UT (Tax & Chancery) UT/2023/000098 - [2024] UKUT 00404 (TCC)

Section 12(2) TCEA 2007 provides that if the UT finds that the making of the decision under appeal involved the making of an error on a point of law then the UT “may (but need not)” set aside the decision of the FTT. This discretion was considered by Henderson LJ in Degorce where he said:

“95.

I would accept the submission of Mr Gibbon that, if the Upper Tribunal finds an error of law to have been made, it then has a broad discretion whether or not to set aside the decision of the FTT. That is the clear import of the words "may (but need not) set aside", and in my view it would be wrong in principle to interpret the scope of this discretion by reference to the previous law on tax appeals under TMA 1970 . TCEA 2007 set up a new tribunal structure, and the provisions of section 12 apply to all chambers of the Upper Tribunal, not merely to the Tax & Chancery Chamber. That said, however, I consider that a test of materiality will still have a crucial, and usually decisive, role to play in the decision of the Upper Tribunal whether or not to set aside the decision of the FTT, and likewise in the decision of this court if an error of law by the Upper Tribunal is established. At least in cases of the present type, I find it difficult to envisage circumstances in which the Upper Tribunal could properly leave the decision of the FTT to stand, once it is satisfied that the error of law might (not would) have made a difference to that decision. As a taxpayer, Mr Degorce is entitled to be taxed according to the law, and if an error of law is detected in the FTT's decision, which is material in the sense I have mentioned, justice will normally require nothing less than that the decision be set aside. Conversely, if an error of law is made, but the Upper Tribunal is satisfied that it was immaterial, there will be no injustice to Mr Degorce in allowing the decision of the FTT to stand. Similarly, if we were to take the view that the Upper Tribunal erred in law in the task which it had to perform, but that the errors could have made no difference to its decision to dismiss Mr Degorce's appeal, there would again be no injustice if his appeal to this court were in turn dismissed.”

Applying this guidance, the question for us to consider is whether we are satisfied that the error of law “might (not would) have made a difference” to the Decision. We consider the reasoning of the FTT in reaching its conclusion to assess whether we are so satisfied. In conducting this exercise, we are mindful of the warnings of the higher courts that we should read the Decision “fairly and as a whole, without focusing merely on individual phrases or passages in isolation, and without being hypercritical” (Popplewell LJ in DPP Law v Greenberg [2021] EWCA Civ 672 at [57]).

It was common ground that the FTT correctly identified the issue at [14] and, having made its findings of fact and set out the parties’ submissions in some detail, set out its proposed approach at [22] to [24]. It is notable that at [24] the FTT said it would start by looking at the reasons why the Appellant made the Payment and then move on to consider the reasons why the EBT made the Loan to MC. At this stage the FTT was drawing a clear distinction between the Payment and the Loan, and explaining why it would be addressing the reasons for the Loan, namely that when considering the reason why the Payment was made the FTT could also consider subsequent events (including the Loan, the purchase of the Shares and the introduction of £800,000 into the Appellant by KC).

Having set out its consideration of the reason for making the Payment at [29] to [32], the FTT then considered the additional question it posed at [33] to [37], namely whether the Loan was a reward or benefit, before then addressing at [38] to [55] the reasons for the making of the Loan.

Mr Waldegrave submitted that the discussion at [33] to [37] was obiter, or what he described as a “sideshow”. We consider that, superficially at least, there was some force in this submission given the overall structure of the Decision. The FTT did immediately revert, at [38] to [55], to what it had set out as its proposed approach, even referring to this as the “second stage of the enquiry” (at [38]) and then expressed its conclusion by reference to the Payment at [57].

There are, however, difficulties with Mr Waldegrave’s characterisation of this part of the Decision:

We recognise that some of these points could be said to arise from too close a scrutiny of individual words and phrases used by the FTT, in particular those made above in relation to the use of “it” and “its” in [37]. However, reading the Decision as a whole, we have come to the conclusion that the error of law might have made a difference to the decision reached by the FTT. We are particularly concerned by [44] and the way in which the FTT explained its conclusion at [56] and [57]. We have concluded that the error of law is material in the sense described by Henderson LJ and that justice requires that the decision be set aside.

