UT-2023-000053/54 - [2025] UKUT 00087 (TCC)

In our November Decision (at [228]) we held that, as the disgorgement calculation is looking to “deprive an individual of the financial benefit derived directly from the breach” and not to go further and punish them (which is the, perfectly legitimate, role of later steps in the calculation of financial penalties), the possibility that tax has eroded the value of a benefit should always be considered in the context of disgorgement.

In FCA v Da Vinci Invest Ltd, [2015] EWHC 2401 (Ch) at [219]-[223], Snowden J considered whether a person should be required to disgorge their gross profits from a wrongful activity (in that case share dealings that amounted to market abuse) and observed that he did not accept that “a person who has engaged in market abuse should be required to disgorge benefits that they have not received”. On that basis, whilst he was not inclined to allow a reduction on account of general business overheads, he allowed a reduction on account of certain costs (payments under a 50/50 profit sharing arrangement with a third party) directly linked to the wrongful activity.

Although we did not have these passages from Da Vinci in mind when we prepared our November Decision, we consider that they provide further support for the conclusion we have just summarised. Just as Snowden J considered that the penalty should be reduced to reflect costs directly linked to the earning of the benefits in question, so we consider that, at least to the extent that it is permanent (clearly, if the payment of the penalty reverses the tax liability triggered by the receipt of the benefit, so that the tax can be reclaimed, no credit should be given for it) and capable of being calculated (or, at least, reasonably estimated), a liability to tax which erodes the value of a benefit should be taken into account in the calculation of the amount to be disgorged.

In our November Decision we made the (we hope, uncontroversial) observation that taxation can be a complicated, difficult and sometimes uncertain matter, and so there must be limits to how far tax can be taken into account. Here, for example, the Applicants seem to have taken money out of CFP by way of salaries, dividends and pension contributions (the latter paid directly into their personal pension schemes). Clearly, there is likely to be an immediate income tax liability on the receipt of dividends and salaries. There will be no immediate income tax liability when the pensions contributions are made, but there will likely be when pension withdrawals are made. Accordingly, a thorough analysis would be required (including a consideration of the impact of the Applicants’ personal circumstances on their tax liabilities) to determine the extent to which (if at all) tax eroded the value of the benefit derived by the Applicants from CFP. So, at [239](1), we directed that:

The pdf files the Applicants sent to the Authority on 21 January included a lot of material (for example, copies of tax returns) relating to tax years outside the period we are concerned with (the “Relevant Period” - 21 April 2015 to 31 October 2017). Some tax calculations and one draft tax return (for Mr Price for the tax year 2015/16) relating to periods within the Relevant Period were supplied, but the Applicants did not provide any narrative explanation of how tax has impacted on the value of the benefits they received.

On 6 February the Authority sent in their submissions in relation to taxation and interest in the disgorgement calculation. So far as taxation was concerned, their principal comment was to highlight the failure of the Applicants to comply with our directions.

On 24 February the Applicants’ representative emailed the Tribunal to say that:

“My client (sic) have managed to log into their “My HMRC” accounts & downloaded the attached confirmations of tax paid for the tax years ending 2015, 2016, 2017 & 2018. See attached.

I also attach copies of the tax calculations produced by my client’s accountant for the tax years ending 2016, 2017 & 2018. The amounts of tax due agree with the amounts HMRC confirm as being paid.”

On 25 February the Authority responded to this material and confirmed that it accepted that the tax shown in the documents sent on 24 February had been paid and that the tax shown by these documents to have been paid should – on a pro-rata basis to match the Relevant Period – be deducted from the capital amount of the disgorgement element of the penalty. The Authority calculated the tax deduction to be £43,665.20 for Ms Fox and £42,167.66 for Mr Price.

