UT (Tax & Chancery) UT/2023/000096 - [2024] UKUT 00203 (TCC)

AO claimed losses of £216,273. His tax return showed previous employment with Refco Overseas Limited (“Refco”), and AO confirmed he had traded in oil futures as an employee and then on his own account. He declared sales of contracts for differences (“CFDs”) of £87,850 and purchases of £283,944, of which £200,000 related to a contract between AO and Pendulum Investment Corporation (“Pendulum”). The margin on the other sales, was £3,906. At most, his only transactions in CFDs took place in the space of less than four months but in all probability in the space of less than one month.

RO claimed losses of £506,370. His tax return also showed previous employment with Refco, and he confirmed he had worked in oil futures. He declared CFD sales of £327,653 and purchases of £817,865, of which £500,000 related to a contract between RO and Pendulum. There was a discrepancy in the evidence related to these purchases and sales, but in oral evidence RO conceded that the small number of other sales had produced a loss of £155. His only transactions in CFDs took place in the space of less than one month.

The arrangements constituted a marketed tax avoidance scheme ([40]).

That scheme sought to create an artificial trading loss for tax purposes which the scheme users would be able to set against their general income ([41]).

The Pendulum Contract was a simple bet that the FTSE would have moved up or down from its level at the date of the contract by a specified range of points at specified dates in the future ([43]).

The Pendulum Contract was documented by a Master Agreement, an Offer to Trade and an Acceptance Confirmation Note (although the Appellants were not able to produce a signed copy of the version of the Master Agreement which governed their Pendulum Contracts) ([44] and [46]).

The Pendulum Contract provided for a maximum of five Phases. The counterparty would pay the Initial Margin to Pendulum. If the Designated Index moved (up or down) by an amount greater than the designated swing movement over Phase One, Pendulum would be obliged to pay the “Trade Profit” to the counterparty. If the Pendulum Contract did not terminate, it would move into Phase Two, and Pendulum would serve a Notice of Obligation on the counterparty requiring the counterparty to pay the Margin Call Balance. Phase Two was to last for two years. The Pendulum Contract provided for further Phases ([47]).

RO was looking for tax planning advice from Montpelier ([53]). In his witness statement AO stated his brother had introduced him to Montpelier, but in the hearing he said that Matthew Woolf and his brother had told him about Montpelier ([57]).

Montpelier Financial Services Limited (“Finance”) wrote to both Appellants on 28 February 2006 and each Appellant was told “You should consult your accountant or a tax specialist” as Finance were not giving advice on the tax treatment of CFDs. On 1 March 2006 the Appellants signed and returned a letter in which they each confirmed they understood that Finance was not advising them as to tax and that they must seek the advice of an accountant or tax specialist ([59 and 60]).

On 3 March 2006 both Appellants attended a meeting with Peter Crawford from Finance and Andrew Simpson from Montpelier Tax Consultants (City) Limited (“City”) ([62]).

The Appellants signed various documents at that meeting, including a Professional Services Agreement with Montpelier Tax Planning (Isle of Man) Limited (“MTP”) in which services provided by MTP were taxation advice in respect of the UK tax implications and consequences of the client commencing the trade of purchase and sale of derivative contracts ([65]).

The appellants’ recollection was that they were told that the scheme had been backed by Counsel and that it was legitimate. Anthony Outram said that no detail was given about that Opinion. In cross-examination he conceded that he was aware that Montpelier marketed tax planning and what he called “investments”. Neither could remember much else that they had been told although Ross Outram conceded that he had been aware that Montpelier marketed tax planning and that they were tax advisers. He said in cross-examination that Montpelier had marketed both tax planning and “trade” at the meeting. He said that it was “very possible” that tax advice had been given at the meeting. He said that he had been told that the fees were built into the cost of the CFD and that a loan was available to fund the Margin Call Balance (“MCB”) if it became payable. In his witness statement Anthony Outram said that he recollected that “…the fees were wrapped-up in the price paid for the CFD contract.” In cross-examination he could not remember if it was included in the initial Margin.”

The Appellants received an Offer to Trade from Pendulum ([72] to [77]), and the first phase in the Pendulum Contract was for seven days, with a designated swing movement of up and down 140 points of the close of FTSE trading on the previous day.

The Appellants paid the Initial Margin of 7% of the issue value on 16 March 2006; AO paid £14,000 and RO paid £35,000 ([78]).

The FTSE did not exceed the designated swing movement at the end of Phase One, so both entered Phase Two. Under the terms of the Master Agreement the Appellants were required to pay the balance of the Designated Issue Value (ie the Margin Call Balance) under the Pendulum Contracts on being served with a Notice of Obligation to pay the Margin Call Balance from Pendulum. Service of those Notices should have triggered a draw-down of the loans ([80]).

Pendulum served Notices of Obligation on the Appellants on 27 March 2006; £186,000 for AO and £465,000 for RO ([81]).

The Appellants both stated that they signed loan agreements with Mandaconsult AG (“Mandaconsult”). The copies produced to HMRC were undated and signed only by the Appellants ([83]). The loan was not interest bearing but the lender was entitled to a fee (specified as equal to varying levels of profit, payable in the event that profits were made), repayment was due on the 50^th anniversary of the agreement or earlier upon specified defaults such as being of unsound mind or bankruptcy but not in the event of death ([84]). In a letter dated 23 June 2014, Mandaconsult informed BR that it had never signed any loan agreements with AO or RO and had never made any payments to AO or RO ([87]).

The terms of the proposed loans were wholly uncommercial but, of course, in the event there were no loans ([88]).

At no time has either Appellant contacted Pendulum to check if the Margin Call Balance had been paid and if so by whom ([89]).

Neither Appellant had contacted Pendulum at the end of the subsequent phases to ascertain whether or not they had made a profit or if there was a different valuation for the contract. Although to be fair, Ross Outram did say that he knew he had not made a profit ([91]).

The true objective of the Appellants in entering into the Pendulum Contracts was not to make a profit at the end of any Phase but to lose at the end of Phase One so as to create a loss in respect of which they did not bear the full economic cost but which reduced their liability to tax ([137]).

The PowerPoint presentation and speaking notes (which we refer to as the “Montpelier Materials”), whilst dated two months after the date of the Appellants’ Pendulum Contracts, accurately represent how Montpelier marketed the arrangements ([138]). The Pendulum Contracts were marketed to the Appellants as a tax avoidance scheme, and the Appellants knew that ([140]).

Montpelier’s marketing focused on a two-stage process, establishing a trade and then incurring losses. That part of the message does not appear to have been acted upon by the Appellants. The Appellants did not commence any trade before entering into the Pendulum Contract ([142] to [143]). Both Appellants only entered a very small number of other CFD contracts; and these were after the date of the Pendulum Contracts ([144] and [145]). The CFD contracts other than the Pendulum Contracts were mere window dressing to give the impression of trading ([147]).

The FTT did not accept that either Appellant was trading in CFDs and even if they were wrong they were not doing so on a commercial basis with a view to profit. Very few, if any, of the badges of trade are present. If you do not have a trade, as Montpelier made very clear, you cannot relieve any losses ([148] and [149]).

There was no loan constituted in any way. The Appellants suffered no economic loss ([157]).