We therefore set aside the Decision.

As we have set aside the decision of the FTT, we must decide whether to re-make it or remit it.

Whilst HMRC had initially reserved their position as to whether we should remit the case to the FTT or re-make the decision, at the hearing both Mr Elliott and Mr Waldegrave agreed that we should re-make the decision. We agree that this is the appropriate approach in circumstances where the Appellant’s ground of appeal had not identified any challenge to the FTT’s findings of fact.

Section 12(4) TCEA 2007 provides that in re-making the decision the UT (a) may make any decision which the FTT could make if the FTT were re-making the decision, and (b) may make such findings of fact as it considers appropriate. At the hearing Mr Elliott did submit that there were areas where the UT should, if we decided to set aside the Decision and re-make it, “smooth over” or correct the findings of the FTT. Those related to what both parties accepted was a correction to, or completion of, the finding at [15(25)] in relation to the cash movements on 26 November 2010, and (which was opposed by HMRC) to the findings in relation to KC’s loan account with the Appellant and in particular to what was said to be the finding that MC had unfettered access to the money withdrawn on that account.

Our starting-point is that the ground of appeal did not identify any challenge on Edwards v Bairstow grounds to the findings of fact made by the FTT. Furthermore, it is well-established that an appellate court or tribunal should be slow to interfere with conclusions of a fact-finding tribunal that involve elements of evaluation and judgment. However, such evaluative decisions cover a wide spectrum and in some tax appeals the evaluative exercise contains a much smaller factual component and in such cases it is much easier for an appellate court or tribunal to interfere (Lord Drummond Young in Rangers CS at [47]).

Addressing the two specific matters identified by Mr Elliott:

Mr Elliott submitted that the loan account was KC’s loan account with the Appellant and that, as KC and MC are separate individuals, we should make a finding that MC did not have unfettered access to the money withdrawn or repaid from that account. We are wary of seeking to re-draft findings of the FTT on specific issues but conclude that such an exercise is unnecessary in any event.

We are able to re-make the decision on the basis that the FTT’s findings of fact are undisturbed save in relation to [15(25)] (which is amended as set out above); and such findings include the FTT’s conclusions, based on the evidence before the FTT, as to the reasons for the Payment and the Loan.

The Appellant had appealed to the FTT against the determinations and the FTT had expressed the issue as being “whether the sole or a substantial reason why the Payment was paid by the company to the EBT as part of the arrangements was because it was a reward or benefit for MC for his exertions as an employee/director” (at [14]). Mr Elliott accepted that the Appellant’s appeal against the determinations would be dismissed if we conclude that either the Payment or the Loan comprised the payment of earnings of MC.

We have already set out our analysis in relation to the Loan and concluded that the making of the Loan by the Trustee to MC did not constitute a payment of earnings of MC.

We address here whether the Payment to the Trustee constituted a payment of earnings of MC.

Mr Waldegrave submitted that the legal analysis in relation to the Payment is identical to that in Rangers SC, which sets out the approach we should adopt in re-making the decision. We have already summarised the parties’ submissions in relation to Rangers SC, outlined the facts and set out the issue which was addressed by Lord Hodge.

Having set out at [36] that the “central issue” is whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her work in order for that reward to amount to taxable emoluments, Lord Hodge set out his conclusion as follows:

“41.

As a general rule, therefore, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it. While that is a general rule, not every payment by an employer to a third party falls within the tax charge. It is necessary to consider other circumstances revealed in case law and in statutory provisions which fall outside the general rule. Those circumstances include: (i) the taxation of perquisites, at least since the enactment of ITEPA, (ii) where the employer uses the money to give a benefit in kind which is not earnings or emoluments, and (iii) an arrangement by which the employer’s payment does not give the intended recipient an immediate vested beneficial interest but only a contingent interest….”