We pause here to observe that it is wholly unacceptable for the Applicants blatantly to disregard our directions in the way they did. They were told to calculate the amount of any reduction on account of tax they thought appropriate and provide “full details (with supporting material) of how they have calculated the relevant amount of tax”. Instead, as Mr Temple (bluntly but fairly) observed, the Applicants “dumped a large number of pdf files and left all questions of assessment to the Authority.”

In our November Decision we commented that an individual’s tax liabilities can be heavily influenced by their personal circumstances. Only they, or their advisers, know what these are. So, if taxation is to be reflected in a disgorgement calculation, the first step must be for the subject or their advisers to provide a fully reasoned calculation of the effect of taxation which the Authority and (if necessary) the Tribunal can review. That is why we directed that the Applicants should “make the running” in this regard.

In the absence of any engagement from the Applicants on this point, we accept the Authority’s calculations of the tax adjustments to be made in the disgorgement calculations. We are grateful to the Authority for its fairness in stepping into the void left by the Applicants and calculating these tax adjustments.

Some of the benefits derived by the Applicants from CFP took the form of pension contributions made directly into their pension schemes. We were told that the amounts involved here were substantial. Clearly, no tax liabilities would have been incurred at the time those payments were made, nor will tax liabilities be incurred on investment returns generated within the pension schemes. However, tax liabilities will very likely be incurred on future withdrawals by the Applicants from their pension schemes.

In our November Decision (at [228]-[229]), we raised the possibility of a reasonable estimate of tax liabilities being taken into account. The task of trying to estimate future tax liabilities occasioned by withdrawals from a pension scheme strikes us as being a very difficult and uncertain process, which would require a number of assumptions to be made, for example as to the tax regime applicable to future withdrawals, how money would be drawn out of the pension scheme and the Applicants’ personal circumstances at that time. All of these are ex hypothesi currently unknown and any assumptions we made could prove to be completely wrong.

Neither the Applicants nor the Authority developed any submissions on whether (and, if so, how) we should make some allowance for the impact of deferred tax on the value of the benefits derived from CFP in the form of pension contributions, and we do not consider that it would be appropriate for us to embark on that exercise off our own bat.

That said, one circumstance where it should be possible to calculate with sufficient certainty and precision the effect of tax on the value of the amount held within the Applicants’ pension schemes which is to be disgorged would be if they were to withdraw that money from their pension schemes to pay the corresponding part of the penalty around the time it was calculated.

Provided that the full amount of tax reliefs or allowances available to the Applicants (for example, the ability (subject to a cap) to withdraw up to 25% of a pension “pot” free of tax, the annual nil rate band (to the extent it is available) and any losses or other amounts available to reduce the amount of tax payable on a withdrawal) were all treated as applied in reducing the tax payable on this withdrawal, then it seems to us that a reduction in the amount to be disgorged by reference to that tax liability would be appropriate. It would be important that the calculation of this tax liability took the full value of all available losses, reliefs etc into account (even if they might also be available against other unrelated amounts), to make sure that the reduction in the penalty was not effectively funding tax that the Applicants might otherwise be liable to pay at some point.

This approach would be consistent with the policy behind disgorgement, of making sure that the wrongdoer is not left with any benefit from their wrongdoing without penalising them. It would also make sure, in a case such as this, where it is said that the Applicants would suffer financial hardship if a penalty beyond the amount to be disgorged were imposed, that the Authority’s imposition of a penalty does not trigger a tax liability which would almost inevitably go unpaid.

No doubt, as we are dealing with delinquent individuals who lack integrity, the Authority would wish to scrutinise any proposed tax reduction rigorously and might wish to control the flow of cash (taking control of the full amount withdrawn from the pension scheme and making any tax payment directly to HMRC on behalf of the Applicants), but this does not detract from the basic point that, if the tax liabilities referrable to amounts in the pension schemes cease to be deferred, will be crystallised in funding the payment of the penalty and can be calculated with confidence and accuracy at the time the penalty is calculated, they should be reflected in the calculation of the amount to be disgorged.