly affect his parents’ finances.
The Court of Appeal (“COA”)
On 6 October 2021, the COA’s decision:
Who can be a Quasi-Transferor Issue:
The concept of quasi-transferors, originating from historical tax cases, was examined in detail. It traced back to cases like Congreve v IRC (1948) and Vestey v IRC (1980), which provided a foundational understanding but left certain aspects open to interpretation.
The judgment accentuated the broad nature of the Transfer of Assets Abroad (TAA) provisions. It conveyed that these rules were intended to encompass any number of individuals who actively participated in facilitating a transfer. However, it clarified that passive involvement without active contribution didn’t render one a quasi-transferor under these provisions.
It emphasised distinctions between directors and shareholders, highlighting scenarios where joint control over a company could invoke the TAA code, especially when individuals acted together in effecting a transfer.
Does there need to be avoidance?
Echoing the House of Lords’ decision in IRC v McGuckian [1997], the Court upheld that the TAA code could be applicable without requiring direct avoidance of income tax. This reaffirmed the broader application of the TAA code, implying that its enforcement wasn’t contingent upon explicit income tax avoidance.
Motive Defence
Despite recognising the transaction’s genuine commercial intent aimed at preserving the business, the Court critically analysed the interdependency between the avoidance of betting duty and the primary objective of sustaining the business.
It concluded that the avoidance of duty was intricately intertwined with the core aim of ensuring the survival of the business. Consequently, the Court determined that it was impossible to disassociate the avoidance of duty from the primary goal of business continuity, asserting that the avoidance was indeed a purpose of the transaction.
EU Law Defence
The judgment extensively examined the previous rulings of the Court of Justice of the European Union (CJEU) concerning direct tax infringements.
It particularly emphasized Gibraltar’s legal status within EU law, affirming that, for EU purposes, Gibraltar is considered part of the UK rather than a distinct member state.
Additionally, it highlighted the limitations of fundamental EU freedoms concerning internal events within a member state. This reaffirmed the principle of preserving fiscal autonomy for each member state, excluding certain internal matters from the scope of EU law.
The Supreme Court
Overview
In the final phase of the Fisher case at the Supreme Court, the focus was on two pivotal issues that were more sharply defined compared to the broader range of topics discussed in lower courts:
- Does the transfer of assets have to be a transfer by the individual who has the power to enjoy the income can the transfer be by any person;
- If the individual has to be the transferor of the assets, 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?
Issue 1 – Defining the Transferor
The crux of this issue revolved around whether the provisions were exclusively applicable when the taxpayer directly executed the transfer of assets generating income.
The Fishers argued that Vestey’s judgment established a narrower interpretation, confining the charging provision solely to individuals directly effecting asset transfers.
In her delivery on behalf of the Supreme Court, Lady Rose conducted a comprehensive review, referencing Lord Wilberforce’s pivotal insights in Vestey. Wilberforce had examined two potential interpretations: one limiting the provision to direct asset transferors and the other extending it to all individuals benefiting from assets transferred abroad. He favoured the former, citing that the broader interpretation would result in unjust outcomes contrary to Parliament’s intent.
Lady Rose concurred, affirming that the provisions targeted individuals residing in the UK who were directly involved in asset transfers.
This led to a favourable ruling for the Fishers on the first issue.
Issue 2 – Shareholders’ Treatment in a Company Transfer
While the legal transferor was SJA (the Company) was undisputed, HMRC argued that the Fishers, due to their controlling interest in SJA, should be considered as transferors.
Lady Rose rebutted this notion, asserting that shareholders, even if they concurrently serve as directors, cannot be deemed quasi-transferors procuring transfers made by the company.
She acknowledged potential legislative gaps but underscored separate provisions addressing non-transferors benefiting from such transactions.
Moreover, she rebuked HMRC’s implication of deploying vague legalities as a means of intimidation, citing Vestey’s disapproval of such practices She dismissed HMRC’s argument, rejecting any notion of leveraging ambiguous legalities to instil fear among taxpayers, emphasizing the need for clarity and constitutionality in enforcing provisions.
However, the fact that HMRC is advancing this as an argument is fairly chilling.
Conclusion
The Fisher case, akin to the Arthurian legends, has concluded after a convoluted and lengthy journey. However, unlike the tales of King Arthur, this saga has reached a definitive end.
At present, the overarching outcome solidifies the understanding that the TAA code’s reach is more restrained than initially perceived by HMRC and others.
Lady Rose’s affirmations confirm that a shareholder within a company, even one holding a majority stake, does not assume the role of a “transferor” concerning a transfer executed by the company, notwithstanding their dual position as company directors facilitating such transfers.
Nonetheless, uncertainties linger regarding the definitive boundaries delineating who qualifies as a ‘quasi-transferor.’ Lady Rose acknowledged that determining these ‘outer limits’ necessitates the context of a future case to provide clarity.
Another TAA Arthurian quest, anyone?
If you have any queries around this article on the Fisher case, the TAA provisions, or tax matters in general, then please get in touch.