Lord Hodge’s summary of the analysis then included the principle that “income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee” ([58]) and set out the following:

“59.

Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect….”

Lord Hodge then applied this purposive construction to the facts in the appeal:

This decision of the Supreme Court not only sets out the applicable general principles (including at [41] and [58]) but also includes Lord Hodge’s application of the law to the facts as found by the majority of the FTT. However, this decision must be understood and applied by reference to the issue that was before the Supreme Court in that appeal.

The decision of the Supreme Court in Rangers SC establishes that a payment to a trust (or another third party) may itself comprise taxable earnings in that amount, and it is not precluded from being such by the fact that the employee receives such amount from the trust by way of loan rather than outright gift. However, it was accepted by the taxpayers that the payments to the trust were remuneration for services provided by the employees (including for this purpose the footballers and the executives). This is apparent from the summary of taxpayers’ counsel’s submissions at [34], where he was said to assert that it is not sufficient that the payment of money arises from the performance of the duties of an employment and that the payment to a third party does not amount to a payment of earnings unless the employee already has a legal right to receive the payment and it is paid at his direction to a third party, and was reflected in Lord Hodge’s description of the issue before the Supreme Court at [1] and [36].

The role then played by whether there was an entitlement to the relevant remuneration is more difficult. Lord Hodge set out the issue at [1] as involving the circumstance that the employee had “no prior entitlement to receive it himself or herself” and then set out the general rule as being that the charge to tax “extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party” ([41]). He was rejecting the taxpayers’ counsel’s submission that a payment to a third party can only be earnings if the employee had a legal right to receive the payment and it was paid at his direction to a third party. The facts then involved two different situations. For the footballers, the focus of the discussions before their engagement was on the net remuneration which would be made available ([61]), and the side letter between RFC and the relevant footballer then included a commitment by RFC to fund the principal trust ([22]). There was thus a contract providing for the amount to be paid by RFC to the trust. There was no equivalent to this side letter for the executives. For those employees, Lord Hodge said that there was no contractual entitlement to the bonuses before their employer decided to give them ([66]). We agree with Mr Elliott’s submission that this should not be read as saying there was never any entitlement at all; rather, that there was no entitlement to these bonuses which had been agreed upon engagement, but that during the employment the employer decided to award the bonus and decided that this would be delivered through the trust arrangements.

It is not agreed between the parties to this appeal that the Payment was remuneration for MC’s services, and we therefore reject Mr Waldegrave’s submission that this appeal involves a straightforward application of the decision in Rangers SC.

The FTT has found:

We agree with Mr Waldegrave that it would be artificial to focus only on the finding made by the FTT as to the substantial reason for the Payment rather than going on to take account of the subsequent finding as to the reason for the making of the Loan, given that the reason for the first was to make the second, and the FTT found this was prewired. However, we conclude that these findings do not support a conclusion that the Payment itself was money paid as a reward or remuneration for MC’s exertions as an employee. We need to consider the full picture, and that includes:

Whilst not stated in these terms, it is clear that the FTT considered there to be a link or connection between the Appellant’s decision to make the Payment to the Trustee and MC’s position as a director of the Appellant. This is evident from the FTT’s conclusions as to the reasons for the Payment and the Loan, and as to the arrangements being prewired. The Appellant knew that when it paid £800,000 to the Trustee, that amount would be lent to MC, and this did in fact occur. However, the existence of such a link or connection is not sufficient for the amount of the Payment to constitute earnings of MC, as it takes no account of the character of what was received by MC, namely the Loan, and MC’s resulting obligation to repay that loan. We have identified above the areas of key difference with the facts in Rangers SC, being not only the agreement between the parties in that appeal as to the payments to the principal trust being remuneration, but also the facts in relation to the side letters for footballers which were agreed alongside the employment contracts and the expectation that the terms of the loans would be extended throughout each employee’s lifetime such that they would only be repayable out of their estate.

We have concluded that the Payment was not earnings of MC.

The Appellant’s appeal is allowed, we set aside the Decision and re-make it to allow the Appellant’s appeal against the determinations.